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The 4 Bookkeeping Mistakes That Can Kill Your Small Business

Small business bookkeeping mistakesYou might think that having a great idea is the key to running a successful business, and you’d be somewhat right. But that’s not all you need to be successful. Having an amazing product is a nice start, but often times, it’s what goes on behind the scenes that determines the success of your business. More specifically, the success of your business comes down to being organized. Keeping the books might not be the most fun thing in the world, but if you don’t do it right, your business will fail.

With that in mind, let’s take a look at some of the biggest bookkeeping mistakes you need to avoid as an entrepreneur.

Mistake #1: Trying to do it all on your own

Let’s get one thing out of the way from the beginning – it’s always advisable to get help from a professional bookkeeper. Yes, as a small business owner, you do have to wear many hats and you don’t often have a lot of money to hire outside help for various tasks. However, this is one of the areas where you shouldn’t go it alone. Taking the DIY route with your bookkeeping could actually end up costing you more money. The IRS has strict penalties for tax mistakes, so if you mess up, it could end up costing you your entire business.

But that’s not the only way a bookkeeper can save you money. Chances are, you are making some critical mistakes with your record-keeping that are costing you money every single month. Take, for example, the story of Zalmi Duchman, chief executive of The Fresh Diet, who told Entrepreneur magazine that his company started saving up to $1,000 every quarter after hiring a bookkeeper to get their books in order. A professional bookkeeper can help you make informed decisions that help take your business to the next level.

Mistake #2: Not saving or organizing backup documentation

The fact is that we live in a world where audits exist. So if you send off your taxes and claim a bunch of deductions, you need documents to verify that all of the information in your tax return is completely accurate. That means you need to keep things like receipts, bank statements, invoices, employee data, and so on. All of these documents need to be stored in a safe place and organized in a manner that allows you to find whatever papers you need quickly and easily.

It’s also a good idea to make sure you have backups for all of your files. If all of your files are digital, you should make paper print-outs of all important documents. If you only have paper documentation, scan them into your computer so that you have a digital back-up as well.

Mistake #3: Not understanding the different classes of employees

This is undoubtedly one of the most commonly confused areas for small business owners. In today’s world of freelancers, contractors, and consultants, it can be tricky to figure out who is an employee and who isn’t. That means it’s also difficult to determine what taxes you need to file for your various employees and non-employees.

There are a few different factors that determine whether or not someone is an employee of your company. These include the individual’s work location, how much control you have over their work process, whether or not you provide the tools needed for the job, etc. If you schedule the worker’s working hours and force them to do the job in a certain manner, chances are that they could be an employee rather than just a contractor. So in that case, that might mean you’d need to file a W-2 form instead of a 1099. Again, this is where having a professional bookkeeper in your corner could be a great asset.

Mistake #4: Mixing personal funds with business funds

As a small business owner, it’s sometimes easy to blur the lines between personal funds and business funds. However, you can get yourself into serious trouble if you’re buying personal items with business funds or buying business items with personal funds. There are proper methods that must be followed when managing your transactions, so it’s important that you follow these and ensure everything is done properly. Once again, this is another reason to hire a professional bookkeeper.

Is bookkeeping the most exciting thing in the world for a small business owner? Of course not, but you can’t neglect it if you want your business to thrive.

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About the Author Grayson Bell

I'm a business owner, blogger, father, and husband. I used credit cards too much and found myself in over $75,000 in debt ($50,000 in just credit cards). I paid it off, started this blog, and my financial life has changed. I now talk about fighting debt and growing wealth here. I run a WordPress maintenance and support company, along with another blog, Eyes on the Dollar, which is another great personal finance blog.

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41 comments
Pauline says September 23

To me, bookkeeping is the most tedious aspect of working for myself. I am happy to outsource and sleep soundly knowing everything is done properly.

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Taynia || The Fiscal Flamingo says September 23

As a CPA, I cannot shout from tops of mountain tops loud enough about number #1. Even if you can’t afford a bookkeeper to maintain your books every month, get a consult at least once a year to see if you should consider any changes to your current process.

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    Grayson Bell says September 27

    Thanks for the insight Taynia. I do think getting a consultant would be a good thing to do just to make sure you are taking care of everything properly.

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Matt Becker says September 23

If I ever get to a point where I have real transactions to track I’ll definitely be looking for help. Taxes are such a tricky world, even when it comes to personal taxes, and are often an overlooked area to save a ton of money. It’s just extremely unlikely for a non-tax professional to know all the ins and outs of the tax code to be able to use to their advantage.

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    Grayson Bell says September 27

    I did my bookkeeping with my online business, but realized that I probably could have found a better way to do them. It would take me weeks during tax time.

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DC @ Young Adult Money says September 23

Ugh this reminds me that I still need to sit down and reconcile my bank statements for 2013. As an accountant I know the value of backup documentation – you live and die by it. At the same time, if documentation is gone you have to make the best of the situation.

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    Grayson Bell says September 27

    I hate reconciling. There is nothing fun about it! Good luck with that DC.

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FI Pilgrim says September 23

Good info, thanks. I’ve not ventured out on my own yet, but I hope to in the next few years. The accounting portion sounds fun, but I would definitely need some professional help to do it well.

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John S @ Frugal Rules says September 23

Could not agree more. Keeping those records and not going it alone are vital. I keep very good records and we work with a CPA to make sure we have everything in order and maximizing what we should be doing, it’s so worth the cost.

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Holly@ClubThrifty says September 23

I do all of my own bookkeeping but it’s easy since I’m my only employee. It’s important to keep excellent records and every single receipt.

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    Grayson Bell says September 27

    It makes it easier when you are the only one and especially if you are a LLC or sole proprietor. It just flows right onto your taxes.

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Simon @ Modest Money says September 23

No doubt about that, if you want it done it right, hire a professional…in any case the tax code keeps changing from time to time and chances are that as a solo entreprenuer you are too busy taking care of your business to be aware of all the tax-code changes, to save yourself the headache, its best to let the professionals handle it.

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    Grayson Bell says September 27

    It is too difficult to keep up with the tax code. Almost impossible and I am sure there are many tax attorneys that have a hard enough time doing it.

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Michelle says September 23

Great post! Having separate accounts and staying organized are very important for a small business.

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Jake @ Ca$h Funny says September 23

These are all great tips. I don’t really need much accounting for my small business (blog) yet, but I know that when I do I’ll have trouble giving away some of the responsibility. I like to have control of everything, but I know that this is bad in a small business. Thanks for the reminders.

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    Grayson Bell says September 27

    I have trouble giving away responsibility as well, but I am slowly learning to do so!

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canadianbudgetbinder says September 23

Trying to do it all on your own sounds like something we would do and to be honest at this point I don’t think I could. Bookkeeping is lots of work and unless I know what I am doing the last thing I need is to start messing things up.

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Laurie says September 23

All wonderful tips here, Grayson, and I can’t even pick a favorite because in the several small businesses we’ve owned, we’ve learned our lesson by example in all four of these areas. They’re all so very important.

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    Grayson Bell says September 27

    Thanks Laurie. I am with you there. You learn a lot being a small business owner.

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Marissa@Thirtysixmonths says September 24

Hear, hear! I couldn’t agree more! It’a a tedious and tough work to do bookkeeping but in the end it will be good your business.

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dojo says September 24

Very good advice. In my country we have to keep an accountant to handle the bookkeeping for our small business and, while I dislike having to pay her monthly, she does keep us on our toes and helped me not get into all the mess I’d probably get otherwise 😀

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Cat @ Budget Blonde says September 24

Great post! I do all my bookkeeping because it’s just me, but I use online software that really keeps it organized. So far, it has not been too difficult, but I’m going to talk to an accountant when I get back to the states just to make sure everything looks right.

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jefferson @SeeDebtRun says September 24

Great tips… I know that keeping business and personal money seperate was something that frustrated me originally, but you certainly will regret it if you don’t come tax time!

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Axe Debt says September 24

It so true, you have to have documentation for all of your expenses. I always ask for a recept and put it into a folder that has tabs for each month. Seems to work out pretty well.

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Charles@Gettingarichlife says September 25

Grayson,
i am a firm believer in outsourcing your documents to an accountant. My accountant has found my thousands in tax breaks so he is worth all his fees.

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    Grayson Bell says September 27

    Thanks for the comment Charles. Glad your accountant is doing good work.

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Mike Collins says September 25

I think the separation of personal and business spending is something a lot of people don’t realize when they’re first starting out, especially if the side gig started out as a hobby and then grew into a business of its own.

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    Grayson Bell says September 27

    I didn’t used to do it, but now any business that I have will get separate accounts.

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Karla Twomey says September 27

Hi Grayson,
Thanks for this information. I have bookmarked it so that when my personal business goes live, I will remember these tips. Being the creative type, the best takeaway I got from your post is to hire a bookkeeper. Will do! Thanks

Karla Twomey
latest blog post – FREE Credit Card Calculator for your Website from Golden Financial Services – No Strings Attached! http://nomorecreditcards.com/?p=3108

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Kelly Boros says October 29

Hiring an outsourced bookkeeping firm is one way small businesses can avoid making mistakes on their books and taxes. With outsourced bookkeeping you pay a monthly fee for services, versus hiring, training, and placing a new employee on the payroll. Plus, most firms will automatically keep backups of your books, so you don’t have to worry about losing data.

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    Grayson Bell says October 29

    Thanks for the feedback Kelly. I think that is a great idea. Outsourcing it can be a good idea.

    Reply
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