8 Small Business Bookkeeping Blunders During Startup

| 6 min read

8 Small Business Bookkeeping Blunders During Startup

Running a bookkeeping consulting firm geared towards small businesses teaches you a lot about business startups. We see all sorts of missteps, whether it is right from the beginning or several years down the road. It is very rare that a business will do everything right during the startup phase. The list of tasks that need to get done to get your business up and running can be overwhelming. No matter how experienced you are in business you can’t be an expert in every facet of launching a business. It is amazing to me how reluctant people are to ask for help during the startup phase of a business. I think many people have the mindset to get their business launched by spending as little money as possible. However, this approach often leads to costly mistakes, which are more expensive in the long-run. It is usually much cheaper to pay someone to do something correctly the first time rather than pay them to fix your mistakes in the future. Here are 8 common bookkeeping mistakes I see new businesses make when starting their business.

Not Consulting With A CPA And Lawyer On Business Formation

The first thing I would recommend for any new business venture is to consult with a good CPA and lawyer. Although both of these professions come with large hourly price tags, your consultation should not be too in depth nor costly in the long run. A good CPA will assess your business and personal tax situation and go over several options with you. That initial tax consultation may cost a few hundred dollars but could easily save you thousands come tax time. A good lawyer is worth every penny. Having a lawyer help you with the initial formation and legal documentation for starting your business is worth the money. One of the first questions I have for any new client is if they have consulted with a CPA and lawyer. Don’t try and save money on this step as it will cost you much more down the road.

Doing Any Bookkeeping Without A Consultation

Many small business owners try and save money by attempting the bookkeeping on their own or having a friend help them. While this approach can work, I often find that it costs more money. I guarantee you that we would charge you less money if you have done no bookkeeping as opposed to any bookkeeping. The reason is that it is harder to find and fix your mistakes than to just do the bookkeeping correctly the first time. We also have no problem training you on how to do the bookkeeping correctly. I don’t ever recommend that a business owner completely step out of the bookkeeping process. Even if you are not handling the bookkeeping it is important to understand your financial reports and where the numbers come from. Learning to do the bookkeeping on your own is a great way to understand the financial aspect of your business. Get a bookkeeping consultation prior to attempting the bookkeeping on your own to learn how to do it correctly the first time. We even offer QuickBooks and bookkeeping support on an as needed basis to answer those questions that will eventually come up.

Choosing The Wrong Accounting And POS Software

It pains me to have to tell a new client that the accounting or POS software they chose is wrong for their business. You want to make sure that you choose the correct bookkeeping and POS software that meets your needs. I would say that in general a business owner tends to over buy for their actual needs. Many businesses buy QuickBooks without taking into consideration what version of QuickBooks they will need. Just because you want to be able to access QuickBooks from anywhere does not mean you automatically need to choose QuickBooks online. We feel that QuickBooks online is a much less powerful program than the desktop version. A simple VPN connection to a dedicated computer with QuickBooks desktop on it will give you a much more powerful program with the conveniences of accessing your data securely from anywhere. We also see a lot of businesses buy versions of QuickBooks that are overkill for their business. Another mistake we see is Mac users automatically choosing QuickBooks for Mac. The windows version of QuickBooks is a better program and can easily be run in Windows Parallel for Mac.
The mistakes made with selecting a POS system are not much different. I don’t think people do enough homework in assessing a POS system for their business. I have seen businesses go through three different POS systems before asking for advice from us. Some buy new systems that look all fancy but the functionality and reporting simply don’t work for their business. Other POS systems pop up only to go out of business a year later and you are stuck with software that is no longer supported. Choose a proven POS system that has good support and comes recommended for your industry. In your initial bookkeeping consultation be sure to ask your bookkeeper for advice on an accounting and POS system that will meet your needs.

Choosing The Wrong Bank

Choosing a financial institution may not seem like a big deal but it is a common mistake for many new businesses. Some may choose a small credit union to support their local bank or for the promise of low fees. Others may choose a bank nearby for the convenience. I only have a few rules for banks:
• Data must be able to be imported into QuickBooks.  Online bill pay that is compatible with QuickBooks is also a nice feature.
• No bank fees. Absolutely no bank fees! Find a bank to work with that has a way that you can set up your banking needs for free. Don’t think it is possible? Call me, I never pay bank fees.
• They keep up with cutting edge technology. You always want a bank that is keeping up with new technologies that make it easier for you to bank with them.
• They have an online interface that is secure and easy to use.

Ask your bookkeeper which bank they would choose and why. Another mistake I see businesses make is overcomplicating their banking structure. For the general small business you most likely can get away with a business checking and credit card. For a bigger small business you may want to consider having an operating checking account, a payroll checking account, a savings account and a business credit card. One common mistake I see businesses make is to open a new checking account for each new location they open. I don’t think this is necessary unless you are opening a totally different business.

Not Reconciling

This should probably be higher on the list, as in #1 on the list. However, I thought the other items were more related to setting up your bookkeeping system. From a bookkeeping procedural standpoint nothing is more important than reconciling. It is also the most common mistake I see businesses make; not reconciling. Reconciling your accounts is the only way to know you have accounted for all of your financial activity. One common reason I have found that businesses don’t reconcile is they come across a transaction that they don’t know how to code so they just skip it. You should enter and code all transactions to Ask My Accountant that you are not sure of what to do with. This will allow you to reconcile your accounts and it will also keep all of your questionable transactions in one spot for easy review with your accountant. Don’t stop reconciling after you have balanced your bank accounts. Many accounts can be reconciled including bank accounts, credit cards, payroll liabilities, loans and lines of credit. Reconciling all of your accounts is the only way to ensure that you are looking at accurate financial reports.

Not Analyzing Financials

One important step that many small businesses neglect is analyzing financial reporting. A business that ignores financial reporting and analysis is running their business blind. There is a lot of important data in your reporting that can help you make business decisions and grow. Ongoing reconciliation of accounts is important as it gives you real time analysis of your financial data. Accurate financials give you the peace of mind that reporting is up to date. You can then conduct a financial analysis to help spot trends; both positive and negative. Constant financial analysis will keep your business on track with your goals. You should also be able to create a budget and financial forecast based on your historical data.

Poor Procedures That Expose Your Business To Theft And Fraud

Many small business owners don’t understand how to put checks and balances into their bookkeeping system to control theft and fraud. Implementing certain procedures can help you to reduce and eliminate the possibility of anyone stealing from you. By using different members of your financial team to carry out certain tasks you can easily put checks and balances into your system. One example would be regarding cash. If you accept cash as a form of payment you are vulnerable to theft. One system that has worked well for us is to have a high level manager or owner handle all cash within the business. Cash deposits for each day’s sales or a series of days should be deposited by a high level manager. Your bookkeeper should then verify those deposits against your daily sales summary report and then record the deposit into your accounting system. Any discrepancies should be flagged for review with the business owner. You should also take the proper steps to make sure that your bookkeeper is not stealing from you.

Lack Of Accounts Receivable And Accounts Payable Procedures

Another area I see lots of small businesses really struggle with is accounts receivable and accounts payable. Although collecting money and paying bills is pretty elementary it is quite often an area that gets neglected. Once your AR and AP balances start to get out of balance it is difficult and time consuming to fix them. Make sure you apply customer payments to the correct invoices. Additionally keep on top of your vendor bills. If you get a statement and you are out of line call the vendor to identify the discrepancy and fix the issue. AR and AP are pretty simple, but also areas that can get out of control quickly. Make sure you are regularly running aging reports to keep your receivables and payables up to date.

We see many small businesses make elementary bookkeeping mistakes and create a mess. Quite often it is more expensive to identify and fix mistakes than it is to just do the bookkeeping correctly from the beginning. Do yourself a favor and get a free bookkeeping consultation to get your financial system set up correctly the first time.

What bookkeeping mistakes has your business made?

What would you have done differently in the business startup phase?

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