Get your startup off on the right foot by instituting bookkeeping best practices on Day One.
As an outsourced bookkeeping and controller services provider, I’ve seen business owners make the same handful of mistakes over and over. The good news? Because these mistakes are so common, they’re easy to anticipate — and to avoid.
Save yourself time, money and hassles by guarding against these four common bookkeeping errors.
1. Not Separating Business From Personal Finances
This is an easy trap to fall into, especially if you’re new to owning a business. Because it’s your business, it’s understandable that you might think of the financing as your money — and not adequately segregate your personal accounts from your business accounts. At first, it might not seem to matter. If you use your personal credit card to buy computer equipment for your new business instead of getting a dedicated business credit card — well, what difference does it make, as long as the bills get paid?
The difference will become apparent if the bills don’t get paid. If you’ve made no attempt to separate your personal finances from your business finances, then you could forfeit the protection normally afforded personal assets in a business bankruptcy proceeding or lawsuit. That means, among other things, that you could lose your house.
“Piercing the corporate veil” is the legal principle that creditors can use to go after your personal assets if you’ve failed to distinguish your own finances from your business’ finances. Yes, there are plenty of other good reasons to avoid paying business expenses with personal checks, or using the same online payment service for both company and household expenses, or not having a dedicated company credit card. The most important one, however, is that it can cost you everything you own.
2. Not Closing Your Books Each Month
Again, this is an easy habit to fall into when you start a business. So much comes at you so fast, it’s all you can do just to pay your bills as they come in and invoice your customers as the orders go out — let alone take the time to reconcile everything at the end of each month.
But that creeping sense of overwhelm is exactly why you have to do be disciplined about the month-end close. Taking a financial pulse on a regular basis is the soundest way to monitor the health of your business. Are any of your customers more than 60 days in arrears? More than 90? What can you do to collect?
Are some of your product lines performing worse than anticipated? Are some performing better? What can you do to reduce (or even eliminate) the former and promote the latter? These are the decisions that can separate a successful business from a struggling one, and the monthly close is the most reliable way to get the financial insights you need to drive those decisions.
3. Not Putting a Second Set of Eyes on Your Books
Even if you have a dedicated staff of honest team members, mistakes can happen. If a $10,000 transaction is accidentally recorded as a $1,000 transaction, that can have a significant impact on your relationship with a customer, a vendor, your CPA, the IRS or all of the above. And tracking down the mistake can take precious time — time that we’ve already established is in short supply. A second set of eyes can help ensure that the missing decimal place is spotted right away, before the customer is invoiced, the vendor is paid or your tax documents go to your CPA.
And that’s just in the case of avoiding honest mistakes. That second set of eyes, and a conscious segregation of duties, also serves as a critical security measure. Far too often, when a single person is both reviewing the company’s bills and paying them, the temptation to commit fraud can be too great to resist. Outsourced bookkeeping and controller services are an effective hedge against this.
4. Not Hiring a Payroll Provider
Some business owners try to save money by cutting all of their employees’ paychecks themselves. But calculating withholding taxes can be complicated — especially if some of your employees live out of state and work from home part or all of the time. As the business owner, you’ll be liable for any unpaid employment taxes or compliance failures.
And that’s to say nothing of the added distraction of meeting the requirements of benefits programs, calculating paid time off and other HR functions attached to payroll or the negative impact on employee morale if you underpay someone or are late to cut their check.
Basically, the simplest way to confirm that a competent payroll provider is well worth the cost is to try to get by without one.
Learn from Others’ Mistakes
If you’re thinking of starting a small business — congratulations! Few things in life are more personally rewarding. And by avoiding these common bookkeeping mistakes, starting a business can be financially rewarding, too.
At Supporting Strategies, our experienced, U.S.-based professionals use secure, best-of-breed technology and a proven process to provide a full suite of bookkeeping and controller services. Are you ready to learn how you can move your business forward? Contact Supporting Strategies today.