For Part I, please see this post.
In Part II, we will take a look at some other potential bookkeeping pitfalls you may run into as you run your business
No Chart of Accounts: A “Chart of Accounts” (COA) is defined by Wikipedia as, “…a created list of the accounts used by a business entity to define each class of items for which money or the equivalent is spent or received. It is used to organize the finances of the entity and to segregate expenditures, revenue, assets and liabilities in order to give interested parties a better understanding of the financial health of the entity.” In layman’s terms, the COA is intended to be a road map of all of your business financial transactions – both incoming and outgoing. It is designed to have separate registers for each bank account, credit card, etc., as well as properly classifying categories and sub-categories.
If you do not have the skillset developing a Chart of Accounts this can become a problem very quickly. You need to know how to track income and expenses in the correct categories to ensure proper measure your company’s financial health. If you do not adhere to general bookkeeping guidelines for standard categorization and follow generally accepted accounting practices, you are in going to run into issues as you grow your business.
Neglecting to Reconcile Accounts: This is sort of a no-brainer, except that it quite often gets overlooked and slips to the bottom of your “to do” list when you get busy and other things take priority. You need to consistently reconcile your books with your credit card statements, bank statements, and any other financial statements that you receive as part of your business finances. This is one of the key fundamentals of good bookkeeping. Oftentimes businesses either incorrectly reconcile, or fail to reconcile at all on any kind of regular (e.g., weekly or monthly) basis. The primary benefit of reconciling accounts is to make sure that the statements you receive equal the amount of cash on your books. It also minimizes errors and identifies potential financial issues. Using a professional bookkeeping service can alleviate these problems for you.
Not Keeping Separate Bank Accounts: All too often small business owners tend to co-mingle their personal accounts and business accounts – not for any nefarious reasons but in many cases simply because they started out using their personal accounts and never opened a specific account for their business – and as their business grew, this never changed. It’s critical that your personal and business finances be kept separate at all times, regardless of size, because if you are ever audited, you will need to provide complete records from both your business activities and your personal expenses.
Poor Management of Petty Cash: As a small business owner it is quite likely that you keep a small amount of petty cash on hand, but have no way to accurately track how it gets spent and by whom. Make sure that you get (and use) a petty cash lock box and that you get receipts for all disbursements out of that box. Petty cash may be a small amount, but you will be surprised at how quickly you can burn through it when you are not tracking where it goes and who is spending it.