An effective accounting system is an indispensable tool for any company. Without one, you have no way to truly understand the financial workings of your business—and without that understanding, you have no way to make informed and astute decisions about its present or its future.
The bedrock of an effective accounting system is accurate and timely bookkeeping, but because keeping up with the books can be a tedious and time-consuming task, startups and small businesses often relegate it to afterthought status. As mundane and laborious as it may seem, keeping your books accurate and up to date is one of the most important ways to lay the groundwork for your company’s success.
But even if you’ve resolved to diligently maintain your business’s books, a handful of common bookkeeping problems can land you right back where you started: with reports full of outdated and inaccurate information.
With that in mind, we’ve compiled a list of five common bookkeeping mistakes, along with tips to help you correct them or avoid them altogether.
5 Common Bookkeeping Mistakes
Before we dive into our list, it’s important to note that bookkeeping problems aren’t always the result of mathematical errors, omissions, and the like, but can sometimes be the result of errors in judgment or planning. In these cases, even though the way a task has been performed is correct in the sense that the math adds up, it follows protocol, it isn’t illegal, etc., it may still result in a distorted or inaccurate picture of your company’s finances and prevent you from optimizing the actionable insight you’re able to derive from your financial reports.
Because of the vast amount of readily-available information on simple mistakes in execution, we’ll be focusing on those errors of judgment and planning.
1. Waiting Until The Last Minute
Perhaps the single most prevalent mistake first-time founders make when it comes to bookkeeping is procrastination. Business owners put off bookkeeping tasks for several reasons: Some assume it will be quick and easy. Conversely, others see it as a daunting job they just aren’t ready to tackle. Others still simply don’t see the value of regular bookkeeping.
Regardless of the reason, if you aren’t being proactive about your company’s bookkeeping, you’re doing yourself and your business a great disservice. The further you get away from a given transaction, the more likely you are to forget crucial details about it or even forget to enter it altogether; it’s much easier to create an accurate entry when the specifics are fresh in your mind.
Instead of spending more time and energy chasing down transaction details after the fact, make a habit of entering them as they occur, or even better, take advantage of new and emerging technologies that could automate many of your bookkeeping tasks.
2. Relying On Manual Accounting Systems
As we just mentioned, advancements in artificial intelligence (AI) and machine learning (ML) have enabled the automation of many of the most repetitive and tedious bookkeeping tasks. Where it was once necessary for a human to manually enter and reenter data in accounting software, perform basic calculations, and undertake a host of other time-consuming bookkeeping procedures, some virtual bookkeeping services can now perform them more quickly and accurately with minimal human oversight.
Instead of wasting valuable time and energy on bookkeeping, virtual bookkeepers can now employ AI and robotic process automation (RPA) to:
- Enter transaction data in the correct accounting formats
- Sort transactions into the appropriate expense categories
- Reconcile accounts against corresponding bank statements
- Discern information from scanned receipts or invoices to identify vendors and amounts
- Match receipts and invoices to their corresponding transactions
- Ensure compliance with the company’s expense management policies by comparing them to employee expense reports
Additionally, ML can use the same bookkeeping data over time to identify patterns and make more accurate decisions, as well as locate and identify aberrations in data that a human professional bookkeeper failed to detect.
Rather than waste precious time and energy on outdated manual bookkeeping practices, take advantage of current technologies that will allow you to keep your books more accurate and up to date and focus your organization’s personnel on higher-value tasks.
Bookkeeping problems aren’t always the result of mathematical errors, omissions, and the like, but can sometimes be the result of errors in judgment or planning.
3. Relying On Cash Basis Accounting
For first-time founders, the choice between cash and accrual basis accounting can be confusing. Maintaining your books with cash basis accounting is easier and quicker than using accrual accounting, as it eliminates the need to track more complex accounts, like payables and receivables. It’s also useful for evaluating your company’s cash position at a moment in time. However, cash basis accounting doesn’t allow you to assess your business’s financial health over the longer term, nor does it provide the information necessary to create financial forecasts.
If your business currently uses the cash method, it’s likely in your best interest to make the switch to accrual basis accounting as soon as possible.
While accrual accounting is significantly more complex and time-consuming, it will provide a much more accurate assessment of your business’s financial health and will be necessary if you plan to seek venture capital, register with the Securities and Exchange Commission (SEC), or go public, along with a host of other eventualities. Additionally, the longer you wait to make the switch to accrual basis accounting, the more difficult and time-consuming it will be to retroactively adjust your books.
For a more detailed explanation of cash and accrual basis accounting, as well as the advantages and disadvantages of each method, take a look at our blog post on cash basis vs accrual basis accounting.
4. Underutilizing Your Chart Of Accounts (COA)
While there are plenty of ways that simple human error can result in bookkeeping and accounting problems related to the categorization of business expenses and revenues, there’s also ample potential for those planning and judgment errors on which we’ve chosen to focus—specifically, failing to cater your company’s COA to the specific needs of your business.
Your COA is the listing of all accounts in your organization’s general ledger, each of which is assigned an account number and listed in order of their appearance in your financial statements. The level of detail included in your COA, as well the placement of accounts in appropriate account types (assets, liabilities, equity, revenue, and expenses) can have an enormous impact on the eventual insights you’re able to gain from the financial records and reports your accounting system generates.
Designing your business’s COA will involve striking the appropriate balance between too much and too little detail; in general though, it’s wise to err on the side of more detail as it’s much easier to aggregate granular data than it is to go back and attempt to disaggregate data within an overly-broad category. The number of accounts and the specific accounts included in your COA will depend on the unique needs of your business, but one of the most common accounting errors startups make is including only one revenue account rather than distinguishing between recurring revenue and non-recurring revenue.
The best way to avoid this problem, and get the most out of the reports your accounting system generates, is to work with an accounting expert from the outset to design an appropriately detailed and scalable COA that will allow you to perform one-to-one comparisons of your company’s financials over several years.
5. Mixing personal and business expenses
It may sound obvious, but once you’ve decided to start a business, you need to open separate bank accounts for business income and expenses. It takes a ton of time and energy to sift through your personal bank account and identify which are business purchases, reimbursable expenses, income, or other financial transactions that need to be recorded in your business bookkeeping vs reflective of your personal finances.
Even independent contractors and freelancers benefit greatly by keeping track of business purchases and income with a dedicated business bank account and credit card. (And come tax time, you’ll be especially thankful you kept your personal expenses separate from your business funds!)
Zeni helps you solve bookkeeping and accounting problems before they occur.
Zeni is a full service AI-powered startup finance concierge that combines cutting-edge technology and professional human expertise to help you avoid the most common accounting and bookkeeping problems and—just as importantly—optimize your accounting systems so you always have access to the most accurate and up-to-date information about your company’s finances. Additionally, the Zeni Dashboard gives you real-time access to your company’s financials, anytime, anywhere, along with key insights to help you understand and act on the data you’ve gathered.