Most Common Small Business Bookkeeping and Accounting Errors to Avoid
When first starting out in business, most business owners realise they must know their numbers. If you don’t, how can you plan for expenditure? How do you know whether you are profitable and make adjustments accordingly?
Having an understanding of your business’s financial status is so important. It will help you decide when the right time to increase your growing efforts begins. We get it that some business owners love diving into the numbers and processes of business accounting. For others, it can feel like they are completely out of their depth and not their idea of a good time!
We would remind you that taking the right calculations and correctly recording your cash flow is vital. Not only for your own knowledge and planning but for legal reasons and for tax purposes. Errors can be more costly to fix than you would imagine.
Some business owners decide to outsource this part of their operation. They will hire external help from a professional bookkeeper, accountant, or tax agent. If that’s the route that you decide on you should ensure that the person/company that you choose are suitably qualified. Check out testimonials from other small businesses. Facebook reviews are a great way to do this!
There are some small businesses that handle it themselves. They do their own accounting and bookkeeping without the help of an expert bookkeeper. If this is you, it’s a good idea to have an understanding of the common errors made in business accounting. And more importantly, know how to avoid them. We have been doing businesses books for years and have noticed there are some common errors. These are things that we come across and have to correct when clients first make the decision to outsource having done the books themselves.
1. Bad Budgeting or No Budgeting at all!
We understand you feel really frustrated at the mere mention of this subject! It’s a cliche, we get it. Correct and clever budgeting can make or break a business. Glossing over expenses can give you a false sense of how much you need to make to break even or profit and can disguise a whole.
This may result in premature celebration when you make budget or go over. It can mean paying more tax. – That, of course, means less profit than expected for your business. Take an in-depth look over your expenses and re-evaluate your budget on a regular basis. The aim of doing this is to give you a clear idea of how your business is going. You will be able to identify whether you’re breaking even, or perhaps you are making a profit. If you’re a new business, this process can be a bit of a steep learning curve. but don’t despair, it takes a bit of time to learn the ropes, but you will soon understand and be doing this like a pro.
2. Not Understanding the Difference Between Employees and Contractors
Hiring staff is an exciting time for a growing business. Exciting and also downright confusing! If you are not sure about payment systems, it can be a minefield. In short, there are two ways to hire staff. Each has its own pros and cons. Your choices are to hire an employee or a contractor.
There are huge differences with regard to things such as insurance, payroll tax and the legalities. There are other implications when it comes to whether your ‘staff’ are actually employed by you or are contracted by your company.
There are a couple of things to consider before deciding which to go. It will depend on whether you’ll need the extra help on a temporary or long-term basis. Contractors are businesses themselves. They will invoice you for the hours spent on the agreed jobs. The sort of businesses that you would contract might include:
- Construction Companies
These are all people who need to keep track of hours rather than be paid a salary.
Because you are contracting them (or outsourcing their business) to work for you, you are not liable to pay their super contributions. Nor will you pay tax, or any benefits to them, because of this their hourly rate is likely to be higher than you would pay an employee. It might be that you are looking for someone to work within your business and as a member of your business. Hiring a casual, part-time, or full-time permanent employee is the way to go if this is the case. Be aware that this does come with extra responsibilities that fall on you as an employer. The benefits though are many. You are bringing people into your business that are working towards fulfilling the same goals as you. They will have a better understanding of you and your business and what it’s about.
3. No Organisation or Paperwork
Keeping the right documentation is important, especially when it comes to tax time. As business owners, it is easy to give in to the temptation to put off doing the books until the end of the week or the end of the month. It is tempting but remember it is easy to get behind on financial statements and reports.
These must be filed on time and your sales tax payments, and bill payments should be made too. Putting off the paperwork means you have a lot of work to do to catch up when it’s tax time.
Our top tip is to give yourself a daily checklist of tasks you need to complete and keep all your paperwork organised neatly in files. You can do this digitally or physically. Don’t ever forget, you’re required to hold onto these files for seven years in Australia.
4. Mixing Personal Finances with Business
More than 25% of business owners admit they do not have a separate bank account for their business. This is a risky situation for you and for your business! You are giving yourself a huge and unnecessary headache. Mixing up financial accounts will make it tougher to sort out your personal expenses from your business transactions. Of course, your personal expenses are not tax-deductible which will cause a big headache when it comes to tax time.
The confusion of a mixed business and personal account may cause you to miss an expense that you could list as a business deduction. On the other side of the coin, you could get into trouble deducting inappropriate expenses.
Unless you’re a sole trader, opening up a separate business account and not mixing business and personal expenses is essential.
5. Contracting the Right Bookkeeper or Not at All
So, who should consider contracting a qualified and experienced bookkeeper? For small business owners that are not 100% confident in their money management skills, hiring a bookkeeper can be a great investment. While it is an added expense, it’s an investment into your business and its growth. The really good news is that it’s also something that is deductible during tax time! Some other benefits of hiring a professional bookkeeper include:
- A massive time-saving potential getting someone else to do the books. That means you spend more time running your business.
- You are contracting someone that will understand the ins and outs of business finance. They will be able to give you relevant and helpful advice.
- They will get to know your business. They will help give your business structure and help you work towards your goals.
- A great bookkeeper can help you address weak spots in your budgeting or cash flow.
- All your documentation will be well organised and available to you to access whenever you need it.
- They will help to take the stress out of money management.
Contracting the right bookkeeper for your business ensures they understand your business and the industry you operate in. It means you are hiring someone with the same ambition and drive as you. After all, they are business owners too! Do your research before hiring the right bookkeeper for you. Setting up your business to have good financial management can save your business a lot of money. It will save you time and stress.
If you are new to business accounting or need a little refresher, try out some of the tips mentioned in this blog. If you’re looking for a trustworthy and qualified bookkeeper in, you should speak to Liz Peacock from Keeping Numbers. If you would rather become more expert yourself then Liz can train you so that the intricacies of Xero become second nature to you.
Give her a call on 0405 801 119 for an informal conversation about your needs and how best she and her team can help you.
Keeping Numbers is based in Redcliffe but servicing businesses in Queensland and Australia wide.