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5 Basic Bookkeeping Mistakes No Business Owner Can Afford To Make

August 2, 2017

As a small business owner, you know that money fuels the operation. Proper bookkeeping ensures you handle your company’s money correctly and ultimately gives your business a better chance at success.

To help you do a better job at bookkeeping, we’ve highlighted five basic bookkeeping mistakes you can’t afford to make:

1. Not establishing a budgeting method

Sure, budgeting isn’t the most glamorous part of being a small business owner. It’s probably not what you’re talking about at the black-tie gala. But it’s important. You need one in order to be a disciplined bookkeeper.

You’re probably aware that many new businesses fail. What you should also be aware of is that, according to a US Bank Study, 82% of small businesses fail because of bad cash flow management.

So, stick with a budgeting method—and enjoy more control and visibility over your company’s money. There are many effective budgeting methods, including:

  • Zero-based budgeting: The primary calculation for zero-based budgeting is: income minus expenses equals zero. For each accounting period, you must justify how every dollar is spent. If you have money leftover after expenses, you put it towards debt repayment, reinvestment, or another purpose. The idea is to get back to zero.


  • Incremental budgeting: With incremental budgeting, you look at how much money was spent during the previous accounting period. Then, factor in inflation and new expenses, such as new employees and business expansion, to establish a budget for the next accounting period.


  • Top-down budgeting: If you’re highly active in the daily operations of your company, top-down budgeting can be a great choice. Along with other owners and high-level managers, you set the overall budget and communicate it to individual departments.


2. Not separating your personal and business bank account

Why complicate things by mixing personal and business expenses on one card or account?

Whether you’re a corporation or LLC, you should absolutely separate personal and business expenses. It makes so many bookkeeping tasks easier.

Specifically, tracking business expenses is much simpler. You won’t have to look through transaction histories and wonder if a purchase was for personal or business use. And when it comes time to deduct business expenses, you have everything in proper order and be able to take full advantage of deductions.

The IRS allows companies to deduct business costs, capital expenses, and parts of certain personal expenses. Separating bank accounts understanding what you should be deducting much easier.

3. Not using the right software

Gone are the days when you had to enter each financial transaction into your bookkeeping system. Most of your expense tracking can be automated with software, which ensures reporting accuracy and saves resources. This gives you more time to focus on what matters: spending your money wisely.

Using cloud-based bookkeeping software enables your team to access bookkeeping data and report transactions from anywhere. Data can be easily exported for backup as well.

Simply put, no matter the size of your company, bookkeeping software provides numerous advantages. There are a lot of bookkeeping solutions out there, so take a look at what the experts are saying if you’re unsure. Seth David, the president of Nerd Enterprises, Inc, a top bookkeeping firm, states that Sage One, Xero, and QuickBooks Online are all good options.

4. Misclassifying, miscategorizing, and forgetting to report

Misclassifying, miscategorizing, and forgetting to report are bookkeeping mistakes which arise from making things unnecessarily complicated or not being thorough enough with the bookkeeping process. Some examples include:

  • Not properly classifying employees vs. contractors. This can cause confusion during tax season.


  • Using too many or too few categories for expenses. Find a balance, and establish a standard that makes everything straightforward and simple.


  • Forgetting to report expenses that could be reimbursed. For instance, maybe you paid for an impromptu business lunch with a personal credit card, and forget to report it back at the office.


Eliminating these types of mistakes starts with being diligent. Also, it’s recommended to regularly take time to update financial data and reconcile the books with bank statements. You can’t let receipts sit there and collect dust. That’s just more work for you later.

5. Lack of communication

Your employees and contract workers must be aware of the importance of reporting expenses. Obviously, you can’t micromanage everybody. But your workers should understand how company cash is to be spent (and not spent).

Similarly, if you hire an external accounting or bookkeeping service, you must make every effort to provide them with the necessary information to do their job. This way, your company can get the most out of their service, which should be able to find you some ways to reduce your tax burden.

When it comes down to it, a culture of transparency and accountability prevents many bookkeeping errors or oversights from happening. This requires effective communication with your entire team.

Bookkeeping done right

Again, bookkeeping might not be the most glamorous part of running a business. But if you do it right, you’ll see how much money you can save by properly managing your finances.

With more cash in your hand, you’ll be ready to drive your business to the next level.