Top 3 Bookkeeping Mistakes of Entrepreneurs

If you asked 100 entrepreneurs what their net income was last month, quarter or year - how many would know?

How about if you asked that same group how strong their balance sheet was?

Let’s make it a little simpler.

How many of those 100 entrepreneurs have reconciled their bank accounts within the past 30, 60, 120 days?

From my experience, not anywhere close to enough.

But why?

The simple answer is that bookkeeping can be overwhelming, coupled with the fact that most business owners who are wearing multiple hats typically attribute more value into the sales and operational aspects of their business and by default, tend to neglect the back office finance function.

No matter the size of an organization - having a firm understanding of your company’s financial position is an integral part of making sound business decisions. You don’t have to be an expert, but as a business owner, you should know enough to be dangerous.

Below are the top three bookkeeping mistakes I witness entrepreneurs consistently make.

First, a mindset that assumes the only reason to do bookkeeping in the first place is to be able to file taxes. While this is an extremely important aspect of accurate bookkeeping, especially if you find yourself under an audit, but also to know that you are maximizing deductions, it is far from the only purpose. Consider this: every large organization in the world has entire teams dedicated to maintaining organizational budgets and entirely different teams to producing timely information on actual results. And the primary reason for these teams is not taxes - it is to ensure that capital resources in the organization are being allocated appropriately to achieve the company’s goals. The expectation is not that small business owners are anywhere close to that level of maturity, in fact, in many cases, it would be counterproductive. That said, entrepreneurs should have a general sense of their company’s financial position at any given point in time for the exact same reason as mentioned above - and in order to achieve this, business owners should consider if they are dedicating the appropriate resources to this part of their business.

If you’re of the above mindset that bookkeeping is only important during tax season, you likely aren‘t maintaining your records timely - mistake number two. Again, if you don’t have visibility into your financial position, how can you be expected to make sound business decisions? The easiest way to kill two birds with one stone here is to ensure that you are reconciling your bank accounts to your accounting system monthly (at a minimum). If you get into a good habit with this, the actual analysis part becomes easy and fun.

Tip: most cloud based accounting software platforms (like QuickBooks online) have the ability to link your bank account directly. This makes the reconciliation process so much easier.

Lastly, spending too much time on bookkeeping. I realize this may sound counter to the above two points, but hear me out. Too many entrepreneurs end up spending precious time that could be better utilized elsewhere, on bookkeeping, which becomes unproductive to the business. This is usually a result of two things: 1) too much historical neglect of the books, 2) aiming to achieve perfection when it isn’t needed based on the size of their business.

The goal that most small business owners should have when it comes to this aspect of their business, is to only spend the amount of time needed to maintain timely and accurate enough results to make sound business decisions.

Takeaways:

Accruity