We cannot understate how critical it is to have a trained professional managing your company books. It’s equally important to ensure there are processes in place that hold them accountable for their work. The first step is knowing about the bookkeeping mistakes that can occur when someone without proper accounting experience is managing your books. We’ve put together a list of eight of the biggest mistakes that a professional bookkeeper should catch.
1. Untracked Reimbursement Expenses by Employees
You probably know that you shouldn’t just accept an employee’s word about what expenses to reimburse for business trips, dinners, and other purchases made on behalf of the company for a variety of things. It requires receipts, but did you know it may also require substantiation, which is proof that the spending is explicitly for business purposes? Did you also know that it may also require differentiating between deductible expenses (e.g., rental cars, hotel fees), which require reimbursement that’s tax free to the employee, and other spending (e.g., “fun” events not explicitly for business, be it drinks or a trip to a museum) that you should be reimbursing as taxable wages?
There are two ways to provide reimbursed expenses as defined by the IRS. When you don’t have processes in place to manage reimbursement, you may run into a problem where either the deductible expenses end up being double taxed against your employee’s income or non-deductible expenses don’t have the necessary income taxes applied, which becomes problematic when filing your taxes. Alternately, you may not be applying the any income tax to your reimbursements at all, when it’s strictly required by the IRS. Plus, there’s always the risk that employees could get reimbursed for more than they should be, especially if you’re not already collecting receipts.
2. Not Reconciling Books with Bank Statements
In a perfect world, your books would always be accurate, but one way to ensure they are is to reconcile them with your business bank account. This can be done monthly, with the bank’s official statement, or it can be done on a weekly or even daily basis thanks to cloud computing. Optimally, there are no discrepancies, but when there are, you can track them down and adjust your books (or contact the bank) as necessary.
When your books aren’t reconciled regularly (or at all), then any mistakes made in the books can build up and present highly inaccurate numbers in your financial reports. This could potentially make your business look like it’s doing more poorly than it is, but it’s more likely that it will make your business look like it’s doing better than it is. You won’t be able to make accurate decisions about your business plans, and you risk not having the funds to pay operational expenses.
3. Simple Math Errors
If you don’t have a bookkeeper, the chance of simple errors is higher. You have other concerns and responsibilities, and you don’t necessarily have the time to review your spreadsheets, software, or math you’ve done yourself. It’s understandable, but a simple mistake — say, adding when you should have subtracted or skipped a field — can skew your results and reports across the board. Yes, it’s a simple or even small mistake, one anyone could make, but it can have terrible consequences. Something as small as forgetting a decimal point when working with your cash flow could make things look categorically better or worse.
Your bookkeeper is only human, so mistakes can still occur. But training can ensure their mistakes are minimal, and since their sole job is managing your books, they need time to review their work and have processes in place to review it accurately and catch any mistakes that could occur. If your bookkeeper consistently makes math mistakes that they aren’t catching, this can have even more devastating consequences. It can vastly skew what you know about your business’ health, and you may not even realize there’s an issue until it’s a major problem.
4. Unpaid Invoices
Unpaid invoices represent money that your business should have — money that your business is counting on being able to use to sustain itself and grow — but doesn’t have yet. Debt recovery is a huge strain on any business, both financially and in terms of maintaining good relationships with your partners and clients. The longer invoices go unpaid, and the more invoices that go unpaid, the harder it gets on your business. While there are terms and workflow practices that can minimize this (e.g., deposit up front, incremental invoicing), your bookkeeper needs to follow up on unpaid invoices, working with accounts receivable to follow up on invoices, or notifying you that invoices haven’t been paid.
5. Mixing Funds
Mixing Funds refers to the practice of using the same bank account for both your business and personal use. While this is most common for sole proprietors and small businesses, this practice is still extremely problematic no matter where it occurs. There are two aspects to this. First, you can run into problems with the IRS when filing your taxes, and for small businesses, the actual designation of being a business can be put at risk.
Second, you risk dipping into the wrong funds. Whether you use business funds for personal use or vice versa, you put your ability to function financially — either personally or professionally — at risk. It can be easy to overspend on either end, skewing your cash flow and profits, or worse, undermining your ability to pay vendors and operational costs on time, or to pay your own personal bills.
6. Incorrect Cash Flow Forecasting
Arguably, your cash flow is as important as, if not more important than, the profits your business shows at the end of a quarter or fiscal year. It’s critical to remaining solvent, as well as paying your employees, vendors, and overhead. Cash flow forecasting allows you to get a glimpse into how your business should be doing over the next quarter or fiscal year, and it’s used to help you make important decisions about your business.
Forecasting ought to show you potential shortfalls and when they’re likely to happen so you can work to avoid them. Accuracy is critical because it’s possible to end the year with plenty of profit, but no money. It’s ironic, and painful, to go into bankruptcy while showing a profit. While an inaccurate forecast that shows you’ll have shortfalls when you actually won’t may not sound bad, it’s likely to cause you to hold back on decisions that will help your business grow and open up new opportunities.
7. Not Properly Tracking Operating versus Non-Operating Income
Operating income is your earnings before interest and taxes, or the part of the money directly received from business operations that will eventually become profit. Non-operating income is peripheral or incidental income from activities that aren’t part of your business operation, such as dividends, profits and losses from foreign exchange, and profits and losses from investments; they happen irregularly. These incomes need to be differentiated and tracked because losses or gains from non-operating income don’t actually reflect how your company’s operations growth. Potentially, non-operating income can make your business look better or worse than its actual performance.
8. Not Monitoring Accounts Receivable
There’s more to your accounts receivable than just your unpaid invoices. Most companies assume that a portion of their accounts receivable will go unpaid, which is the allowance for bad debts. The value and health of your business relies in part on the trend of how allowance for bad debts is handled, especially when being analyzed by a potential investor or a company looking to merge with or purchase yours. When your sales-to-accounts-receivable ratio is high, it means your business has difficulty being paid by customers and clients. When your allowance for debt trends up over time, it suggests structural problems that exacerbate your inability to collect debts. Monitoring your accounts receivable allows you to get ahead of the curve and fix deficiencies before they become a problem and hurt your business.
These eight mistakes are just a handful of the potential accounting mistakes that could occur when you or your bookkeeper aren’t qualified to handle your business’ financial needs. But these bookkeeping mistakes are avoidable when you hire the right bookkeeper. So the question becomes this: Is your bookkeeper qualified and doing the best they can do, and are you sure you know how to determine that? Remember that options like remote bookkeeping exist to help businesses like yours by putting a team of experts in charge of your books at a reasonable cost.