Every business has to start somewhere. Kahuna Accounting started out of frustration.
For years Kahuna Business Group suffered some big financial losses from self-inflicted and avoidable wounds and costly financial mistakes.
As a small business, you may think you’re safe from these mistakes, but that’s simply not true! In fact, the smaller your business is, the more important your financials are to the success of your business and possibly even the wealth and health of your family. A small error can stunt your growth and end in financial disaster.
After learning from mistakes and how to turn the daunting task of bookkeeping into a value-added part of our business, Kahuna Business Group launched Kahuna Accounting – “The Virtual Accounting Team for Entrepreneurs.”
Based on our own experiences and what we’ve helped entrepreneurs get through in terms of bookkeeping for their business, here are the top 8 mistakes entrepreneurs make with bookkeeping.
1. Intermingling Personal and Business Funds
Imagine having two buckets of quarters sitting right next to each other. You need to make sure they are kept separate, but your dog walks by and knocks over both buckets and the quarters are all over the place. Now you have to try to remember which quarters go into which bucket. Does this sound like fun to you?
One of the most common mistakes, if not the most common among entrepreneurs, is mixing personal and business funds together. The more mixing of the two, just like the quarters, the harder it is to separate when it’s time to report income or file taxes.
The Fix: First, make sure you have separate bank accounts. When taking out business funds for personal use (draws), take out the exact amount of cash and keep a record of it.
Maintain separate credit cards for business and personal and pay tax payments from your personal accounts when incurring a tax expense related to your personal expenses.
2. Overstating Income
The higher your income as an entrepreneur, the more taxes you owe. It seems simple enough, but a common problem lies in overstating income and not reimbursing yourself for expenses paid for with personal funds. If you pay for business expenses out of personal funds and don’t reimburse yourself, you’re technically lying about your personal income and will overstate it when it’s tax time. Don’t cheat yourself out of money by forgetting to write off business expenses you pay with personal funds. This is another example of the problems that can arise when you mix personal and business funds.
The Fix: If possible, never use personal funds for business expenses to keep things separate and the buckets of quarters from touching each other. If not possible, keep all of your receipts and make sure you’re paying yourself back as soon as possible when paying for business expenses from personal accounts.
How many of us wait until the last minute to complete important tasks? When we’re worried about that next paycheck or landing a big sale, spending a few hours trying to balance our books from the last couple of months takes a backseat on our priority lists. We have worked with hundreds of entrepreneurs who have spent days if not weeks trying to catch up at the end of the year just to have a chance at having their taxes ready by April 15th.
The Fix: Schedule time for accounting and bookkeeping if you are doing it yourself. Make it a priority, or it will become one at the most inconvenient times.
4. Losing Track of Transactions
Sometimes if you ask clients who a specific deposit was made for they can’t remember, so they guess. Sometimes they didn’t even create an invoice. Other times they give the wrong client credit. Losing track of a single transaction can cost your business thousands of dollars. We’ve come across numerous clients who have lost track of invoices and never billed a client for a significant amount of work.
The Fix: Proper bookkeeping can prevent these transactions from slipping through the cracks. If you don’t have a good bookkeeping process in place, get one! If you’d still like to handle it yourself, develop a system where you create a record of every ingoing and outgoing transaction as soon as it’s made.
5. Confusing Pay and Draw
Taking a draw and paying yourself a salary have different implications for business taxes. A draw is for sole proprietorships and partnerships and a salary is a payroll amount that comes from a corporation.
The Fix: Know the proper way to take money out of your business for personal use that corresponds to the type of business you own.
6. Not Seeking Professional Help
All entrepreneurs need professional help. Just because you are skilled at sales doesn’t mean you are proficient in accounting or even managing day-to-day tasks.
The Fix: Don’t force yourself into important aspects of the business that you have no interest or skills in. If you don’t know what you’re doing and don’t have the time to learn, get a professional to help. The money you spend will be a better investment than an inefficient use of your time.
7. Cash Reconciliation and Accrual Statements
Do cash reconciliation and accrual statements sound like a foreign language to you? Don’t worry, you’re not alone, and there is help available.
The Fix: Take a few minutes to learn about cash reconciliation and accrual statements. These are far from the only important terms and processes you need to know about, but they are two of the most frequently misunderstood concepts among the entrepreneurs we work with.
8. Data Entry Mistakes
Carry the one and then…Wait, what did I just do? Have you ever said this?
Accounting is not kind to people who make data entry mistakes, but nearly all of us make these types of mistakes.
The Fix: Establish a solid grasp of accounting concepts and always have checks and balances in place to make sure mistakes are caught quickly and corrected. Use a cloud-based accounting program that can import information directly from statements and help identify mistakes immediately to avoid these critical errors.
The most important takeaway we’d like to leave you with is to KNOW YOUR NUMBERS!! You can’t win if you don’t know how to keep score. This game is far too important to lose by not taking the time to learn what you need to know. Don’t let your business slip away from you because you don’t understand how your financials impact your business. Take a step today to ensure the future of your business and discover what works best for you in keeping up with the financial numbers that power your business.