Are you a small business owner who struggles with bookkeeping? You are not alone. Although bookkeeping is essential to any business, it can be neglected. Because of this neglect, business problems may occur, including financial and operational difficulties and even legality issues. To avoid these problems, it’s essential to be aware of the most common bookkeeping problems and their solutions. Here are 5 areas that small business owners may overlook and how to overcome them.
1. Not Tracking Expenses
Starting a business is expensive. Whether expenses are for the initial setup of an office, storefront, or ongoing operating costs, they can quickly get out of control. That's why tracking your business expenses is so important. By monitoring what you're spending, you can keep your costs under control and make sure your business is on track to be profitable.
Solution: You can use a simple spreadsheet to track your monthly expenses or use accounting software like QuickBooks or FreshBooks. Whichever method you choose, track all your payments consistently to get an accurate picture of where your money is going.
2. Not Recording and Categorizing Transactions
Recording transactions is the first step in the accounting process. This involves creating a record of each transaction that your company makes. You can do this by hand or use accounting software. Once the transactions are recorded, they need to be categorized. This helps you to see where your company's money is going and makes it easier to prepare financial statements. But doing this work can be time-consuming for small business owners trying to manage their businesses.
Solution: The most efficient and effective way to record and categorize transactions, aside from hiring a bookkeeper or an outside professional firm, is to use accounting software like QuickBooks. If you have not yet made an investment in accounting software, the most important task is keeping up with the recording of the transactions. You can record them in a ledger such as a cash receipts ledger. The main thing is to not let them get out of control and thus overwhelm you by piling up.
3. Not Tracking Inventory
In any business, an owner needs to keep track of inventory levels to know which products are selling well and which ones need reordering. It’s easy to neglect this area because you are so busy filling orders or managing the business.
Solution: To track inventory, use spreadsheet software like Microsoft Excel. You can also use specialized inventory management software, like QuickBooks or Fishbowl. No matter what method you use, a few key pieces of information need to be tracked: The type of product, how many of each product you have in stock, the minimum and maximum levels for each product, and the reorder point for each product. If you keep track of this information, you'll always know what products you need to order and when.
4. Not Staying on Top of Invoicing
Invoicing is critical to running a successful business but can also be a thorn in the side. Late or unpaid invoices can quickly strain your cash flow, and if you're not on top of invoicing, it can easily slip through the cracks.
Solution: Set up a system that works for you. This might mean using software to automate your invoicing or creating the invoices manually. Place a reminder notification in your cell phone or Outlook, so you don’t miss sending invoices out. Be sure to commit to sending invoices out at their designated time such as the first of the month.
5. Not Producing Accurate Financial Statements
Producing accurate financial statements is essential to the success of any business. Financial statements provide a clear and concise picture of a company's financial position, performance, and cash flow. They help you make informed decisions about where to allocate resources and how to grow your business. If your financial statements are inaccurate, you can make poor operational decisions, and open yourself up to fines and even bankruptcy.
Solution: To ensure financial statement accuracy, be sure your staff is adequately trained in counting inventory, so fewer errors are made. Also, salespeople should take care to submit accurate expense reports. Both these examples of errors can result in accounting errors. Finally, try to automate the process by using software, which helps avoid human mistakes.
The solutions to these common bookkeeping problems may mean outsourcing your bookkeeping to a professional firm, investing in bookkeeping software, or hiring a full-time bookkeeper. If you’d like more information on how to avoid common bookkeeping errors, call us at (203) 641-7678.