7 Common Bookkeeping Mistakes Small Business Owners Make (And How To Avoid Them)

Bookkeeping is one of the essential pillars of running a successful small business. However, many small business owners, especially those without a financial background, often make bookkeeping mistakes that can lead to significant financial consequences. In this article, we’ll highlight five common bookkeeping mistakes small business owners make and provide tips on how to avoid them.

While bookkeeping may seem like a straightforward task, there are several common mistakes that can occur, often without the owner realizing it. These mistakes can result in cash flow problems, compliance issues, and inaccurate financial reporting. By learning about these common errors, small business owners can take steps to improve their financial management.

1. Mixing Personal and Business Finances

One of the most frequent mistakes small business owners make is failing to separate personal and business finances. Whether new or old, big or small every business person should get in habit of keeping their business accounts completely separate from their personal accounts. When personal and business transactions are mixed, it becomes difficult to track business-related expenses, which can lead to inaccurate financial reporting and tax issues.

Initially, you might think that this doesn’t seem to cause any trouble, but as the business grows it may result in major financial issues.

The golden rule is to never combine business and personal matters, most importantly the finances. Business funds should always be used solely for business purposes. Similarly, never use personal money for business expenses. Most importantly, never declare personal expense as a business expense it may land you in huge tax problems. If you are unsure, make a quick call to your CPA to save yourself from adjusting a year’s worth of books down the lane.

Also, read: How To Register a Business In Manitoba

How to Avoid It

• Open a dedicated business bank account: This is the simplest way to ensure that personal and business expenses don’t get tangled up.
• Use business credit cards: Keep a separate credit card for all business-related expenses to streamline your bookkeeping.
• Maintain clear records: Always document the purpose of every transaction to easily distinguish personal from business expenses.

Keeping personal and business finances separate is essential not only for accurate financial records but also for compliance, especially during tax season.

2. Failing to Reconcile Accounts Regularly

Failing to reconcile accounts regularly is another common mistake small business owners make. Account reconciliation involves comparing your financial records—such as sales, expenses, and bank transactions—with bank statements to ensure they align. When businesses neglect this important step, discrepancies like duplicate payments, missed transactions, or unauthorized charges can go unnoticed. These issues can distort your financial records, leading to inaccurate reporting and cash flow problems. Regular reconciliation also helps detect fraud early and ensures that your business’s books remain accurate and up-to-date.

How to Avoid It:

• Set a monthly reconciliation schedule: Ensure that accounts are reconciled at least once a month to catch any discrepancies early.
• Use bookkeeping software: Tools like QuickBooks can automate much of the reconciliation process, making it easier to spot inconsistencies.
• Hire a bookkeeper: If reconciling accounts feels too time-consuming or confusing, consider hiring a professional bookkeeper to manage this task for you.

Regular reconciliation is key to maintaining accurate financial records and avoiding larger problems later.

3. Not Saving All Receipts

Many small business owners make the mistake of throwing away some receipts just because they think the amount is too small or irrelevant. But what they don’t realize is that this can lead to overspending on taxes, or not being able to show proof of expenses to the CRA when they are audited.

This bad habit can cause real issues for any business whether big or small, especially during tax time or a CRA audit. Most business owners tend to save receipts for large purchases like office equipment but overlook smaller expenses such as shipping costs or office supplies. Failing to track these smaller costs can lead to missed deductions, resulting in overspending or penalties if you’re audited.

How to Avoid It

To avoid this, keep documentation for all business-related expenses, “no matter how small”. You can store them in a physical folder or digitally, as the CRA accepts both original and digital copies. By doing so, you ensure you’re prepared for any audit and can fully support the deductions you claim on your tax returns. Properly tracking receipts is crucial for maintaining accurate financial records and minimizing the risk of fines.

4. Incorrectly Categorizing Expenses

Expense categorization is crucial for tracking your business’s financial performance and for tax purposes. Many small business owners either misclassify or fail to categorize expenses altogether, which can distort financial reports and complicate tax filings.

You you categorize your expenses incorrectly, this can lead to a lot of headaches and confusion during tax time. It’s essential to track all your expenses and separate them as either personal or business-related. Many small business owners think they can deduct any expense, but that’s not true. Tax authorities like the CRA have clear rules about what qualifies as a business expense. You can only deduct costs that directly contribute to earning business income. Misclassifying expenses can cause issues, so understanding these categories will help you avoid mistakes.

How to Avoid It

• Understand standard categories: Learn the basic categories used in bookkeeping, such as operating expenses, cost of goods sold, and capital expenditures.
• Use accounting software: Most modern bookkeeping software like QuickBooks includes built-in categories that make it easier to correctly classify expenses.
• Consult with a bookkeeper or accountant: If you’re unsure about how to classify certain expenses, consult a professional.

Misclassifying expenses can lead to inaccurate financial statements and missed tax deductions, so it’s important to get this right.

5. No Tracking Your Income

Not tracking income properly is a critical bookkeeping mistake that can have significant consequences for small business owners. A well-organized system to record income is vital to understanding the health of your business and preparing for tax season. While bookkeeping software can simplify the process, the accuracy of your income records is only as good as the data you enter. Many business owners try to track income manually or through makeshift methods, which can lead to errors, missed entries, and a chaotic tax season.

Without accurate income tracking, it’s easy to overlook payments or misreport earnings, which can lead to problems with cash flow or even tax penalties. Relying on DIY methods often results in a time-consuming, stressful situation, particularly when tax time rolls around. Outsourcing this task to a professional can free up time for you to focus on growing your business while ensuring that your financial records are accurate and up-to-date. This proactive approach helps prevent unnecessary headaches and ensures your income is properly accounted for.

How to Avoid It

1. Use Accounting Software: Use reliable accounting tools like QuickBooks or Xero to automate income tracking and ensure accuracy. These platforms simplify recording and organizing income.
2. Set Regular Review Times: Schedule time weekly or monthly to review and update income records, ensuring no entries are missed.
3. Outsource to a Professional: If managing income tracking feels overwhelming, consider hiring a bookkeeper or accountant. They can monitor and record your income accurately, helping avoid costly mistakes during tax season.

6. Procrastinating on Bookkeeping Tasks

Delaying bookkeeping tasks is a mistake that usually causes the most headaches for small business owners. This is because the longer bookkeeping is delayed, the more difficult (and costly) it becomes to catch up, which can result in missing receipts, forgotten transactions, and inaccurate books.

Bookkeeping is keeping records of small tasks and it builds a collection of numerous small tasks over time. So as you can imagine, it can’t be done at once. Delaying and piling up bookkeeping tasks will cause not only stress but even anxiety eventually leading to significant errors in the books.

No one likes the tedious task of bookkeeping but it’s a critical aspect of a business that needs to be done timely. But if you wait until your shoebox starts an overflow of receipts, it may lead to the following consequences:

• Hard time trying to remember what receipts for which transactions and their amounts
• Bank reconciliation will become extremely difficult
• You will have no idea about tax-deductible expenses

With all the above issues, you will not have enough time to identify and correct the errors. Finances will become out-dated leading to wrong business decisions Missing important tax deadlines

How to Avoid It

• Set a weekly schedule: Dedicate a set time each week to update your financial records. This prevents the workload from piling up and ensures accuracy.
• Automate where possible: Use accounting software to automate tasks like invoice generation, payroll, and expense tracking.
• Outsource your bookkeeping: If you don’t have the time or expertise to stay on top of bookkeeping, consider hiring a professional bookkeeper to handle it for you.

Timely bookkeeping keeps your financial records accurate and helps you avoid a last-minute scramble during tax season.

7. Doing it yourself: Is This a Mistake?

The reality is that small business owners do not like the boring task of maintaining their books but still insist on doing it themselves. But, instead of wasting time in managing the finances, they should use most of their time to grow the business. They should leave the burden of maintaining accurate books to the experts.

Bookkeeping requires specific skills to ensure the job is well done. A professional can carry out bookkeeping quickly and efficiently as he/she possesses the expertise to fix errors even the minor ones which are often overlooked. Working with a professional bookkeeper can save time, money and a lot of stress.

An expert bookkeeper is well aware of the tax laws and changes. It is good to have a professional for having an expert hand which will save you a lot of time and money.

The Importance of Accurate Bookkeeping

Bookkeeping is a crucial part of running a successful small business, but many owners make some common mistakes that can negatively affect their financial health. The good news is that all those mistakes are avoidable. If you have the time, try educating yourself so you can have a better grasp and understanding of your business finances. Alternatively, you can simply hire a professional bookkeeper to take proper care of all your bookkeeping responsibilities and keep your finances organized.

At Great Start Bookkeeping, we offer reliable and high-quality bookkeeping services tailored to your business needs. We’ll keep your books updated, keep you informed about your financial situation, and free up your time so you can focus on growing your business.

Get in touch with us today to book a FREE consultation and learn how we can help with your accounting or bookkeeping needs!