Top 5 Bookkeeping Errors Made by SMEsBack
Some bookkeeping or accounting errors are minor, insignificant and easy to correct. Others however can be far more serious and costly affecting your business’ financial health. However done properly and regularly combined with management accounts your bookkeeping is key to managing and growing your business. Poor financial management is one of the main reasons businesses fail.
This post highlights the most common bookkeeping errors made by small businesses which we come across.
Error 1: Leaving it
This is probably the biggest mistake we come across at The Financial Management Centre. Bookkeeping is seen by many business owners as a necessary evil, mundane task which invariably is at the bottom of their “to do” list. What they already perceive to be an unpleasant chore becomes worse at it eats into their evenings and weekends. In some cases the bookkeeping is just not done and that inevitably leads to problems and big accountant’s fees further down the line.
Bookkeeping won’t go away it needs doing and the sooner you do it the better. Keeping on top of the bookkeeping ensures transactions being processed are recent and so you have a better chance of remembering things than if you wait until your accountant gives you a list of queries months later.
Error 2: Poor quality bookkeeping
There is a saying ‘garbage in garbage out’ and this is so true when talking about bookkeeping. Doing your own bookkeeping might seem like a good idea that will save you money. However done wrong it can take your accountant longer and therefore cost you more due to the additional work required to unravel your mistakes and bring your accounts up to date. In many cases it is easier to start from scratch than try to unpick someone else’s work.
There are a number of reasons behind poor quality records with the main ones being:
- Lack of knowledge and training
- Inconsistencies often caused by leaving the bookkeeping to the last minute and rushing which in turn leads to mispostings and inconsistent classification of transactions
- Lack of detail
- Data entry errors such as incorrect dates and amounts
Error 3: Poor record keeping and a lack of systems
You need to keep your records for at least 6 years. This includes all sales and purchase invoices and bank statements. Sales invoices should be sequentially numbered and filed in order. We would suggest bank statements are filed in chronological date order. There are several ways to file your purchase invoices and so our advice is to choose a logical way which works for you and is easy to find invoices if you ever need to refer to them. A shoe box or carrier bag is not a good filing system and will more than likely increase your accountant’s fees.
Error 4: Not having separate bank accounts and reconciling them with your accounting records
It is both tempting and easy to use your private bank account for business. If you operate a limited company you must have a separate bank account in the company’s name but in any case mixing your business and personal finances makes things unnecessarily complicated. This is a very common problem for new business owners who have not taken some professional advice and guidance before starting.
Regularly reconciling your bank accounts ensures that all transactions are accounted for in your books. We recommend that you do this at least on a monthly basis as left this can become a time consuming task which if left to your accountant will be reflected in their fees.
Error 5: Lack of petty cash management
The old adage 'small things add up' nicely sums up petty cash. Small businesses in particular still rely on petty cash for daily and incidental expenses. These items are commonly ignored by business owners with receipts not kept and proper records not being maintained. Whilst individually these transactions tend to be small over the course of a year they do mount up and become a considerable amount. Failing to keep records means you can’t account for that expenditure in your accounts and furthermore any cash differences will be attributed to the owner / director(s) of the business.
Poor bookkeeping processes and errors can be problematic for businesses in more ways than one. It is tempting to try and do your own bookkeeping in order to save money. However using a trained and experienced bookkeeper such as The Financial Management Centre will enable you to concentrate on managing your business and driving it forward. A good bookkeeper will more than pay for itself by freeing up your time as well as reducing your year end accountancy fees. Click here to read about the benefits of outsourcing your bookkeeping to a professional.