3 Common Bookkeeping Mistakes New Business Owners Make
Feb 05, 2024
I am so excited to be able to share a portion of an interview I did with Sam Chlebowski, host of the Designing Growth podcast!
We had an incredibly full discussion—if you want to hear the full interview (and you should!) then head to Episode 165 of Profits + Prosecco!
In the meantime, one of the big things we talked about were the mistakes I see people in corporate careers make when deciding to leave corporate…and the mistakes solo owner-operators of small businesses make with their bookkeeping.
Here is a list of the biggest bookkeeping mistakes small business owners make:
Bookkeeping Mistakes
Doing the “Safe” Thing
This first one doesn’t have as much to do with bookkeeping, but hang in there—I have a point.
I am what I like to call a “reformed rule-follower.”
I lived most of my life head-down, following the path in front of me that were laid out by someone else, figuring out what I needed to do to do the “right thing.” The “safe thing.”
So even though I was really inspired working with small business owners, and I always thought they were so brave and bold and I loved seeing their numbers at the end of the year, it always felt too risky for a rule-following accountant like me. I didn't see that future for myself.
My whole life was lived inside the box, because most of the adults in my life weren’t encouraging me to go for it or take risks; they were telling me to do what’s safe.
This isn’t just a thing for me, either—the tendency to lean towards studying accounting in the first place generally makes you somebody that's conservative with your risks. It makes you want something that you believe is secure…even if it isn’t.
The truth is, it’s not that secure to have all of your eggs in one corporate basket.
They’re the ones that are keeping everything afloat. You never know how that business is doing, even though that's your entire livelihood. It's actually super risky, but they tell us that it's safe, and we make the mistake of believing them.
So while this isn’t a bookkeeping mistake, it is a mistake many people who are attracted to professions like bookkeeping or accounting make!
Neglecting Bookkeeping
For the most part, when I get on client calls, the people I’m talking to have no system in place for bookkeeping at all.
They're not looking at their numbers throughout the year; they’re just trying to put them together for tax purposes.
You aren’t required to do bookkeeping for your small business; you should, but you don't have to and you won't get in any trouble for not doing it. So oftentimes, that means small business owners are going to neglect it.
To me, bookkeeping should be done monthly. So if you're compiling your numbers at the end of the year and calling it bookkeeping, it's close, but it's not giving you the insight that you need. Which leads me to…
Starting Too Late
In addition, when people are coming to me that late in the process, they’re already making very avoidable bookkeeping mistakes that have an affect on tax.
Unfortunately, by the time they're coming to me, it’s usually October of the next year, because they're looking at the extension deadline of the next year.
October 2023 is the extension deadline for all of 2022. That's when a lot of people come up out of the woodwork to file their taxes, and before that, they start looking for a bookkeeper.
Here’s why this is a huge bookkeeping mistake: when someone comes to me that late, we can't do any planning. We can’t be proactive. You've already set up your business wrong. You've mixed everything together. You didn't set money aside for taxes. And at that point, I’m forced to be the bearer of bad news, because there’s nothing I can do at that point to fix it.
This is the kind of thing that can send people back to working in corporate, because after two years, you realize that you made money, but then you spent it. And then the tax bill comes in and you still owe it, because you still made that money—you just spent it on rent and food and everything else that's not a deduction. And now you have a bill for the IRS, plus penalties and interest you can't afford, and you have to go back to work for somebody else just to make enough money to pay your tax bill.
All that stuff could have been avoided with a bookkeeper in play much, much sooner. And honestly, it broke my heart to see it. It’s such avoidable stuff; it’s just that there's no good solution after the fact.
Not Paying Attention To Tax Requirements
That said, even when I do share about tax stuff with clients, I often have a hard time getting anyone to listen to things that they should not mess up with taxes.
This bookkeeping mistake gets made because taxes just aren’t where everybody's focus is when they’re starting a business. Instead, they're focusing on their skill, their sales, and their delivery, followed by hiring a team, marketing, etcetera. The finances are always an afterthought.
Avoiding Looking at the “L” in P&L
Next on the list of common bookkeeping mistakes is not paying attention to the “Loss” piece of “Profit and Loss.”
To be honest, I can see how this happens. You're in a rat race trying to keep up with everyone else, and you think bringing money in will be the solution, so you only focus on what can help with that. But ignoring the money going out is definitely one of the bookkeeping mistakes that can deeply mess with your affairs later on.
We need to pay attention to both sides. If we don't know what we're profiting, we have no idea what we're doing. And if we're not profiting and we're running ourselves into the ground, we're not ever going to reach the goal that we've set out to achieve. But if we only look at profit and never at the loss, we won’t have that information to work off of.
Almost everybody starts a business for some form of freedom: freedom from debt, time freedom, freedom to travel, freedom to make our own schedule…whatever it is, we're looking for freedom.
If you're running a business that is not profiting enough to pay for your life, or you’re losing money, you are actually going in the opposite direction of freedom. You're getting into debt, you're spending more time on work, you have less money…and you don’t have a clear idea of why, because you're not looking at what you're making and losing.
If you just total up what you brought in and what you spent over one month and looked at it, even if it was in a simple spreadsheet (and I do sell a DIY template, if anybody needs one!), then you’ll actually be able to see how are you doing at the end of the day.
Most people know what they made last month in sales. Very few know their actual profit.
The biggest bookkeeping mistake that people make is avoiding this all together.
Sometimes it’s because of overwhelm, sometimes it's shiny object syndrome keeping us busy with other things, and sometimes it's really that they're afraid to look at it. But regardless, we have to get over that hurdle, because this is one of the bookkeeping mistakes that can kill a business fast.
Not Keeping Personal + Business Separate
One of the most common bookkeeping mistakes I see, even when everything else is in order, is not keeping your personal and business accounts separate.
This is one of the simplest things that you can do to help your business and make your bookkeeping easy, and it’s shocking how many people don't do it. Some do and others don't.
You want to get a separate bank account for your business, as well as separate credit cards that are used exclusively for business. If you're receiving money through Stripe, PayPal, or other POS systems, you want those transfers to be going into your business checking account. You want your expenses to be paid out of your business checking account. You want a separate credit card for business that your business checking account pays for. And as a solopreneur, you can move money between your business and your personal account, but that should be the way that it is: transfers.
But Wait…There’s More!
For more advice on avoiding bookkeeping mistakes, starting a small business, and scaling your business smoothly, listen to the full interview in Episode 165 of Profits + Prosecco!
EPISODE RESOURCES:
Need a tool to effortlessly see (and therefore INCREASE) your profits every month? Get the Small Biz Starter Kit: www.orderlyaccounting.com/kit
Want a peek behind the curtain into what it really takes to have a simple and scalable (and successful) bookkeeping business? Get access to my free, on-demand four-part series, 6 Secrets to a Simple, Scalable Bookkeeping Business: www.katieferro.com/6-secrets
Need to boost your bookkeeping basics? Join BABs now: https://www.katieferro.com/become
To browse my workshop library and find more resources for your bookkeeping business, visit https://www.katieferro.com/coaching now!
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