By Eric Matthews, That Bookkeeper
Let's face it, running a small business is hard work. You can make it a bit easier on yourself by avoiding these 5 common bookkeeping mistakes.
It's really easy to get behind on your bills, especially in the beginning stages of a small business. In product heavy businesses you need to spend a lot of money, often before the first sale ever gets made. This can sometimes get your payables (the money you owe others) to uncomfortably high levels. When it's time to start paying them down, people use several methods. Sort them by age or pay off the small ones first to get quick wins. Maybe you pay the squeaky wheels first, or only pay the statements that show up on blue paper. The big mistake some owners make is to lump the bank and the government in with the company that sold you business cards. Maybe the phone company will wait an extra month, and not really hold it against you. Consistently paying your loan or your taxes late will do more than earn you a frowny face stamp on your next statement. Always pay loan and tax bills first, and then budget for the remaining payables with what money is left. Maybe you won't get a Christmas card from your printer, but at least they won't take away your home.
Too many business owners rely entirely on the Income Statement (aka Profit & Loss) to determine their success. On paper, you could show a net profit of $1,000,000. That's great, but that's not the whole picture. Guess what isn't on the Income Statement? Plenty…but loan payments and owner draws are two big ones. If you are paying yourself too much, or making huge payments every month for a mortgage or credit card debt, that huge net profit disappears quickly. There are countless situations where a company is making huge profits, but having their credit cards declined at Starbucks. Take a look at the big picture, including the Balance Sheet, Statement of Cash Flows, and good old fashioned common sense.
Yes, it's true, you can technically cram for taxes the way you crammed for mid-terms. As long as your taxes are all filed on time, you're certainly allowed to get your internal books caught up quarterly or even yearly. Heck…if you're paying the government too much, they don't care if your internal books are ever caught up. Your accounting records are meant to be a tool, not just a legal requirement. Current records will let you spot negative trends before it's too late to react. It's also much easier to correct mistakes when they're fresh. You might remember the $63.49 purchase on last month's bank statement that you're missing the receipt for. Will you remember what it was 7 months from now?
Just because your 3rd cousin on your Mom's side got a good grade in Math once, that doesn't necessarily mean you should hire them to do your books. I'm always surprised how often the company's bookkeeping gets handed to whoever drew the short straw. Owners will spend days agonizing over who they hire for the sales position, but rarely spend that much time on the person solely in charge of the company's financial records. No matter how boring bookkeeping is, it's still a very important part of a small business. Make sure you choose that person accordingly.
Net 30 (allowing people to take 30 days to pay you) isn't a law, and should probably be removed from your vocabulary, especially in the beginning stages of a small business. Too often a small business will generate large sales totals each month, but only collect on a small percentage of those. Positive cash flow is the most important part of growing a small business. This can't be achieved when you're letting people pay you whenever they get around to it. At the very least, you need to collect from your customers before you need to turn around and pay your vendors and staff. If you pay your employees monthly, collect on your invoices every 2 weeks. As long as you make your terms apparent from the beginning, and stay consistent, your customers will rarely object.
