Top bookkeeping mistakes that are losing you money
As an entrepreneur, cash is king. It not only helps keep the lights on in your business but also funds your life, from the roof over your head to your kids’ soccer camps to nights out with the girls. That cash is your lifeline, and the reason why I wanted to fill you in on the biggest mistakes I see clients make with their bookkeeping that is losing them money.
So grab that cup of coffee or glass of vino and take a minute to better your business (and how to ensure these mistakes aren’t keeping YOU from earning more).
NOT SEPARATING PERSONAL FROM BUSINESS
One of the first steps for any entrepreneur when setting up their business is to separate their business finances from their personal.
Why?
To Prevent Headaches. You will spend 4x more time on your bookkeeping and figuring out your taxes if you don’t separate your finances (and no, that’s not an overstatement). Those hours you spend combing through trying to separate everything out are hours you could be spending attracting new clients, doing more revenue-driven work, or upping your marketing, all of which impact you financially. When they say time is money, you best believe it.
To Protect You. Even if you’re set up as an LLC, which gives you an added layer of protection against people who may sue you, co-mingling your business & personal funds can illustrate to a judge that the separation between the two is very grey, meaning someone could at that point have access to your personal money, too. Keeping them separate defines a clear line between the two and helps protect you in the even someone were to try to go after your money.
The best step for separating your business finances from personal is to open a business bank account and run all of your business income and expenses through there.
Need help choosing one?
You can find my suggestions in this free Small Business Bank Account Comparison Chart.
NOT RECONCILING
Reconciling is basically a fancy word for making sure that things match, and, in the case of your business, you’re capturing all the income & expenses you’ve incurred. And let me tell you - it’s one of the most important things to do in the bookkeeping world in terms of your bank or loan accounts.
You typically reconcile at the end of each month by pulling up your monthly bank statement and verifying the number ties to the ending balance of that account for that month in your accounting software (i.e. QuickBooks, Xero, etc.).
True story on why this is so important:
A few months ago, I was going over the books for a new client and found some things just weren’t adding up. The balance on one of their loans in QuickBooks did not tie to what it showed they still owed when I logged into their online bank portal.
So I dove in. And what did I find?
4 months of missing transactions in QuickBooks. And when I went to review their prior year tax return, I found that $6,000 of interest expense related to that loan wasn’t included, meaning they overpaid thousands of dollars in taxes.
Luckily the government does allow you to amend returns, and they received close to $2,000 back.
That, my friends, is why you reconcile.
NOT KNOWING WHAT YOU CAN RUN THROUGH YOUR BUSINESS
This isn’t me giving you permission to spend your money just because it’s a “business expense.”
That is a horrible strategy and one I hope you do not use.
However, knowing what you can run through your business that is tax deductible (and what isn’t) can help you become strategic when it comes to saving money on taxes.
And if you were going to be spending the money anyway, why not include it as an expense so you pay less taxes?
I developed a cheat sheet that details the expenses you want to ensure you’re running through your business (i.e. ones most people miss!), and great news: It’s FREE. Get your copy below!
The Entrepreneur’s Tax Deduction Cheat Sheet
Now onto the flip side for our last mistake…
INCLUDING PERSONAL EXPENSES OR PAY AS BIZ EXPENSES
If you are on your company’s payroll, meaning you get a paycheck and will receive a W-2 from your company at the end of the year, then that cost is determined an expense.
If you are paid guaranteed payments (if you don’t know what this is, you probably aren’t getting them), then that cost is determined an expense.
Pretty much everything else you pay yourself is not an expense to the company, and you shouldn’t use it to decrease your profit.
That also goes for your quarterly estimated tax payments and personal expenses, like house cleaning or haircuts or clothes, too. Neither of those are an expense and shouldn’t be included on your income statement. Instead, categorize those as distributions, which reduce the equity you have in your business.
Have questions? Feel free to leave them in comments below!
