In the early days of their business, entrepreneurs often tackle every single process, including bookkeeping and accounting, by themselves. Too often, though, entrepreneurs without experience in these areas make small bookkeeping mistakes that can have a big, lasting impact on their business.
As the CEO and founder of cloud-based bookkeeping and accounting platform Xendoo, Lil Roberts has seen her share of these mistakes among new business owners. To help, she outlined some common errors entrepreneurs make when doing their own books and offered her advice on how to avoid them.
They don’t do monthly bookkeeping
In Roberts’ experience, the No. 1 bookkeeping mistake she sees small business owners make is failing to keep up with monthly bookkeeping, which results in business owners not having a good sense of what their profits are and how they can affect their profits throughout the year.
Roberts gave a hypothetical example of a pizza shop owner who knows they’ll need to eventually replace their pizza oven, which will cost about $50,000. The shop owner also made $100,000 in profit on which they’ll be paying income tax during the following tax season.
“If you're not doing monthly bookkeeping, you don't really know that you truly have $100,000 in profit and that you're going to have to pay $33,000 to $35,000 in federal income tax,” Roberts told CO—. “You also don't know that you could have bought that pizza oven before the end of the year and used Section 179 … so now that pizza oven only would’ve cost you $34,000.”
In other words, said Roberts, if an owner “runs their business from the bank account” instead of consistently evaluating their books, they lose out on valuable insights into their business operations.
[Read more: How to Set Up Your Accounting Right from Day One]
They don’t have checks and balances
Another common bookkeeping mistake that Roberts sees with small business owners is that they fail to put checks and balances in place.
“Approximately 40% of all small business owners get embezzled at some point by an internal team member,” she explained. “[When you] don't have checks and balances, [you] don't always have to have an outside eye to protect that.”
Entrepreneurs may not always understand their books, but they might also avoid asking for help when they’re out of their comfort zone.
Roberts gave a few tips to protect against internal fraud:
- Sign the checks yourself as the business owner.
- Gather supporting documentation if somebody internal in your organization is preparing checks.
- Back up your records and receipts, because “with today's desktop publishing software like Adobe Creative, anybody can make up an invoice.”
They don’t understand their books
Entrepreneurs may not always understand their books, but they might also avoid asking for help when they’re out of their comfort zone, Roberts said.
“Lots of times business owners are Type-A personalities and they don't want to say, ‘Hey, can you explain to me what this means, or how we could trim the costs here?’” she added.
While sometimes difficult to admit a lack of knowledge in a certain area, it’s in a business owner’s best interest to trust and involve professionals’ experience in important situations like bookkeeping.
[Read more: 7 Tasks Small Businesses Can Outsource]
They don’t have KPIs in place
Key performance indicators (KPIs) help business owners guide their organization in the right direction based on goals and progress. Roberts advised setting a specific revenue number that you need to have and working out your KPIs based on that.
“Pick what your cost of goods percentage should be or cost of wages percentage should be, and then understand if the price that you're selling your product for will allow for those margins in your business,” Roberts said.
They treat their business like a piggy bank
Roberts said the best way for business owners to stay on top of their finances is to truly know their numbers. This means avoiding the temptation to treat your business like it's a piggy bank.
“[Business owners think], ‘Hey, money's in there. Oh, that money's mine,’” said Roberts. “But if they knew the numbers, they'd understand that [they] need that much money for my payables, and that much money for a rainy day, and that much money for income tax, etc.”
“At the end of the day, it's about knowing your numbers and planning accordingly,” she added.
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