5 Bookkeeping Mistakes You Don't Want to Make

Look, I get it. You didn't go to school to be an accountant. Heck, maybe you didn't even go to college because your business took off and you didn't need that expensive degree. But now you're a little in over your head for something that "should" be easy to do.

In today's post, I'm going to walk you through 5 common mistakes that I see small business owners making and what you can do to make sure this doesn't happen to you.

1. You don't keep up with your books in a timely manner (aka monthly)

So, I had a client whose spouse took care of everything on the financial side of the business. My client did all of the day-to-day work, and the spouse handled the money. Except that, the spouse didn't have an accounting degree and didn't employ a tax professional or a bookkeeper. Unfortunately, the spouse passed away and left a huge financial mess for my client. Not only was my client in a serious state of grieving, the business had to continue operating and the taxes had to be filed. I come into the picture to get everything cleaned up and it took hours of work because we had to start from scratch for multiple years worth of bookkeeping that hadn't been kept up with properly. Not only that, but my client's taxes hadn't ever been filed correctly because my client didn't hire a CPA, so this turned into a months-long ordeal, back and forth with the IRS to try to persuade them that this was an extenuating circumstance and that my client didn't know what was happening. I share all of this as a cautionary tale that your books can't wait. They must be kept accurately and timely. 

I recommend that the books are done on a monthly basis so that reconciliations can be performed to ensure nothing is missing, and that reports can be run so that you will know the current status of the health of your business. At a moment's notice you would be able to pull out your Profit and Loss statement and know what happened in your business last month. This is KEY for businesses who care about saleability, auditability, and profitability.  

2. You don't have any idea what's going on with your cash flow. Your business is turning a profit, but your cash is low and getting lower each month.

If you're a cash basis sole proprietor, single member LLC, or partnership, you might have run into an issue where your reports state each month that you have positive net income, but you're hemorrhaging cash. For a cash basis business, that doesn't make much sense, so you've got to take into consideration what you've taken out of the business in the form of Owner's Draws, whether for personal use or for your tax liabilities. 

If you're an accrual based business, maybe an S-Corporation or C-Corp, you might see this cash flow issue due to the timing of receivables and payables. If you're reporting high revenue that's still sitting outstanding as a receivable, you're going to have cash flow issues. You must be collecting what you're selling. Likewise, it might be smarter to be strategic about when you pay certain bills to manage your cash flow better.

3. You take advice from other coaches in your niche, and not from actual accountants.

I'm just going to say it: everyone likes to think they're the expert on finances, especially other coaches/creators that you've met at events or conventions, but rarely do these people have certifications or degrees in accounting or are experts at the very complicated tax code. And you wouldn't expect them to be, in reality, so WHY do you continue to take their (financial) business advice?

As much as you might want to, you just CANNOT get a tax deduction for your shopping spree at Nordstrom or Lululemon. Per the IRS, items that *can* be worn in your everyday life are not tax deductible, even if you're only using them for business purposes. So, please, stop listening to your buddy and just ask your accountant or bookkeeper! This way, you won't be disappointed when you find out after-the-fact that that huge shopping trip wasn't a true business expense and you'll be better prepared to make these decisions in the future.

4. You don't separate your business expenses from your personal accounts... and therefore you miss tax deductions.

I don't know of many people who are so Type-A that they get this perfectly every time. And hey, sometimes you can't help that certain platforms won't let you put in your business credit card info and it HAS to come out of your personal account. I get it, these things happen. But if you don't stay on top of invoices and receipts, things get missed, and that means that tax savings get missed. It's vital to save every receipt and invoice in a place that is accessible and safe. For more on that, visit my other blog post about the importance of record-keeping.

5. You don't understand the difference between debits and credits.

To me, this is the biggest one of all. As mentioned above, you probably don't have an accounting degree, and that means that when certain tricky scenarios arise, will you know how to code them accurately in your accounting software? 

Let me share a few examples: a personal expense on your business card, a federal tax payment comes out of your checking account, a refund, a credit memo, you purchase an asset, you pay on your loan/credit card, etc. The list goes on. Without getting out my t-accounts to show you how these would all be handled, I just want you to know that you need an EXPERT handling these things for you, or things could get really messy and difficult to fix. And the last thing you want to do is spend thousands of dollars on a cleanup because you tried to do your books by yourself.

So that's it! These are the top 5 mistakes, in my opinion, that may cause issues for small business owners when they are doing DIY bookkeeping.

If you're finally feeling the pull to get some help from someone with YEARS of experience, fill out the inquiry form and let's chat!