As Albert Einstein once said, “The definition of insanity is doing the same thing over and over again but expecting different results.” This sentiment is certainly relevant when it comes to small business bookkeeping. Many entrepreneurs stumble through tax season each year, stressed out by missing receipts and accounting errors, then breathe a sigh of relief after filing the taxes and think, “Whew, hope I never have to do that again!”
The fact is that you’ll deal with taxes on an annual basis for the rest of your life. So you should learn from your mistakes and try to make each year better than the last. This type of continual improvement isn’t difficult as long as you apply a proactive approach that begins well before April 15.
“Accounting errors happen from time to time, but many common accounting mistakes can be avoided with proper planning and preparation,” says a small business accounting report from The Balance Small Business. “We all know that it usually takes more time to correct a mistake than to get it right the first time. Interestingly, it is also cheaper to identify and correct mistakes early in a project rather than waiting to correct the problem later.”
When it comes to categorizing your expenses, the sooner you can catch an error, the better. Even minor mistakes compound over time. And the further removed you are from an expense, the less likely you are to remember the details surrounding it.
So what are some of the hazards you should watch out for? Here are 8 mistakes that small business owners often make when it comes to categorizing their expenses:
- Making guesses: If you’re not sure where to categorize an expense, avoid the temptation to simply make an educated (or not so educated) guess. Every error you make today brings consequences tomorrow. When you encounter a categorizing quandary, take the time to learn the correct solution.
- Inputting mistakes: Sometimes you know how to categorize an expense correctly, but you simply fail to do so. These mistakes happen to all of us. It might be adding an extra digit to a number or dropping an expense into the wrong category. Regardless of the specifics, you should always be on guard for these small blunders.
- Failing to reconcile: You should always compare your bank statement with your business’s bookkeeping at the end of each month. Make sure everything lines up and that your categorizations have all been done correctly. This process is how you’ll catch the type of inputting errors mentioned above. It’s easy to conduct this exercise regularly. Wait until the end of the year, however, and it can be a real nightmare.
- Tossing receipts: Even if you correctly categorize your expenses, they’re incomplete if you don’t keep the corresponding receipt. It’s easy to lose these small slips of paper, so make sure to save a digital file in a secure location. That way, if your pants go through the wash with a bunch of receipts in the pocket, you’ll still have them recorded.
- Not getting back up: You should be saving more than just your receipts in your accounting software. Every expense categorization should be accounted for, with details that’ll help as you reconcile monthly and at the end of the year.
Although you’re aggregating all of this data in your software, don’t throw away the original documents. These receipts and other documents could be crucial if you’re audited. Digital files have been known to be accidentally deleted or corrupted from time to time. You can guard against that disaster by keeping the hard copies as backup.
- Making it personal: Avoid getting into the habit of using your business credit card for personal purchases. This practice is a common error, and there are fairly simple remedies available, such as reimbursing the business account. But when this blurring of lines becomes commonplace, you run the risk of major categorization errors. And those mistakes will haunt you during an audit.
- Using inferior help: Just because someone advertises themselves as a bookkeeper doesn’t mean you should trust them with your finances. Look for a professional who has proven experience in your specific industry. Leverage your professional network or trade organization to solicit referrals.
- Mixing business with business: Occasionally, small business owners categorize an expense correctly, but they assign it to the wrong place. This mistake can happen when you have multiple business entities within the same accounting program. Always double-check that your expense went exactly where you intended it to go.
Taking a more proactive approach to bookkeeping may sound like a burden, but it will always save you time and money in the long run. And accurate categorizing of expenses plays a huge role in this process. Commit today to learn from past mistakes and do better this year, and your bottom line will thank you.