The majority of businesses have some type of inventory, but a large percentage do not track it or check it for accuracy. There are all sorts of reasons why you should be tracking and maintaining your inventory on a regular basis (meaning more than once a year).
Many software companies advertise that their products are so easy to use that any business owner can do it. They may be easy to use, but using them correctly is another story. Many people come to me looking for training because they thought their software would be so easy to use, but it is not. Many more come to me and say they have been doing a great job they just don’t have time, but it turns out they have not been doing a good job. I recently stopped doing any trainings for Quickbooks because I realized I was giving business owners just enough knowledge and tools to do more harm than good. I saw that they were following directions, but not actually understanding what they were doing. This ended up causing a lot of problems because when they did something wrong they did not know that it was wrong and the problems just piled on top of each other creating a big mess. If you don’t understand what bookkeeping and accounting is and what is on each of the key financial statements, stop here, you should not be doing your own bookkeeping. No software will help you do your bookkeeping accurately.
The most common mistake I see with new clients involved reconciling their accounts. Many cloud based accounting software systems allow you to connect your bank and credit card accounts so that transactions come into your accounting software automatically. This is a great time saver, however when you add transactions from here it is not reconciling your account. You need to reconcile your account to make sure all of the transactions on your bank statement are in your accounting software. You also need to see if there are transactions in your accounting software that haven’t cleared your bank. If you don’t know what reconciling is, stop here, you should not be doing your own bookkeeping.
The next biggest mistake I see is categorizing transactions incorrectly. Business owners may classify getting a cup of coffee on the way to work as a business meal. Or the owner of a Sole Prop may classify the money they take out of the business as wage expense. Many owners classify gas for their personal car for getting to and from work as a business expense. And finally, most commonly, business owners categorize transactions to accounts without knowing if the account is an expense, liability account, or equity account. If any of these situations don’t seem wrong to you or don’t make sense, stop here, you should not be doing your own bookkeeping.
Not Understanding Financial Statements
While this is not necessarily a mistake, the majority of small business owners that I have contact with do not understand their financial statements. Most commonly they don’t understand the difference between expenses and cost of goods sold. To go along with that they usually don’t understand the difference between revenue/income and gross profit and net profit. Finally many business owners don’t understand what accounts show up on which key financial statement and how they are connected.
Know When to Get Help
I’m not sure why bookkeeping is a part of businesses that owners feel like they can do or should be able to do. They happily hire marketing managers, lawyers and accountants. They spend money on education, business mentors, and large scale trainings. So why don’t they hire out their bookkeeping? There are many programs that claim to basically do your bookkeeping for you. Many business owners claim they are doing their bookkeeping accurately and share that with their peers. Those along with many other reasons make owners believe they can and should do their own bookkeeping. If you are one of these people ask yourself these two questions: Do you understand what bookkeeping is? and Do you understand your financial statements? If the answer is no to either of those questions than you may want to consider hiring help. Just because you can do something do not mean you should.