Bookkeeping Mistakes Made by Sole Traders and Small Businesses
According to the smallbusiness.co.uk, six in ten small businesses fail within the first five years of opening their doors. Two key factors for this are poor financial management and lack of proper bookkeeping. The following seven bookkeeping mistakes are among the most common errors that cause small businesses to fail due to poor financial management.
A few of them may surprise you
1. Combining Business and Personal Finances
One of the golden rules of small business finance is to never combine business finances with personal ones. Before you even open your doors to the public, avoid this bookkeeping mistake and open a business bank account. This ensures that funds taken in by the business are used expressly for business purposes.
2. Forgetting to Keep Track of Petty Cash
Many businesses have a “petty cash” box, which is used for small purchases such as office supplies and other incidentals. If you make the bookkeeping mistake of not keeping track of this money you may end up spending much more than anticipated on these smaller purchases.
3. Failure to Reconcile Bank Accounts
Don’t panic when it comes time to reconcile your bank accounts each month. Chances are, once you’ve done it once or twice, it will quickly become second nature. Problems arise if and when the task is ignored for several months in a row. I reconcile mine and those of my clients’ once a month and it works fine.
4. Neglecting to Save Every Receipt
One of my real bugbears is when some business owners make the bookkeeping mistake of not keeping receipts. How can you claim for a legitimate expense when you have no receipt as proof of purchase?
5. Going Completely Paperless
It’s easier to go paperless than ever before. However, when it comes to bookkeeping, you’re much better off leaving a paper trail. Why? If everything is done electronically and you neglect to back up your files, there’s the possibility that you might lose everything if your hard drive crashes. Remember, when it comes to keeping track of small business finances, the simplest way isn’t always the best way.
6. DIY Bookkeeping
In an effort to save money, many small business owners attempt DIY bookkeeping. If your budget doesn’t allow you to hire someone, even part time, consider hiring someone on an “as needed” basis. The money you spend usually comes back to you several times over, considering the possible mistakes a bookkeeper will undoubtedly avoid.
7. Misclassifying Employees
Misclassifying employees and freelancers/contractors can be a costly mistake when tax and p.a.y.e time rolls around. These classifications determine who is eligible for benefits and exactly what benefits you must provide, such as overtime pay and workers’ compensation. If you’re not sure check out the HMRC classifications here
Now that you’re aware of these common bookkeeping mistakes regarding small business failure, your chance of being successful will likely be much higher.
Knowledge is power. The more you stay on top of your finances, the better off you’ll be.
If you’re a Sole Trader and need help with your bookkeeping, get in touch.