We’ve all read the statistics showing that half of all new small business fails within the first five years. The primary cause they say is poor financial management and for many business owners bookkeeping is often a task left to the last minute. With a poor understanding of accounts and compliance regulations this often can mean costly mistakes leading to penalties for late or incorrect lodgement of returns.
It makes economic sense to engage a professional certified bookkeeper to do the day to day recording of your sales, purchases, GST paid and received, reconcile your credit and bank accounts and provide you with accurate financial statements. This will enable you to manage and control your business and not be part of the statistics.
#1 Backup
You may be surprised that I have placed backup as number #1 mistake. It has never failed to astound me how many businesses I have been into that have no backup system or have a rudimentary backup system that they have never checked to see if it was backing up correctly, only to find out in the worse possible way that it was faulty. I have personally seen what happens when a backup has failed and seen the devastation of a business losing all their data and having to start all over again. Have you ever considered the costs associated in having to reconstruct your records? What would you do if you lost your accounting data today? This doesn’t need to happen if you have the right software for your business data backup. Data needs to be backed up and kept in different locations to avoid potential losses and even more important in today’s business world if you are operating in a paperless environment.
Let a professional certified bookkeeper evaluate your backup to ensure that your data is secure, should there be a burglary or fire. Don’t waste your time trying to keep up with the latest software, just leave it to the professional’s advice on the most reliable backup and be secure that your data is safe.
#2 No Bookkeeping System
The shoe box full of receipts is no myth and no way to run a business. What usually happens is the business owner is too busy starting up the new business that they don’t put in a bookkeeping system in place and the bookkeeping is put aside during the first few months. By the time they realise that they need to organise a system they find they have lost receipts, have forgotten small expenses and because it’s too chaotic it goes into the too hard basket only to rear its ugly head with the financial year looming. Leaving this late means you won’t have the reports you need so you can’t make fully informed decisions in running your business in the most profitable way.
Hire a professional certified bookkeeper right from the start and at least have your records maintained on a monthly basis along with a proper filing system. This will save you time and money on your taxes and will provide the necessary documentation should you ever get audited. Having a bookkeeper provide accurate financial reports on a regular basis means you can “nip problems in the bud” and is essential to the growth of your business. A bookkeeper with the knowledge and skills necessary to complete your books accurately is crucial to the success of your business.
#3 Using the Wrong Accounting Method
Cash and Accrual are the two accounting methods and it’s important to know which method is right for the type and size of your business. Cash accounting is based on the actual flow of cash in and out of a business and records the sale or service when the money is received. Accrual accounting records when they are incurred with the recording of income and expenses as they happen. This makes it easier to accurately match revenue to expenses. With cash accounting the business can look profitable during the months with few expenses and unprofitable during months with large expenses with no way of really knowing the difference.
A professional certified bookkeeper has all the necessary skills and experience to assist you with the choice of accounting methods.
#4 Combining Personal and Business Finances
This is one of the most common bookkeeping mistakes that I see business owners make yet the easiest to avoid. It is crucial that these expenses are separated correctly regardless of size. If your business is audited you will need to provide complete records of business related expenditure separate from your personal expenses and this is easier if the business has its own separate bank account. The first task for a new business owner should be to open a separate business banking account and deposit all the business income into that account. By combining them all together you could be missing out on tax deductions and on the other hand if you are declaring personal receipts as business expenses you could potentially incur costly fines.
Another common mistake is owners drawing funds from the business impeding the business and impacting cash flow. The question to ask is- are you sustainable? One small business I worked in the owners was clearly paying himself far too much to maintain his lavish lifestyle in comparison to his business income. Even when the company was financially suffering he continued to pay himself and as a result lost the business owing staff and the ATO thousands of dollars.
A professional certified bookkeeper could assist you in avoiding unnecessary fines by setting up your separate business bank/credit card account. A common mistake is that personal expenses are recorded as expenses which mean your financial statements will be inaccurate. Your bookkeeper will set up an equity account called Owners Drawings, if there are more than one owner, create an account for each one. In this Owners Drawings account will be owner’s contributions, owner drawings and personal transactions. By using this equity account your Income Statement (Profit and Loss) won’t be affected.
#5 Not looking at the Big Picture
I’ve seen owners use their Income Statement (previously known as Profit and Loss) to determine their business success. On your Income Statement you may have made a net profit of $250,000 but you need to know what your expenditures are. What you won’t find on the Income Statement is your loan payments, your mortgage, your credit card debt, your personal drawings, all these payments that makes that $250,000 profit dwindle fairly quickly. Looking at the Big Picture means you have to read your Balance sheet and print out a statement of cash flow for a true indicator of how your business is progressing.
A professional certified bookkeeper would be able to provide you with accurate financials and keep you up to date with your day to day cash flow so you can plan for contingencies. Having accurate information means you keep well informed of how your business is really moving ahead. No need for knee jerk reactions when it’s too late to rectify the situation.
#6 Entering Credit Cards as an Expense
This is a common error I’ve seen in small business where the credit card is recorded in an account called Credit Card Expense. The correct way to record credit card expenditure is to set the credit card as a liability account in your bookkeeping system and then record the payment from your bank account to the credit card. The individual transactions are recorded to the individual credit card transaction and reconciled the same as a bank account. By entering the transaction you will always know how much you owe on your credit card and reconciling the accounts ensure all the charges had been processed correctly and that you have proof of the receipt showing the expenditure.
A professional certified bookkeeper can set up your liability account for your credit card correctly and reconcile monthly ensuring accuracy of expenses occurred.
#7 Payroll and Superannuation
Your business could really suffer if you haven’t met your legal obligations on your payroll. These are the questions that you need to ask yourself. Do you know if you are paying the rates legally required? Are your leave accruals accurate and that you are confident accruing the right annual and personal leave entitlements? Are your contractors actually employees? Having an ABN does not necessarily make someone a contractor and you may still be liable for paying their PAYG and Superannuation. Do you have systems in place to make payments to employee’s nominated funds ensuring complicity with PAYG, Workers Compensation and Payroll Tax Obligations?
One small business that invited me to look over their accounts was unnecessarily spending more money than they had to on superannuation contributions. Their previous “bookkeeper” didn’t set up the superannuation and entitlement calculations correctly in the accounting software and this resulted in staff being paid a lot more than the 9.25% on their ordinary times earnings. She was happily paying them on every wage category you could think of. This type of error was costing this small business thousands of dollars.
A professional certified bookkeeper can set up the right payroll system for your business and you can be confident that your staff are being paid correctly, on time and you are compliant with your statutory obligations.
#8 Failing to account for GST Correctly
This is particular applies to dealing with GST on insurance, motor vehicles, registrations invoices that have components of GST and GST free on the invoice. Have you risked claiming GST credits without realising that your supplier is not registered for GST? Are you aware by incorrectly allocating expenses it can result in missing out on valid tax deductions that should rightfully be claimed. You could also incur penalties for incorrect GST coding of entries.
By employing a fully accredited professional bookkeeper your data and your transactions will be coded and entered in accurately making the preparation of your expenses reports and income statements precise where you can deal with budget overruns early. It means that you will know if your cost of sales and margins are in line and that you are claiming the deductions you are entitled to.
#9 Not recording cash expenses
It is crucial to track all expenses related to running a small business so these costs can be taken off your total income at tax time and it gives you a better sense of overall profitability throughout the year. When these expenses are not recorded it overstates your annual income. It is good business practice to keep petty cash on hand to cover minor cash expenses and set up a simple system to manage your Petty Cash.
A fully accredited professional bookkeeper can easily set up a Petty Cash system and ensure that all your receipts and expenses are recorded and the Petty Cash account is reconciled on a regular basis.
#10 Not reconciling your Books
One of the most fundamental aspects of bookkeeping is reconciling your books with your bank/credit statement each month. This means the data entered is compared to your bank/credit statements to ensure that there are no discrepancies. If there are any discrepancies they need to be dealt with straight away but unless you reconcile you won’t pick up these errors.
Leaving this to a professional bookkeeper will ensure that your reconciliations are done properly and avoid financial problems later on. They know what they are looking for and how to deal with inconsistencies and can call your bank on your behalf if necessary.
#11 Credit
Often a small business will general large sales totals each month but can only collect of a small percentage of these. As a positive cash flow is important part of growing a small business and can be achieved if you make your payment terms clear and apparent from the beginning and be consistent on this. Allowing your clients to take 30 days to pay you when you have fortnightly wages is going to make it difficult for your cash flow. If clients don’t pay within your defined terms a courtesy phone call to them will ensure that they are aware of your terms and hopefully you don’t have to be ringing them all the time.
It might be time to hire a certified bookkeeper to work on a plan to get your invoices back on track and chase up your creditors. This will free you up to work on your business.
#12 Filing System
When starting your business there has to be a filing system put in place and a daily or weekly filing schedule established. More often or not paperwork gets left all over the place and important papers can get overlook and thrown out.
Hire a certified professional bookkeeper to set up your filing system and have your systems in place and avoid the chaos.
#13 Your Break-even Point
For a company to succeed it is imperative that you know your break-even point. Chasing turnover without regular job costing and Income Statements (Profit and Loss) means you are running blind. You need to take the time to know and understand your cost structure. Know your fixed costs as opposed to your variable costs. Understand the gross margin you need to achieve to be profitable. Are you pricing for profit or for survival? Are you recovering your true costs of materials and variable (marginal) costs or simply quoting your marginal costs.
A certified professional bookkeeper will ensure your Chart of Accounts is structured so that fixed and variable costs are identified. This will mean you will be able to identify your break-even point and the margin you need to achieve profitability. You will be able to monitor margins and be alerted to over runs with a monthly Income Statement (Profit and Loss) reports highlighting deviations from the budget so you can evaluate the necessary remedial action ahead of time.
Bookkeeping is your biggest weapon when it comes to business management and growth. A good bookkeeper is essential to the success of your business and well worth the investment.
For all your bookkeeping needs contact Jaleana who is certified, has a National Police Clearance and Personal Indemnity Insurance at Bookkeeping Fairy Perth on 9344 5852 or 0400 102 358. Check out her website www.bookkeepingfairyperth.com.au