The process of bookkeeping is an essential function for any small business. Keeping track of financial information is not only a requirement of the Internal Revenue Service, but it's also the primary means for equipping small business owners with the tools necessary to make informed business decisions. Despite its significance, however, many small businesses fall victim to a series of common mistakes that often lead to future problems down the road. Understanding these perils—and how to avoid them—can save you time, money and stress.

The Pitfalls To Avoid

1. Neglecting to Keep Receipts

The Mistake: One all-too-common mistake is failing to keep receipts for business expenses. Some small business owners believe that scribbled notes or a collection of receipts for the majority of purchases is sufficient. However, this mindset can lead to issues if the IRS ever comes knocking on your door to conduct an audit.

The Fix: To avoid this mistake, create a systematic way to capture and store receipts. Consider using the QuickBooks Online mobile app's receipt capture function which provides a convenient way to capture and attach digital receipts to your posted transactions. Moreover, establish a routine for identifying and organizing your purchase receipts weekly to ensure that expense substantiation does not get overlooked.

2. Mixing Personal and Business Finances

The Mistake: Another common error is co-mingling personal and business finances. This often happens when owners use personal accounts for business transactions or vice versa. This practice complicates the bookkeeping process and is not best practice.

The Fix: To steer clear of this problem, make sure you open and use a dedicated business bank account for all business purchases. In conjunction, you should utilize a business bank debit card or dedicated business credit card for any point of service or online purchases. This helps to provide clarity during tax season and is a critical step in protecting personal assets in the event that legal issues arise.

3. Inconsistent Data Entry

The Mistake: Inconsistent data entry makes it very challenging to maintain a set of accurate books. If small business owners forget to input transactions on a regular basis, there is a high probability that there will be discrepancies in their financial records.

The Fix: Implement a consistent data entry schedule. Set aside specific times each week to enter financial transactions into your preferred accounting system such as QuickBooks Online. This practice fosters accuracy and ensures that your records reflect the true state of your business finances.

4. Ignoring Reconciliations

The Mistake: Failing to complete bank reconciliations on a regular basis is a serious error that many small businesses make. It is only through this process that it is possible to quickly and accurately spot discrepancies between bank statements and bookkeeping records.

The Fix: Schedule regular monthly reconciliations, ideally as soon as the month ends and your bank has issued a statement for the prior month. By comparing your bank statements with your records, you can catch errors early, reducing the risk of fraud and inaccuracies that could compromise the financial health of your business.

5. Not Using Bookkeeping Software

The Mistake: Relying on spreadsheets or even pen and paper for bookkeeping remains a common practice among small businesses as a means to save money on recurring expenses. Unfortunately, this method is cumbersome, inefficient and often leads to errors.

The Fix: Invest in reliable bookkeeping applications like QuickBooks Online. Transitioning to cloud-based tools streamlines the process, reduces the likelihood of mistakes and provides valuable financial insights through the use of native reporting features.

6. Failing to Track Expenses

The Mistake: Many small businesses overlook the importance of tracking every expense. They abide by the "close is good enough" mantra to exclude minor costs. This approach can lead to inaccuracies in budgeting and reduces the amount of deductible business expenses.

The Fix: Utilize tools such as the QuickBooks Online mobile app to categorize and track every single expense. If the expense is relevant to your business, include it. Over time, including all of your expenses will benefit you come tax time.

7. Underestimating the Value of Professional Help

The Mistake: Many Small business owners often believe that they can manage their own bookkeeping without any professional guidance. This approach almost always leads to costly errors oftentimes requiring additional billed time from your tax accountant.

The Fix: If you are a startup, consider hiring a professional accountant or experienced bookkeeper at the onset to help you structure your records and establish sound accounting workflows. This will save you significant money in the long run. If you are an established business, utilize the expertise of a professional to provide you with invaluable feedback on the health of your business, guidance for navigating complex financial regulations and tips to help mitigate the risk of costly financial recordkeeping errors.

8. Overlooking Tax Obligations

The Mistake: Failing to account for tax obligations can lead to significant financial repercussions for a small business. Unfortunately, some businesses neglect to set aside funds for taxes, thinking they can cover it when the time comes. This is a short-sighted approach that can have real consequences especially as it relates to cash flow.

The Fix: It is imperative to create a tax strategy that includes setting aside funds on a regular basis. Consider keeping a separate tax savings account and transferring funds there on a regular basis. This will help you avoid last-minute scrambling and potential cash flow issues when tax payments are due.

9. Waiting Until Year-End to Get Your Books in Order

The Mistake: Unfortunately, many small businesses wait until the end of the year to prepare their financial records for tax season. This procrastination compounds a business owner's problems as rushed work leads to mistakes which could cause inaccuracies in your tax return.

The Fix: Adopt a proactive approach by maintaining your company's books throughout the year. Take time to dive into your books on a regular basis so you can gain a better understanding of your business’s financial health. That way, you can feel better prepared for tax season with insight into your tax obligations at year-end.

10. Ignoring Financial Reports

The Mistake: Lastly, many small business owners overlook the value of financial reporting. This mistake severely limits their understanding of the business's performance and hampers potential opportunities for cost savings and growth.

The Fix: Regularly review key financial reports, such as profit and loss statements, balance sheets and cash flow statements. In addition, capture and review reports specific to your business to monitor key performance indicators. By understanding the data available in these reports, you can obtain a level of financial clarity that will enable you to make data-driven decisions.

A business owner is tasked with responsibility for every aspect of their business including what it takes to keep the doors open, their customers happy and their employees feeling valued and appreciated. This requires significant time and effort. Add in the maintenance of business finances and you can see how overwhelming things can quickly become. Without adequate attention given to your business finances, you are likely to experience a number of problems. Try to make it a point to improve your knowledge of what it takes to maintain a sound set of books or involve a seasoned professional to help. Either way, make sure that your financial recordkeeping commands the attention it deserves as the risks associated with poor execution can be damaging to you and the long-term health of your business.