What Are The Most Common Bookkeeping Mistakes Done By Start-ups?
Bookkeeping can be simple if you kick off with the right foot. Being an entrepreneur of a start-up, you encounter several challenges daily. The blog explains where your business often gets deviated when doing with the books.
Having your start-up is exciting and daunting as well. You want it to happen for several valid reasons and there will be hundreds of tasks to sort out daily. While rushing through various activities, bookkeeping often gets lesser priority and goes at the bottom of your to-do list. Probably, you will find the first mistake during the moment of keeping financial records.
Accurate accounting records are crucial to any company's sustainability. It allows a business to fulfill its financial obligations, manage cash flow and plan its investment goals. Bookkeeping mistakes can be grievous to any business, so if you are a startup business, it is significant that you lay the foundations of your business's bookkeeping right. Here are ten common bookkeeping mistakes that can help you maintain the financial records of your startup business error-free:
1. Not Maintaining Financial Records at All
A common mistake that could gravely cost your newly started business is not maintaining any financial records. As the owner of a new startup company, you must ensure proper financial resource management. You must ensure that the accounts are taken care of from the day you lay the foundation of your business. Leaving receipts, small or big, lying without recording them can be problematic. Even the tiniest receipt can come in handy when you are filing for tax. Bookkeeping gives you control if it is updated daily with the company’s financial transactions.
2. Not Hiring a Professional Bookkeeping Expert
You are an entrepreneur, and there are several other tasks related to management that you need to oversee. You will lose track of receipts, important deductions, and much more. Moreover, without any accounting skills, you will only make things worse. Professional bookkeeping experts have a comprehensive insight into matters organization’s financial health. From keeping an eye on your unpaid invoices to recording your daily cash flow and from managing compliances to audits, accounting experts can be a boon to your company. Without the help of a professional adept in general accounting and bookkeeping, you will fall behind drastically.
3. Not Keeping Receipts of Small Purchases
Startup owners have often seen spending on small expenditures but not maintaining any track of the receipts. Disregarding small receipts can amount to bigger expenditures when you have no evidence of how these expenses came by. Spending on stationery, water, snacks, fuel, etc., may be negligible to you, but it is significant to show them in the books. You may miss on preparing a proper budget and assessing the cash flow without these small receipts. Any business must maintain receipts for all types of expenditures, even if they are less than $75.
4. Improper Classification of Employees
The rise of independent professionals providing services has made it difficult for employers to classify them as permanent staff and independent workers. The problem arises when the time comes to file taxes as there are different rules for permanent and independent workers. Misclassifying employees as independent contractors is one of the biggest bookkeeping mistakes a business can make. The US bookkeeping and IRS (Internal Revenue System) will penalize you for this mistake when there is an audit in your company.
5. Paying Company Expenses from Personal Account and Vice Versa
Every startup owner must create a distinct line between personal and business expenses. Paying company bills from a personal account can negatively impact your finances, whereas using the company account to make expenditures calls for tax penalties. It remains disguised compensation and is subject to payroll taxes. It finally pulls down the investment and growth of your business. Open a business account and keep your personal and business expenses separate. This will ensure the good health of company books.
6. Not Reviewing the Accounts Regularly
One of the most overlooked small business bookkeeping mistakes is the owner’s failure to review the book of accounts at regular intervals. Understandably, the new business has less financial load, however bookkeeping experts suggest that owners track the entries every day or every week. Ignoring the financial books completely will prove costlier to the business in the long term.
7. Not Being Tech Savvy/Using Old Software
Stacking physical receipts and invoices to misplace them later will land your business in trouble. Audits and compliances require documents and verification. We are lucky to be living in a modern world where technology is at our disposal. All the documents, invoices, receipts, etc., should be scanned and uploaded into the system. Create file backups to ensure data is available and accessible at all times, even if a technical failure arises. You must use good software to keep your books. Good software ensures high-quality bookkeeping services. Using redundant software doesn't have the latest updates on compliances, taxes, mandatory deductions, etc., and causes problems for your business. Modern and feature-rich software ensures that the errors in bookkeeping are reduced to a minimum. Investing in good software is essential even for a small startup that is trying to save money.
8. Overcategorization or Miscategorization
The bookkeeping and accounting services USA has fairly standard categories for different types of expenses. However, new businesses often tend to make entries under the wrong heads or create too many categories for various expenses. You must stick to the general guidelines of bookkeeping when it comes to categorizing expenditure heads.
9. No Filing System for Purchase Invoices
New startups make blunders in maintaining a proper filing system for purchase invoices which upsets the accounting books of their company. Here is what you should do:
- Maintain two separate purchase files – one for paid invoices and a different one for unpaid invoices
- Enter the date and method of payment made towards the invoice.
- The unpaid invoice should be moved to paid file when you clear the dues
- The files should be maintained in alphabetical order by the name of the supplier
10. Not Using Online Modes for Payments
Small businesses make the mistake of performing cash transactions that don't generate a record. They do physical entries in books to mention the details. Hence, they forget about a cash transaction they performed and fail to enter it in the books. It further causes disbalance in their cash register and affects the accounting books. You can pay through online modes such as an online transfer, a cheque, debit, or credit card. It ensures that a transaction is created in the bank statement carrying the payment details. Also, this must include the person’s name, details of their payment, the amount, date, and reasons for the payment.
New startup entrepreneurs will be amazed at how helpful it would be to follow these suggestions and avoid these bookkeeping mistakes in their business. Consider this list as your ideal way to get perfect and accurate bookkeeping for your amazing start-up.