I spend a lot of my time in facebook groups and around the local community and I often find that when small businesses do reach out for help they often need a hefty amount of cleanup work and it’s often well into the 3rd or 4th quarter of the year. I want to help prevent you from needing all the cleanup which will save you a TON of money when you are ready to connect with a bookkeeper and hire out.
This will also save you a boat load in fines should you ever be audited because you’ll be doing everything properly and there won’t be any need for fines and lost wages from having to research all of this stuff and reconciling years worth of bank statements all at one time.
So what are the 5 most common mistakes I see small businesses making and how in the world do you fix them?
Okay so let’s cover the easiest one to fix first.
1. Having a ton of personal transactions mixed with your business transactions.
Here’s the thing…when you are a solo business running as a sole proprietorship it’s not a huge deal if this happens. It’s more that it’s going to confuse the hell out of you and make your bookkeeping journey feel like a living nightmare. And i’m saying that as someone who made this mistake for years. And i’d always hear people say go get a business checking account…well when it’s just you and your income is still low it can get expensive quick because many banks charge for business bank accounts.
The fix: If you are a sole proprietor all you have to do is go and get another personal checking account and run all of your business transactions – in and out – through that bank account. Same for a business savings account. This will make your life SO much easier, I promise! And your bookkeeper will thank you.
If, however, you are an LLC or a corporation you do need to go and get yourself a business checking account. There are many banks and local credit unions that offer this for free or at a very low cost depending on the number of transactions you process. If you are in the west or Utah specifically Mountain America CU offers a free business checking account. US Bank may be worth looking in to as well for a more nationwide option (27 states).
2. Creating an LLC because too soon or not soon enough
Speaking of LLC’s….that lends itself to the next mistake I often see small businesses make….either creating an LLC too early or not early enough. There are MANY reasons to create an LLC and I will absolutely make a whole blog post about this topic but I typically find that companies make this decision without fully understanding why they are doing it. They think this is just something they “should” do.
There are two main reasons to begin an LLC:
- You have a good bit of personal assets that you wish to protect.
- You are giving advice or providing a service that could lead to you being sued.
A limited liability company allows you to insulate your personal assets from a potential lawsuit or company putting a lien on your home should you fail to pay a bill.
From a financial standpoint it also allows you to take advantage of corporate tax benefits. But it also forces you to have a business bank account and be exceptionally specific in how you move money around. You absolutely cannot use your business funds for personal use whatsoever. For companies making less than a few thousand dollars a month there is no real benefit to creating an LLC. If you are providing a service that has the potential to get you sued I highly recommend looking in to good business insurance AND talking with a CPA about whether creating an LLC would give you an added layer of protection.
If you are a mom blogger or a lifestyle blogger or have an etsy store where you sell printables and you are making less than $100 a month you likely do not need to worry about spending the time or money on an LLC at this point.
3. Not reconciling you bank accounts
Okay so the next one is something I also used to do – eep – but once I started doing it I recognized the benefit and it has really improved my reporting capabilities.
Some softwares will pull in transactions that don’t exist – almost like holds on the account for a penny or a return pulls into the checking account even though it was made to paypal. You won’t know that these transactions did not come through on your bank statement and are inappropriately in your ledger unless you go through and compare the list of transactions in your ledger to those on your statement. It’s really that simple!
Those have been the easy fixes. Now lets dive into something a bit more challenging.
4. Not adjusting certain expenses
Let me explain what I mean by this. You use your car to drive to pickup or drop off client work 3x per month. You’ve decided to write off your gas rather than your mileage. But you’re just taking your gas receipts and claiming the entire amount of gas. You’ve just over stated that expense.
Here’s the fix: First you’ve got to figure out how much of your driving is done for personal use and how much is for business.
Then turn that number into a percentage.
Split the transaction and take that percentage and categorize that as fuel expense and the rest to personal.
PS some people create an average. I just recently redid this for my business and found that it was 47%. I figure some months I’m going to drive more than 47% and some I may drive less so it will work itself out in the wash so to speak.
You would do the same thing for your office rent expense and many other expenses. Check out this video that will walk you through all of this stuff and more.
5. Not properly accounting for credit card and paypal transactions
When someone pays you via paypal or a cc that transaction goes through a processor and they automatically take out a fee. What pulls through to your business bank account is the amount AFTER that fee is removed. Most people just add in a transaction elsewhere and call it bank fee and that’s the end of it.
The problem is that you haven’t recorded your income correctly. Because you’ve actually earned the entire invoiced amount and had an expense of the fee. On the small scale this isn’t an enormous deal but when you start having 50-100 or more transactions over the course of the year you could be drastically understating your income and that type of thing makes Uncle Sam super cranky and could result in major fines if you were to be audited at some point.
The fix: make sure you are accurately accounting for your total income before the fee.