Say Goodbye to Bookkeeping Errors
Posted January 13th, 2009 by ybo
That shoebox full of receipts and I’ll-get-to-it-later attitude toward your business bookkeeping isn’t going to cut it anymore. Lax accounting costs you money and valuable time you could be spending running and growing your business.
Fortunately, avoiding common bookkeeping faux pas is easier than you think. Try these tricks to keep your business finances in order and make life easier.
Separate business and personal expenses. Many small business owners start out using what they have—often personal checking accounts—to execute business transactions. That’s a no-no, says financial strategist Jacqueline E. Ford, owner of J.E. Financial Services, LLC, a virtual bookkeeping service. And it can cause major headaches at tax time. “If you haven’t already done so, open up separate bank accounts,” Ford advises.
She also stresses that it’s important to keep your personal finances in order, even after they are separated from your business accounts. If small business owners are short on cash in their personal checking, they might be tempted to use their business account. “They say, ‘Oh, I’ll make a payment on my business account and make it up later,’ and then forget to,” Ford says. “If you stay on top of your personal finances, it keeps you from digging into the business pot.”
Be smart about paying bills. If the money isn’t there, don’t postdate the check and expect vendors will wait to cash it. “Vendors want the money. They will cash the check, and that causes a slew of problems with overdraft fees and puts your credit in a terrible position,” Ford explains. At the same time, it’s important to avoid late bill payments. If you’re cash-strapped, Ford recommends contacting vendors and working out an alternative payment plan.
Track cash transactions. Ford calls cash transactions an accounting nightmare because when tax time rolls around you may not have the receipt or remember what the transaction was for. “For tax purposes, the business is losing out because that’s an expense that could be on the books,” Ford explains. Instead, make all transactions by credit card, check, money order or another method that allows for proper documentation—or get serious about saving those receipts.
Update your books daily. As a small business owner, you may be a jack-of-all-trades—and odds are, updating the books on a daily basis often falls to the bottom of the to-do list. But it’s an important daily task, Ford stresses, because waiting to tackle the books increases the likelihood of errors. And those errors build upon themselves. “If you’re posting a bill for $10,000 instead of $1,000, it throws off all of your financial statements, and then you’re overstating your expenses on taxes,” Ford says. “It trickles down.” To further protect yourself from costly mistakes, take the time to reconcile the books with your bank statements each month, too.
Get organized. This is when you ditch the shoebox and replace it with a real bookkeeping system, so that whether you do your own bookkeeping or hand it off to someone else, everything is in order. That means filing papers daily. Separate income, expenses and other transactions from the get-go to make bookkeeping easier. And remember the importance of complete documentation: every receipt, deposit slip and invoice should show the product or service, the amount and the date. Beyond paper, consider investing in an accounting program—think Microsoft Small Business Accounting or Intuit’s Quickbooks—to help keep your financial data in order.
Back up your data. Ford says many small business owners will have some kind of modified backup system, but it’s not extensive enough. “You really should get into the habit of backing up on a daily basis, if not twice a day,” she says. To keep your bookkeeping records safe, back up all files on an external hard drive and make sure you have adequate firewall and virus protection.
Know when you need help. Ford recognizes that many small business owners handle their own bookkeeping—and many do just fine. But, she says, “I’m a firm believer that you should never handle your own bookkeeping. Period. Even I, as a bookkeeper, should not be doing my own bookkeeping.” In particular, Ford says it’s time to hand over the reins to a pro if you:
- Have to continually question how to post an entry on a daily basis.
- Haven’t updated your books in a week because you don’t have time.
- Spend more time handling bookkeeping than promoting and marketing your business.
- Reach tax time and realize your files aren’t updated or in order.
- Know you’re not a “numbers person.”
- Are experiencing considerable growth (which means you’ll have even less time to focus on bookkeeping than before).
Find the right expert. If you decide it’s time to hire bookkeeping assistance, the first step is to assess your needs. The structure of your business (sole proprietorship, LLC, S-Corp or C-Corp) and its size, the number of transactions you post and the industry you’re working in are all important considerations when selecting the best bookkeeper. To find the right person, Ford recommends seeking referrals, checking with professional associations and small business groups, and searching online directories.
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