Can You Afford to Overlook Bookkeeping and Accounting

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Article Contributed by Satish Patel
As an ex-CPA and now an entrepreneur managing several small to mid-sized business, I am still amazed at how small business owners from a non-accounting background get duped and fall into crisis due to improper bookkeeping and accounting practices. In a worst case scenario you can get embezzled by someone you trusted to handle your books, if you are not careful or your business might fall into dire straits due to improper management of business records.
Some of the most common mistakes which can bleed your business dry and should be avoided at all costs are:
1) Failing to seek professional help and trying to do it all yourself or worse seeking unqualified help from family or friends:
It can be understood that as a small business owner you are short on funds and might chaff under the idea of seeking professional help. You are probably thinking “my business is too small to hire professional help; I am sure I can manage this on my own” or “my wife/son/relative/friend has some experience in bookkeeping and can manage this for me”.
A big mistake you might not realize immediately! If you are trying to do everything for your business from taking care of day to day operations, to selling and marketing and also handling your own books despite not being qualified to do so, will create serious consequences. Multi-tasking in this manner takes you away your focus from core business. Eventually as you become more and more busy, the company hits rock bottom. How can you sincerely justify the amount of time you spend on doing tasks such as bookkeeping which can be outsourced at much cheaper rates? Your time is precious and should be spent on direct revenue generation activities. Moreover if you are not qualified to handle book in proper consistent manner, you are doing more harm than good for your business. The same rule applies when hiring a friend, neighbor or relative. Before you financial record gets too sloppy and messed up, you need to get professional help in place. Bookkeeping and accounting is too important to experiment and play around with.
2) Failing to use logical accounting structure and systems in place:
Use a proper accounting system to keep track of your payments and receipts. Issue all your checks in the correct sequence and do the same with sales receipts. This will make it easy for you – and the IRS, if necessary, to track all your accounting data.
Do not maintain your accounts in such a way that the IRS will have doubts about your business. The IRS will be much happier if you have maintained your accounts in such a way that your entries can be traced right to the source.
This is easier said than done. You need to become aware of the proper accounting chart/structure for your business type. For example don’t classify expenses basis vendor names, the list might get overly long and exhaustive, instead use types of expenses like telephone charges, electricity charges, fuel costs, employee costs etc. You cannot store all bills in disarray in a shoe box and pray for divine intervention. If you are not familiar with your industry specific chart of accounts, your best bet is to contact an accounting or bookkeeping professional who can help you out. They will help you answer the following questions: Is your chart of accounts structured to your business? Do you know your breakeven point? Can you distinguish between your direct variable costs and fixed overhead costs? Developing a well-structured chart of accounts is the first step toward providing you with such answers to elemental business questions.
3) Failure to use separate credit cards for business and personal expenses.
Use one set of credit cards for business-related expenses, such as those related to travel and purchases – and another set to make personal purchases such as eating out with your family. That way, you can check your credit card statements easily and file those related to your business in your office files.
Set up separate bank accounts in the same way. Issue checks related to your business only from your business account and make all personal payments from your personal account. Follow this system strictly to avoid any confusion come tax time. Also do not forget to prepare a bank reconciliation statement and cross check all your entries.
4) Failure to maintain consistent and regular filing system:
Another major mistake indulged by small business owners is not maintaining regular and systematic filing system. A proper filing system should be broken by receivables, payables, bank statements and tax records. Depending upon your business needs, you might also want to keep a set of file folders by job. A good file system works in tandem with your written policies and procedures. Your policies should state where records are filed, how many copies there are and for how long they are stored.
At year-end closing, the year’s non-permanent files should be bound together and archived in a safe location (usually a metal fire-proof cabinet or stored off-site). Keeping multiple years’ worth of receipts together in one file drawer leads to wasted time filing and retrieving records.
In addition annual archiving helps tremendously in the event of an audit or even a lawsuit.
5) Failing to use proper technological help:
There is an old saying “Time is Money”. Bearing this in mind small business owners need to get techno savvy and study the various software packages available that can do loads of tedious bookkeeping and accounting tasks in a jiffy. The benefits from selecting a right accounting software for you business includes:
· Generate reports and bank reconciliation statement saving overdraw expenses
· Get on demand customized reports
· Simple to prepare year-end tax note
· Automatic reminders on payments and receipts
· Automatic downloads on payroll, credit card and bank statements
Still it is shocking how many businesses do not enjoy the benefits of such software and still try to do bookkeeping manually in a disorganized manner. If you are unsure of which software will help you most, seek help from professionals. They will definitely council you to make the right choice.
6) Failing to have regular back-up systems in place:
Next costly mistake to avoid is not having a back-up system in place. Honestly there is no excuse for not having proper and regularized back-up of your online bookkeeping and accounting systems.
7) Failing to prepare proper bookkeeping procedures and accounting guidelines to be followed:
This is perhaps the most important task a small business owner MUST undertake but usually avoid. They feel they don’t have the time to frame written bookkeeping and accounting procedures and there business set up is too informal for such rules and regulations to be established. Trust me; this can really land your business in hot waters. How can there be accountability and responsibilities if the correct wireframe of policies and procedures are not in place? Proper accounting policies and procedures ensure consistency and eliminate confusion when processing transactions especially when in future you have more employees handling the same tasks and sharing jobs and responsibilities. This eliminates mistakes and fraud. Take time to draft well thought out procedures which help maintain checks and balances. Your policies should cover all future possibilities to make it effective with room for modifications and improvement as per increasing complexity of growing and evolving business.
If you use these tips, you will avoid the pitfalls that many small business owners fall into in the maintenance of their records. When it comes to bookkeeping and accounting, an ounce of prevention is worth a pound of cure!
About Author:
Satish Patel is the President of Analtyix Solutions (www.analytixsolutions.com) which is a fast growing back-office service company providing web-based bookkeeping and accounting, tax preparation and part-time CFO services. Patel has a degree in International Management from MS University in Baroda, India and a degree in Accounting from California State University at Fullerton, USA. He has 20 years practical experience as an entrepreneur, managing several small to mid-sized businesses has made him an expert in day to day operations, human resource, technology, marketing, financial and strategic management.