Common Small Business Bookkeeping Mistakes (And How to Fix Them)
Bookkeeping is a crucial business task. Accurate financial records give you the insights you need to make smarter decisions, manage cash flow and plan for growth … not to mention, they’ll help keep you compliant come tax time.
However, many small business owners don’t come from an accounting or financial background. That means bookkeeping often isn’t a strength, but a challenge. That challenge is exacerbated when an entrepreneur is busy handling other important duties, including managing clients, employees and daily operations. And when bookkeeping is rushed or handled without proper training, mistakes can creep in.
Some errors are small and easily corrected. However, others can snowball into bigger problems. The good news? Many bookkeeping mistakes are quite common; with the right knowledge, then, they’re fixable.
Let’s explore some of the most frequent bookkeeping missteps small business owners make. We’ll also discuss how to prevent them, and what to do if you’ve already made them.
Mistake #1: Mixing Personal and Business Expenses
The problem: It’s tempting to use your business account for personal purchases (or vice versa), especially when you’re short on time. But blending personal and business transactions can make it difficult to reconcile accounts, track deductible expenses and present accurate financial statements. Plus, it can also erode any liability protection your business structure might otherwise provide.
The prevention:
- Open dedicated business bank accounts and credit cards.
- Get into the habit of separating expenses immediately rather than “sorting it out later.”
If you’ve already mixed expenses: Review your statements carefully and reclassify transactions properly. A bookkeeping professional can help you clean up past records and set up systems to avoid future overlap.
Mistake #2: Skipping Regular Bank Reconciliations
The problem: Reconciling your books with your bank account ensures your records match reality. Without this step, errors like duplicate entries, missing transactions and fraudulent charges can go unnoticed.
The prevention:
- Schedule monthly reconciliations as a non-negotiable task.
- Use accounting software to automate parts of the process.
If you’re already behind: Start by reconciling the most recent month, then work backward. A professional bookkeeper can help speed up the catchup process and identify discrepancies.
Mistake #3: Poor Recordkeeping for Receipts and Invoices
The problem: Most business owners know that tossing receipts in a shoebox or forgetting to send invoices is begging for headaches come tax time. But it can also prevent you from getting paid what you’re owed, and getting paid on time.
The prevention:
- Digitize your receipts with a scanning app or accounting software.
- Establish a consistent invoicing process: Send invoices promptly, track unpaid balances and follow up on overdue payments.
If your receipts and invoices are already a mess: Short of dedicating a lot of time you might not have to playing catch-up, you should consider outsourcing your bookkeeping, even if only temporarily, to get back on track.
Mistake #4: Misclassifying Expenses and Income
The problem: Putting expenses into the wrong categories — or worse, not categorizing them at all — results in inaccurate reports. Misclassification can also raise red flags with the IRS, especially if you errantly claim deductions and credits based on those mistaken classifications.
The prevention:
- Learn the basics of expense categories relevant to your industry.
- Rely on accounting software that can automatically categorize common transactions.
- Work with a CPA to ensure expenses are categorized correctly and consistently.
If you think you’ve been misclassifying for some time: Adjustments can be made to realign your books, but you’ll likely want to talk to a professional about doing so.
Mistake #5: Ignoring Accounts Receivable
The problem: Many small businesses are so focused on generating sales that they forget to track whether customers are actually paying on time. Uncollected payments lead to cash flow problems and can strain your ability to cover expenses.
The prevention:
- Keep a close eye on your accounts receivable aging report.
- Set clear payment terms and enforce them consistently.
- Use accounting software with automated reminders to nudge clients when invoices are past due.
If you realize accounts receivable are already a problem: Begin sending reminders out to any late-paying vendors. If you have penalties or late fees, enforce them. Once you’re caught up, consider these tips to ensure better invoice compliance.
Mistake #6: Not Backing Up Financial Data
The problem: Relying solely on manual spreadsheets or a single device puts your records at risk. A crashed hard drive, lost laptop or security breach could erase months of work.
The prevention:
- Use cloud-based accounting software with automatic backups.
- If you prefer spreadsheets, set up a secure, recurring backup system.
- For sensitive data, make sure you’re using encrypted storage solutions.
If you aren’t backing up your data: The good news is, “the fix” is the solution to this, too — immediately begin backing up your systems.
Mistake #7: Waiting Until Tax Season to “Figure It Out”
The problem: Many small business owners ignore their books until tax season arrives, then scramble to catch up. This approach often leads to missed deductions, rushed (and error-prone) reporting and unnecessary stress.
The prevention:
- Treat bookkeeping as a year-round process, not a once-a-year chore.
- Schedule weekly or monthly “finance check-ins” to update records, reconcile accounts and review reports.
Already behind and nearing tax season: Start fresh today and work backward, prioritizing the current tax year. Ask a professional to help get you up to speed.
Ready for Cleaner Books?
Bookkeeping mistakes happen, but they don’t have to derail your business. By implementing stronger processes, leveraging the right tools and enlisting expert help when needed, you can keep your financial records clean.
McManamon & Co. is an accounting, tax, fraud, forensic and consulting firm that serves small and midsize businesses. Our experienced accounting team can help you identify bookkeeping errors, implement best practices and restore accuracy to your financial records so you can make better business decisions with confidence.
Call us at 440.892.8900 or contact us online today to learn how we can help you keep your books in order.
Tags: accounting, McManamon, McManamon & Co., small business, small business accounting | Posted in accounting, McManamon & Co.