Every business begins with DIY bookkeeping and accountancy. You are the accountant, the proprietor, the operations and marketing head. It may be convenient in the first year, but it is not a lasting model. Wearing so many hats brings with its mistakes and mismanagement. And financial mistakes, if not noticed and addressed early, can lead to a hefty price when you least expect it. Many small business owners either have messy or incomplete books of accounts. No one’s to blame as that is how one learns by making mistakes.
Making mistakes is not wrong, but not identifying and correcting them is. The first stage of business finance is bookkeeping. In this article, we will find out the most common mistakes many small business owners make at the first stage and how to avoid them.
Every Small Business Owner Makes the Mistake of Delaying Bookkeeping
No matter how much you hate maintaining books, it is something you have to do. The more you delay it, the more complicated it becomes. There would be times when it is a busy season or some operations crisis. As a business owner, if you have to choose between updating your books of accounts and providing client service, you would choose the latter.
Delaying bookkeeping can have significant financial consequences. Falling behind tax deadlines, missing out on payments, failing to follow up with clients for payments, or overspending could hamper your business performance. It is not just updating your books but also reconciling books with bank statements. An unreported transaction can be difficult to trace at a later date. Such transactions are the source of fraud and audits.
Solution: If you are a DIY bookkeeper, you can get a mobile app to record every transaction. As transaction volume increases, you can hire a professional bookkeeper or an accountant to help you prepare the books. Be transparent with your bookkeeper. Do not hide any transactions that may go unreported and snowball into something you don’t want to be a part of. A professional bookkeeper can identify problems and guide you on complete and compliant bookkeeping techniques.
You would pat your back for making this decision if ever you face an audit, as all your records would be compliant and complete.
Are You Mixing Business and Personal Expenses?
Most entrepreneurs are overwhelmed with too many things when they start a business. The first promoter of your business is you. You put in your savings to get that first delivery and mix personal and business expenses. Even if your workplace is your home, it is better to separate expenses from your home workspace.
Solution: It is advised to create a separate bank account and credit card for your business and divert all business payments and spending into the business account. This will make it easy to separate business and personal expenses and reconcile bank statements. Also, you can control how much of your savings you are putting into the business.
Do Not Make the Mistake of Throwing the Receipts No Matter How Small the Amount
You met a client at a business lunch, and that buffet cost you $20. You pay that amount and dump the receipt in the dustbin. That is a big bookkeeping mistake. While you write it in your books, the Canada Revenue Agency (CRA) asks for documentary proof. Only then can you avail tax benefits that come with those business expenses. There are instances where many entrepreneurs put their personal expenses into business to save on tax. And if the CRA finds out, it will ask for receipts.
Even if you withdraw cash, back that amount with receipts, it can go well for you if there is an audit.
Solution: It is advised to box up all the receipts date-wise, take a picture and save it in the digital format. Always have two to three backups if the original receipt weathers out or is misplaced. Keep the receipts for at least seven years. And for petty cash, you could keep a custodian that accounts for every penny, saving you from potential theft or fraud.
It’s a Common Mistake to Categorize Expenses Wrongly
Are you a freelancer and have been categorizing payments to yourself as a business expense? You might want to check it with your accountant as that is the wrong category. Many expenses fall into grey areas. Your understanding might be different, but the accounting guidelines might say otherwise. Incorrect categorization could lead to miscalculating your taxable amount, leading to underpayment of advanced taxes and penalties.
Solution: Hire a professional bookkeeper who is well acquainted with your industry and knows the guidelines. The bookkeeper can help you stay on track with tax payments.
Contact Glenn Graydon Wright LLP in Oakville for your Bookkeeping Needs
You may be well-versed with bookkeeping and finances, but you have other more important tasks as a business owner. Let the bookkeeping professionals at Glenn Graydon Wright LLP take care of the books of accounts. Instead of spending your time preparing books, use your time to study the books and make strategic decisions to improve and expand the business.