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There’s a lot to love about running your own business, but honestly, bookkeeping and accounting just aren’t what most business owners consider “fun.” You have to be focused, organized, love numbers and details, and above all, know what you’re doing. When it comes to balancing books, accounting for expenses, filing taxes, and other common bookkeeping and accounting tasks, mistakes can be costly– and worst of all, the true costs of a mistake may not be realized immediately and may be difficult (and expensive) to fix once they do come to light.
So I know why few small business owners truly love accounting and bookkeeping. It’s stressful and just not as fun as actually, you know, running and growing the business you love!
Today, I’m going to help you understand a few commonly misunderstood terms and phrases (think of it like a mini-bookkeeping glossary), explain the mistakes I see business owners make over and over when working on their books themselves, and explain how these mistakes happen and what you can do to prevent them.
Slava’s Top 5 Bookkeeping & Accounting Terms
1. Accounts Receivable
If you think you know what accounts receivable are– think again. Many business owners treat their accounts receivable as money that is available to them: this is a mistake. Instead, realize that accounts receivable are the monies due to you because of work you did, services you provided, or goods you sold.
Don’t count your chickens before they’re hatched. That’s how you should think of your accounts receivable. It’s not money to spend until it’s actually been collected. And remember, there’s always a chance that you won’t collect on your accounts receivable.
That’s why it’s always a best practice to account for your aging of accounts, which will take into account how long an account has been receivable for and the decreasing likelihood that you’ll collect its full value.
Another best practice is to always include an estimate of the amount that you likely won’t collect for whatever reason. This can be tricky for business owners to calculate, especially during the early stages of your business because you won’t have a good baseline for how many accounts won’t be collected. In addition, as a new business owner, you might have an overly optimistic outlook on the state of your accounts receivable.
2. Accounts Payable
Accounts payable are essentially the opposite of accounts receivable. They’re money your business owes because of purchases you’ve made. Unlike accounts receivable, which are listed as assets on a balance sheet, your accounts payable are liabilities.
To use another cliche, think back to high school physics: For every action, there’s an equal and opposite reaction. Accountants, like the laws of physics, like things to balance out. For every dollar you have in your accounts payable, another company should have a dollar in their accounts receivable. For every transaction, there’s an equal and opposite transaction.
3. Bank Reconciliation
If you think bank reconciliation is fun… you just might be an accountant!
Nevertheless, proper bookkeeping and accounting relies on accurate and thorough bank reconciliation. But what is bank reconciliation?
Bank reconciliation is the process of sitting down and matching the balances in your business’s accounting records with a corresponding record in your bank statements. This eyes-on approach is the best way to identify inconsistencies and errors before they get out of control.
When you do discover a discrepancy, that’s your chance to dig deeper and determine the root cause and correct the problem in your accounting records. The good news is that the more often you reconcile your accounts, the more likely you are to catch little problems before they can turn into big problems.
How often should you reconcile? It depends. Larger businesses may reconcile daily, but for most small businesses, a monthly reconciliation is recommended.
You should also know that a perfect reconciliation is unlikely due to a number of factors, including:
- Deposits and payments that are processing at the time of reconciliation
- Bank service fees
- Earned interest
When you start hiring employees (or start paying yourself), doing payroll right is absolutely crucial. The people who work for you need to get paid on time and need to have their benefits managed properly. That’s your responsibility as a business owner.
Unfortunately, it’s not always that simple. When does your payroll processor require all data to be entered by to make sure checks are cut and deposits are made? What if payday falls on a weekend and there’s a bank holiday the Monday after or the Friday before? What if you forget to run payroll or make a mistake?
Then there’s the process of withholding payroll taxes and deductions. Luckily, most modern payroll software (like Gusto, which I recommend) can do this for you, but how do you make it part of your internal accounting? That’s where many business owners make mistakes, not properly accounting for payroll because of the hassle of moving things between systems. Luckily with the right integrations, it can be pretty simple.
5. Merchant Services
If you accept credit cards directly from customers, either as part of a point of sale system, or through some online system, that’s merchant services. Merchant services can be complicated because different systems charge different rates and provide payment on different schedules. Choosing the right merchant services platform for your business can be challenging. For many businesses just starting out, I recommend Stripe (for online payment processing) or Square (for in-person B2C sales).
Common Mistakes Beginners Make & Why They Happen
Those 5 terms I just reviewed are really just scratching the surface of what it takes to really understand bookkeeping and accounting. Now I want to talk about the mistakes that I see, as well as the very understandable reasons why they happen:
- Poor Record Keeping – This is the cardinal sin of bookkeeping. If you don’t keep good records, you won’t be able to reconcile accounts, manage payroll properly or keep track of your accounts payable and receivable.
- Not Reconciling Accounts – I know there are only so many hours in the day and that reconciling bank accounts often gets pushed to the back burner, or off of the stove completely! But it’s a common mistake that often comes back to bite business owners, as that simple mistake compounds over time and causes a huge headache when it comes time to untangle the mess.
- No Backups – Storage is so cheap today! Local storage costs only pennies per gigabyte and cloud backup services are nearly as inexpensive. There’s no excuse for not maintaining backups of important financial data. Except many business owners play with fire by not backing up their data. Why? It takes too much time or they simply forget to run their backups. The best backup service or solution isn’t worth a penny if you don’t use it.
- A Lack of Systems & Procedures – A good accounting and bookkeeping system is just that: a system. Success relies on repetition, scheduling, and repeatable processes. And those are 3 things that growing businesses often don’t have. Small businesses need to be nimble, adapt on the fly, and tackle challenges as they appear. This approach to bookkeeping and accounting simply doesn’t work.
The root cause of all of these problems are pretty simple:
- Lack of Time
- Lack of Expertise
- Divided Attention
Simply put: business owners don’t have enough time, they often don’t have an accounting background, and they are juggling too many other tasks to give accounting and bookkeeping the time these tasks demand.
That’s why I founded Intelli Bookkeeping, where a team of finance and accounting experts manage every aspect of your bookkeeping and accounting needs. That leaves you to do what you do best: run the business you love.
About the Author: Slava Heretz is an accounting professional with over 7 years experience working with startups and small businesses. He is the founder of Intelli Bookkeeping, a scalable, cloud-based, on-demand bookkeeping and accounting service.