5 Bookkeeping Mistakes That Cost Your Wholesale Business Money
Small Business Bookkeeping Has A Cost If Not Done Right
Bookkeeping is one of those necessary aspects of business. However, it can end up being one of the last things small business owners and service professionals want to deal with. It’s important to know that bookkeeping is more than just adding categories to your expenses and income. Good bookkeeping gives you data you can use to make better decisions for your business growth.
So you can imagine that if your books aren’t organized and accurate, is a stressor that can build up and over time wreak havoc on your business plans. There are many common mistakes that we see business owners make, especially physicians, attorneys, allied health providers, therapists and other service professionals.
These bookkeeping mistakes can cost your business a whole lot of money, time and energy. All three of those things are precious resources you can’t afford to waste. Today we are focusing on the top 5 bookkeeping mistakes that you need to avoid.
Bookkeeping Mistake #1: Choosing the Wrong Bookkeeping Software
First, the worst kind of bookkeeping software you could have is not having bookkeeping software at all. It’s time to scrap the paper ledgers and excel spreadsheets. (yes, we still see people doing business this way.) Manual data entry takes a lot of time and can be riddled with inaccuracies. It also makes it hard to securely share your information with your accountant, a team member or leader.
In fact, we have seen many business run solely on excel spreadsheets, with manual data entry. While we do recommend Quickbooks Online to many of our clients, it’s important for any business owner to have proper bookkeeping software. This reduces errors in the books, it saves time by syncing accounts and information so you don’t have to manually input information in a form and it makes communication with your accountant or tax preparer easier.
Second, the wrong bookkeeping software is the unused software. Maybe you signed up for software, you even categorize your expenses but it stops there. Your software should be used not only for categorizing expenses, but also reconciling accounts, automating accounts receivable and payable as well as giving you reports that you can use in forecasting and budgeting. Which brings us to the next bookkeeping mistake.
Bookkeeping Mistake #2: Not Understanding Your Bookkeeping Reports
You may have your books up to date, but are you using those reports? Too often business owners don’t know what to do with their P&L, their balance sheet or statement of cash flow. When they ignore these reports, they miss trends in their business that would better inform their marketing strategies, pricing, and budgeting. Your reports are something you should look at monthly.
P&L (PROFIT LOSS STATEMENT)
We will have more free trainings to come on what to do with these reports but for now you want to look at your income and expenses in your P&L. You are looking for:
All accounts are up to date and there is no one owing money to you
The types of income, taking note of your major sources of revenue and what other sources of revenue that you could potentially grow
What expenses are usual and customary
Were there any expenses that you can eliminate
What expenses you want to start planning for in your cash flow
BALANCE SHEET
Your balance sheet gives a snapshot of the financial position of your business. It looks at the assets and liabilities. You are looking for:
What the business owns (assets)
What the business owes (liabilities)
What the ratio is of debt to equity
STATEMENT OF CASH FLOW
The statement of cash flow shows you how you incur cash and where that cash goes. It lets you know where the money goes and also if the business is gaining in value. It shows you what liquidity you have in your business. You are looking for:
How much money goes towards operations - paying towards main operations of the business to provide services or products
How much money goes towards investing - purchasing equipment or land, buildings
How much money goes towards financing - paying dividends, issuing shares, or borrowing money
How much did cash increase or decrease since the last period
All three of these reports, when reviewed together, give you a financial picture of the business. Your P&L is meaningless if you are in the negative with your cash flow or if you balance sheet shows excessive liabilities compared to assets.
When we meet with other service professionals and small business owners, these reports are reviewed quarterly and we educate our clients to make sure they understand what to do with these reports. This is what makes bookkeeping essential to your business growth planning and why if you don’t run the reports you are making plans with only a part of the information you need.
Bookkeeping Mistake #3: Lack of Reconciliation
It would be nice to think that all reports are accurate and that bookkeeping software, banks and humans never make mistakes with numbers. But it simply isn’t the case and that is why we need reconciliation. Many business owners who do their own books will categorize transactions and run reports but forget to reconcile their accounts.
Reconciliation is the process where you check your bookkeeping software entries against the bank statements to make sure that everything is accurate. Reconciliation also ensures that all the money in the business is accounted for. No system is perfect but with checks and balances in place, you are more likely to have accurate books. You will also discover if there were payments not recorded, if money was lost or stolen or if there were unnecessary duplicate expenses.
This is a crucial task for every business. We have seen clients miss big expenditures because they didn’t reconcile their accounts or only reconciled one or two of their accounts. Lots of money can be lost without reconciliation. ALL of you accounts need to be reconciled on a monthly basis. Sound boring? That’s why it’s a task you want to outsource to a bookkeeper, so you can focus on the more important stuff.
Bookkeeping Mistake #4: Lack of Sub Categories
All of your transactions will be categorized in your bookkeeping. These categories tell the IRS where your money went and helps your accountant when it comes to tax planning as not all expenses are taxed the same. Most bookkeepers use general categories - office supplies, travel, dining and entertainment, education, etc. - but they make a huge mistake when they don’t utilize subcategories.
Subcategories vary per type of business but essentially they give you a more detailed report of your transactions. For example, if you have several sources of income you could categorize your transaction as income OR you could categorize the transaction to the type of income so that you know percentages of the types of income. A service professional may have several types of services and they can see how each service contributes to the overall income which will help them decide what services to expand or terminate moving forward.
Bookkeeping Mistake #5: Breaking Confidentiality Don’t Use Bookkeeping Software
Since we specialize in working with service professionals we know how important privacy can be. Many medical and mental health professionals are bound by HIPAA law and thus have to keep private health information encrypted and secure. Bookkeeping software is not secure in this way.
Too often we see well meaning professionals input private information, client name or diagnosis or type of treatment received into their bookkeeping software. This is a huge privacy violation that can cost you a lot of money if you were to ever be caught and fined.
You need an encrypted software to interface with your clients and customers. That software can sync solely the financial data to your bookkeeping software. Do not use your bookkeeping software to invoice your clients if you provide any services that are under HIPAA.
What to do about your bookkeeping mistakes.
You may have read through this article and realized that you have made a few mistakes in your bookkeeping. We all make mistakes in our businesses. The key is that when we have been made aware of these mistakes that we take action to rectify the issues and learn our lessons.
So here are some things you can do moving forward to avoid making these mistakes.
GET BOOKKEEPING SOFTWARE
If you haven’t already gotten software for your business, now is the time. If you are going to use a bookkeeper, they may even have a discount code for you (we do!). Get support on moving into paperless bookkeeping. You can hire someone to do the data entry of your past ledgers into the software. You can use apps to scan your receipts in so you no longer need to keep files of receipts. It’s time to ditch the paper for a more organized and streamline process in your business.
GET PROTECTION
If you are bound by the privacy laws such as HIPAA then you now know to not put Private Health Information (PHI) in your bookkeeping. You may replace client names for now with medical record numbers or you may consolidate the income into subcategories of income type and take out all references to patients or clients.
GET DETAILED
What details would help you know what income and expense types you have in your business so you can make better decisions? Step away from those general categories and start using subcategories to help you have a more detailed picture of your business. If you aren’t sure what subcategories to use, one of our bookkeepers would be happy to consult with you on what to consider.
GET EDUCATED
Reports can overwhelm a person until they learn how to use them. If you don’t understand you reports, then ask for help. Get someone to teach you what to look for. This is why we meet with our clients quarterly. We want to be sure they truly understand and not just try to check off a box on their to-do list.
GET ACCURATE
Make sure all of your money is accounted for, that you know where it comes in and where it goes. Have checks and balances in place so you can be confident about the financial health of your business. If you don’t have time to reconcile your accounts, then you need to hire this out to a bookkeeper.
Need more bookkeeping support or just want to avoid all of these mistakes? Click here to book a consult to discover how Grow the Books can empower you as a business owner through bookkeeping.
This article was republished with permission. You can find the original article on the Grow The Books blog here.
Connect with Greg Higdon, Grow The Books
Greg Higdon is the Founder of Grow the Books, a bookkeeping company for small businesses. With over 13 years of experience in education, he teaches his clients so they are empowered and armed with a clearer understanding of what their numbers mean for their business decisions. When he isn't balancing books and helping clients you can find him roasting coffee, drinking coffee, and reading about coffee.
Website: www.growthebooks.com
