The Most Common Bookkeeping Mistakes…
And How to Avoid Them…
TL;DR
Mixing personal & business transactions
Skipping reconciliations
Not having records of transactions (no receipts)
These aren’t all the issue’s that you can run into, but if you can avoid these issues, you are much better off. Ideally you will have clean books - here’s WHY you need them.
Mixing Personal and Business
Impact of this mistake
This one is the most dangerous… Especially if you have an LLC. If you mix personal and business (spending money out of your business for personal things is the main issue). So, if you buy your dog food with your business card and you cut hair for living - you have pierced the corporate veil (here’s some more information on that - HERE - I’m not a lawyer).
What this means is that all the protections - the seperate entity of your LLC - no longer apply. If you are sued, you are now liable, not your business.
How to fix
Separate your bank accounts. You should have a personal account - and personal cards. Then you should have a separate account for your business. It is very easy to set up - most banks can walk you through setting up your separate account with using your EIN. (If you don’t have and EIN, get one from the IRS HERE)
After you have a separate account. Only Spend business funds on business expenses, and personal funds on personal expenses. Then you can get money out of your business with Owner Draws.
Skipping Reconciliation
Impact of this mistake
First off, what is reconciliation? Reconciliation is comparing two sets of records to ensure your books are accurate (Investopedia has a good description HERE). Typically you will compare your books (recorded transactions from an account) to the bank statement.
So what if you don’t reconcile your books… then what? Then your books may not be accurate. This is also where you will miss things - are you being charged for something and you aren’t recording the expense? This is also where a lot of fraud is caught.
How to fix
It’s pretty straight forward. Just DO IT! As soon as you receive your bank statements reconcile your accounts.
No Records
Impact of this mistake
What happens if you don’t save your receipts? The biggest risk is the risk of audit. If you need to prove an expense or an income, it is very hard to prove what you did without records, and that is what you need for an audit. I wouldn’t want to be unable to prove everything I did in an audit.
The other risk is that you don’t record everything you do (and you hopefully catch it in the reconciliation). If you buy breakfast for a client meeting, and you don’t save the receipt, and you don’t record it, you are missing out on a deduction. If you used a bank card you would probably be able to catch it on reconciliation, but if you used cash… You are out of luck.
How to fix
Again this one is simple. Just DO IT! Save receipts, invoices, records. I would recommend keeping them for seven years.
Preventative Systems
Systems are the best way to prevent yourself from making mistakes. Create SOPs (Standard Operating Procedures), Schedules, Checklist, and Calendars. Then stick to it.
Why you might not want to do it yourself.
Time - It takes a lot of time to do your books properly, and you could spend that time working in or on your business. (Or just with your family and friends)
Frustration - If you don’t know what you are doing, it can be frustrating
Money - If you don’t do books properly it can cost you money, either leaving it on the table, or it being stolen by unnecessary expenses.
Quality - I assume if you have gone through the trouble of reading this article you want it done right. You can certainly do it right, but that requires more or the three others.
My shameless plug for the services Courage Bookkeeping Offers…
Fixing these problems is definitely something you can do yourself - I don’t want to turn anyone away from that, and I want everyone to be in control of their own business. However there comes a time when - in order to grow - you need to build a team around you. That free’s up your time (which you almost certainly don’t have enough of).
Feel free to contact me - even with questions on how you can get your stuff going. If you are in Yakima WA, or the surrounding area, I would love to take you to lunch.
Now I’ll sign off like a letter:
Best,
Gunnar Newell Gunnar@Couragebookkeeping.com (509)643-3424