Bookkeeping is complicated. Most entrepreneurs are passionate about their business, but they generally don’t go into business for themselves because they are really good at accounting and finances.
This can lead to a lot of confusion and mistakes.
It’s tempting to just ignore the problem, but I assure you that it won’t just go away. Any issues or mistakes with your bookkeeping will grow and spread until it’s a tangled mess.
Here are 5 common problems in the books of small businesses and some recommendations on how to fix them.
Inconsistency
Owning a business is an all-consuming task and it's easy for time to get away from you. Bookkeeping is normally one of the first casualties of the over-extended entrepreneur.
So, you procrastinate and tell yourself you’ll get to it later. Then, when you finally have some time, you’ll go in and try to do 6 months worth of transactions in one sitting. This always just leads to frustration and mistakes.
The Fix
This probably isn’t what you want to hear, but the only fix for this issue is to just do it. Schedule time every week or month to go over your books and record all the transactions for the period. Setting aside an allotted time just for bookkeeping will help avoid the mistakes that inconsistency creates.
You’ll become more comfortable with your bookkeeping and develop a good feel for how much time you need to spend each month.
Bookkeeping should be a priority. It is exponentially easier to process your bookkeeping as it happens, rather than trying to play catch up months down the line. Let’s be honest here, how likely are you to remember the reason for a $15 charge in your account in a month? 2 months? Even just 2 weeks? Do yourself a favor and stay caught up.
Too many/not enough accounts
There are a lot of moving parts in every small business. Money coming in, money going out. It's important to accurately code all the transactions so that you have a firm grasp on cash flow.
Those new to bookkeeping will often either use the default (and very limited) chart of accounts standard in bookkeeping software, or, on the other end of the spectrum, add so many accounts that it’s impossible to do a fair evaluation of the finances.
There is a perfect sweet spot for your chart of accounts. Enough accounts that you can easily see your spending and income by category, but not so many that it takes a week to go through the financial reports.
The Fix
Most businesses in the same industry have very similar, if not identical, chart of account (COA) requirements. Normally, it’s easy to find a chart of accounts that is standard for your industry. You may have to add or remove a couple based on your specific business, but this will give you an excellent starting point.
If you are not able to find a COA that fits, fear not! Even a standard, generic COA is better than the ones provided by most bookkeeping software, which somehow manages to be both too limited and too broad.
Make a list of your normal expenses and income streams, then compare your list to the COA. Just be aware that every single money stream in or out does not necessarily need it’s own account. For example, you don’t need an account just for paper purchases when a more all-encompassing office supplies account will work.
If you’re just starting out in software, you can just upload the new COA that you’ve created. If not, you may have to add some new accounts to your existing software. Please keep in mind, it is not a good idea to delete any accounts that have previously been used in a transaction. So if you find yourself with an account you no longer need, make sure you process the appropriate transactions to remove everything from the account, then make it inactive. Or just stop using it and make a note with the date and reason for your future self.
Not reconciling
Have you ever reconciled your books? The average entrepreneur isn't familiar with the concept, but it's a basic bookkeeping duty.
Reconciling is comparing your books to your bank statements to confirm that everything matches. You may remember the days before debit cards and the internet when everyone tracked their spending in their checkbook, then compared it to their bank statements at the end of the month. Also known as balancing your checkbook.
This is an activity that has gone out of practice with the convenience of the debit card, but it's still crucial for your business bookkeeping
Small errors have a tendency to spiral out of control and reconciling your account will catch these errors before they become massive problems.
The Fix
Each month, go through your books and bank statements to verify that everything is correct and matches. Most accounting software will allow you to do this within the program, but you can even use just a spreadsheet of that's how you roll.
Take a look at the totals. Do they match? If they do, great! Of not, you'll have to do a deeper dive to compare each transaction item by item until you find the culprit. This can be tedious work, but it'll save you major headaches down the road. Even small errors can multiple and expand as time marches on so catching them early is the key to success.
Mixing accounts
Mixing your business and personal accounts is messy. It makes it unnecessarily difficult to accurately assess the financial health of your business by hiding it behind irrelevant data.
Any unnecessary transactions just create extra work for you and increases the likelihood of mistakes. You can’t just delete them, because then your accounts won’t reconcile with your books. And you can’t ignore them for the same reason. Every transaction through your accounts has to be accounted for in the software.
The Fix
This one seems like an easy fix, but I know that is not always the case. It can be difficult to pull your business and personal finances apart, especially if you have been mixing for a while.
I assure you that it is worth it. You will have to use separate cards and separately pay for any mixed transactions, but a little work on the front end will save you from mistakes that could have been avoided.
Many banks offer business accounts with low or no fees, although there is often a minimum balance required. Do a little research on the banks and credit unions near you and find one that fits with your business. Then, make sure that you are sticking to the separation.
Not closing previous periods
Like reconciliation, I often find that most business owners don’t know that that should be closing their books from previous periods. All this means is that those periods are done and no one can easily go in to make changes.
This is an excellent way to prevent fraud if you are not the only one with access to your books. Once a period is closed, it signifies that all transactions from that period are accounted for and there is no need to go back in to make changes.
The Fix
This is only something you can do from within accounting software, but they do make it very easy for you. You’ll want to complete the reconciliation process from above before you close any periods. Wait until about halfway through the next period, or until you can be reasonably sure that all transactions have been accounted for.
Any accounting software offers the option to close your books. You will just need to do a little research on how to do it in your specific software. Closing your books doesn’t mean that you can’t go back in and add a transaction that was missed, but there will be a few more steps in the process. Once your books are closed, any attempt to make changes will result in a warning message and you will most likely have to enter a password.
Clean bookkeeping is possible for everyone with a little guidance. Take some time to do an in-depth look at your books and see where they might be lacking.
If you find that you don’t want the hassle, then an outsourced bookkeeper might be right for you. The right bookkeeper can keep your books organized and give you key insights on how to help your business grow.