While having lunch with a prospective client recently they asked me this question: “What are the top 5 things that if I do my own books instead of hiring you (or any bookkeeper) would I be possibly doing wrong?” A great question I thought. We spoke at great length regarding this topic and feel that it’s important enough to create my own “top ten” list. So, in no particular order, here are my top ten mistakes that new entrepreneurs could possibly make if they don’t outsource their bookkeeping needs to a professional.
Not do any Bookkeeping at all
This sounds ridiculous of course as everyone knows if you have a business you need to do bookkeeping. However, my definition of bookkeeping and a new business owner’s definition may be drastically different. Throwing all your receipts in a shoe box, haphazardly keeping track of your income and then passing it along to a tax preparer is not bookkeeping. Having money left in the checkbook at the end of the month is not bookkeeping. The definition of bookkeeping according to Wikipedia is:
“Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business. Transactions include purchases, sales, receipts, and payments by an individual person or an organization/corporation. There are several standard methods of bookkeeping, such as the single-entry bookkeeping system and the double-entry bookkeeping system, but, while they may be thought of as “real” bookkeeping, any process that involves the recording of financial transactions is a bookkeeping process.”
My definition is to track, on paper and using software, everything that involves your business financially for accountability reasons and to be used as a tool for future use. In other words, it’s much more than just jotting down what you made and what you paid, it’s calculating gross and net profit, extrapolating data on past performance to be used as a tool for budgets and future planning. By not doing any meaningful bookkeeping you are simply running your business by the seat of your pants and more than likely it will fail.
Not using software
A big mistake in my book is not using software. You don’t have to use the best software out there – but you have to use something. QuickBooks comes to mind as the easiest and least expensive software package. There are other packages that may be less expensive but when it comes to accounting software you certainly get what you pay for. I think back of when I was in high school and we were taught what double-entry bookkeeping was, using “T” accounts and the like. My first impression of what Mrs. Applebaum was teaching us know-it-all kids was silly. Here I am however, my fourth decade of accounting later, and still use some of these techniques today. While I use high-end software at my day job and lower costing packages of QuickBooks and Sage 50 for my own home-based bookkeeping business, it’s all using the same principals. Yes, you can buy (I think) ledger paper and record your transactions manually but I seriously can’t think of why you would when there are so many software options available to you. At the very least, keep your books in Excel!
Not using a separate bank account
Your business has a life of its own, to prove it, you keep a separate bank account for all of your business transactions. I can’t tell you how frustrating it is when a new client comes along and he or she wants me to do their “books” for them and hands me their personal check book. While I don’t mind putting in hours of work (and charging for those hours accordingly), it’s simply a waste of valuable time and opens up the business owner to mistakes. How can you be sure you are capturing all expenses? All revenue? Most important, if you are audited by a federal or state agency you have now opened up ALL of your personal financial transactions and not just the business’s transactions because you combined personal expenses and business expenses in the same checkbook. Checks are cheap, there are free business checking accounts available, use them and take your business seriously! The same holds true for a business credit card. Same reasons as having a separate checking account apply with having a separate credit card; it’s a must!
Reconciling bank statements
So, you took my advice and did open up a business checking account, great! But then you leave it there and never reconcile the statement to your bank. This is a mistake for sure and can be an expensive one on many levels. We all make mistakes, we’re human – I make mistakes every day. The difference is I always implement a way to double check just about everything I do and on a daily basis. By reconciling your bank statement, you double check your payables, receipts and your math! With one simple over-drawn check your free business checking account just cost you $39 for an overdraft fee! If your bank didn’t go ahead and forward payment to whomever you issued the check to, you then would have a possible NSF fee from that vendor, and certainly create a negative tension between all parties. Reconciling finds errors, plain and simple, do it and do it on a timely basis every month as soon as the statement is available.
Filing regularly and be organized
Another common mistake is not filing all of your invoices and other paperwork (source documents). First, keep your paperwork organized in a fashion that makes sense. All of your A/P invoices should be filed as soon as they are paid, in alphabetical order by the vendor’s name. Don’t just file everything in a box because I guarantee you that at some point throughout the year you will need to go back to that document for a piece of information and then it will take you forever to find it or you won’t be able to find it at all. Don’t wait till the end of the year to file, that is a huge time-consuming task at an already hectic time of year. File your receipts in order of when payment was received. File your bank statements along with any other bank-related paperwork together and finally keep all paperwork filed by year together. Spend a few bucks at Office Depot and buy cheap file folders and a few storage boxes.
In the filing issue above I stressed the importance of organizing your receipts together, organizing your payables together etc. You need to have your entire business organized as well. Keep your emails categorized by whatever makes sense for your particular business. Organize your work area, storage/inventory area/shipping area. The more organized you are the more efficient your business will be. Performing some of these not-so-fun tasks in turn will allow for more time for you to sell and market your business. Have a separate desk just for your business if you can’t have an entire separate room. Just like a separate checkbook, having a separate work area is more professional which will result in an efficient work flow.
Don’t wait till year-end to file and get organized
One of the worst things you can do in my opinion is wait to file and organize your documents in April when you start thinking about doing your taxes or dumping the paperwork on your tax preparer. I’ve done this myself and let me tell you it’s no fun playing catch-up organizing an entire year in a few days or even a week. It’s a simple task when done weekly, don’t let it go!
File payroll taxes timely
This shouldn’t be on this list, but surprising enough when you are new to doing payroll you either may not know what the filing requirements are for federal and state withholdings, or you simply forget. The government does not fool around when it comes to withholdings. They will fine you for some outrageous amount that they feel is “what you should have paid” and it will take months to prove them wrong. Even if you do your own books, you perhaps should outsource payroll to either a professional bookkeepe. Well worth the additional cost if it prevents fines and interest.
Review all vendor statements and your Aged Receivables
Don’t assume you have received all invoices from your vendors, always double check that either you have recently paid vendor invoices or you have them entered in your system to be paid. Not receiving an invoice is no excuse to not pay an invoice – especially when vendors go to the trouble to send out monthly statements. Also, are you following up on your Aged Receivables report? Don’t let customers get out too far when paying their invoice or you will be setting a precedent with them and they will expect such lenient terms from you all the time. This of course will hurt your cash flow. What is cash flow you ask?
Not projecting your cash flow
Another common mistake is to not project your cash flow. Small companies erroneously feel this isn’t necessary – cash flow is something only large companies do. You couldn’t be more wrong; it is crucial for a small company, especially when starting up a new company to project cash flow. Not only do you need to project it for each month, but actually compare to how you did with the actuals. If you were way off, then why? Regardless of how big you are, how profitable the company is, you need to prepare a cash flow every month and update it with the actual results to find out where the discrepancies came in which in turn will allow you to make an even better and more accurate cash flow for the following month.
Sales tax returns
Much like payroll taxes mentioned above, you need to file a timely tax return as required by your state. It’s much more though than just paying the sales tax on a timely basis. First of all, I’ve seen businesses who pay their sales tax annually (do to state requirements and minimal sales, especially the first year of business), however when they have to pay the taxes, they have spent all the money! Seriously, this happens more than you think. You make a sale, you collect the sales tax, it all goes into your checking account to write bills and pay yourself. Then you find shortly after year end you have to come up with the entire year’s sales tax that you should have been leaving in your checking account (or having a separate hands-off business checking/savings account just for this). Not good. What is nexus? What is use tax? All vital information that you need to be on top of when it comes to charging and paying the correct amount of sales tax.
I hope this post was beneficial to those thinking about starting up a business or those already in business that perhaps should consider hiring professional bookkeepers to help avoid some of these mistakes. Speaking of mistakes, can anyone tell me what mistake I made on this blog post?