15 Common Bookkeeping Mistakes We See Businesses Make

Imagine you've just closed a big sale. You're excited about the business growth, but what if you didn't record the transaction correctly? This bookkeeping error could cause problems down the road. Common bookkeeping mistakes like this can disrupt your operations and even lead to costly penalties. That’s why understanding the benefits of hiring a bookkeeper is crucial—it ensures your financial records are accurate, up-to-date, and compliant, allowing you to focus on growing your business with confidence. Learning about these errors and how to avoid them can help you keep your business on track.

This article will explore some of the most frequent bookkeeping mistakes and how to fix them. If you’re worried about your accounting processes, Haven can help. We offer accounting services for small businesses to help you manage your financials.

15 Common Bookkeeping Mistakes We See Businesses Make

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1. Hiring the Right Finance Professional Can Make All the Difference

Even seasoned accountants and bookkeepers can slip up now and then. But they’re trained for this. You probably aren’t. Even if you are, is it worth the extra time to manage your business’s books alone?

Bringing a pro on board minimizes the potential for errors in areas such as tracking expenses, paying vendors promptly, balancing bank accounts, and running payroll.

Are you confident you’re handling employees’ tax withholdings properly?
Are you tracking all financial transactions, regardless of size?

A few mistakes in these areas can cost you more than you save by not hiring help.

2. Accurate Cost Tracking Keeps You in Control

When you don’t keep accurate records, your accounting and bookkeeping become less effective. When that happens, you leave your business vulnerable to losing money and being late on crucial bills. This situation sets you up for major headaches come tax season and more problems that can hinder a growing business. It’s not just errors you make while entering transaction data into a spreadsheet or failing to note that you paid a bill.

The Importance of Accurate Financial Tracking

Inaccurate financial tracking ultimately costs your business money and undermines your ability to plan for the next month or beyond. It’s essential for your accounting system, whether it’s just you and a spreadsheet or a bookkeeper, to track every transaction to gauge your business’s financial health accurately.

While having a financial professional handle your books is valuable, an integrated accounting system can help you or your bookkeeper do their job better. Accounting software tracks all of your financial transactions. It records when you pay bills, deposit or withdraw money, or send an invoice.

3. Separate Personal and Business Finances

Small business owners often blur the line between personal and business finances. It’s understandable, especially when a company is just beginning to find its footing. You go to Costco or Walmart to pick up office supplies and get a few items for your home because you're already there. But it goes beyond combining business and personal items on a single receipt.

Many small business owners don’t have a separate business bank account. Using one account for personal and business purposes can cause the following problems:

Difficulty sorting personal and business transactions
Significant issues when filing taxes
Missed tax deductions
Problems when you apply for a business loan or a line of credit

If you’ve been using your business and personal bank accounts interchangeably, break that habit. Open a separate business bank account. You’ll likely get some incentives to do so from the bank where you have your account. If you’re shopping and in a bind, always separate business and personal purchases so you can set aside business receipts.

4. Manage Billing Efficiently to Avoid Cash Flow Problems

Cash flow is essential to keeping a business operating from one day to the next. Billing or invoicing customers efficiently ensures you have money for expenses, payroll, and other needs. Businesses that don’t manage their accounting well can suffer from cash flow problems. Invoicing can be delayed, and customers may take longer to pay, leaving the business struggling to cover its bills.

Being late on your bills isn’t the only ramification of inefficient bill management. According to Statista, 91 percent of failed startups cited running out of money or a lack of financing as the reason they went out of business. Because the stakes are so high, improve your billing management by invoicing customers immediately after you’ve fulfilled your end of the transaction. Accounting and invoicing software can help you create a more seamless process for collecting unpaid invoices.

5. Plan for Tax Season All Year Long

Do-it-yourself tax software can be an attractive solution for small businesses looking to save money on an accountant. But while doing your taxes may be OK for individuals with a simple tax return, it’s not a good idea for small business owners.

Business and payroll tax issues can be complex, and incorrect filings can be costly. To minimize tax errors and oversights, ensure your business uses an accounting system that seamlessly tracks company expenses, payroll, and other fundamental components of its profit and loss statement.

6. Classify Employees Correctly to Avoid Tax Penalties

Most small businesses rely on employees or hire freelancers to conduct essential work. Classifying these individuals correctly is crucial because you could face lawsuits and tax penalties if you do it wrong. Federal and state governments miss out on payroll taxes if a small business owner misclassifies an employee.

According to the U.S. Department of Labor, the penalties for this mistake could be substantial:

Business owners may be responsible for payroll
Social Security
Unemployment and Medicare taxes for misclassified employees

The business can also be penalized and sued if employees aren’t reimbursed and provided benefits under the Fair Labor Standards Act.

Employee vs. Contractor Classification

To avoid misclassifying employees, you must determine if they are employees or contractors based on their jobs, pay, and relationship with your company. If the individual works eight hours a day, five days a week, is paid a salary, and receives health benefits, they are a full-time employee.

If the person works and gets paid per project and isn’t provided any benefits, they should probably be classified as a contractor. Once you’ve made that determination, ensure the worker completes the correct payroll form for their classification. A contractor completes a W-9 form, while a full-time employee fills out a W-4 form.

7. Keep Backup Copies of Paperless Records

A tax audit is the last thing a small business owner wants to experience. But if you must, the more paperwork you have, the better. In this digital age where everything lives in the cloud or on an app, it’s understandable that people don’t save their paperwork for a few weeks, let alone seven years. However, the IRS will want specific records during an audit.

A good rule of thumb is to save the following documents for at least seven years:

Business tax returns
Payroll tax records
Current employee information
Business ownership records
Accountant records
Records from operations

8. Stay on Top of Payroll

Payroll is one of the most significant parts of any business owner’s responsibility. Inability to pay employees correctly, on time, or with the proper deductions can lead to penalties, back payments, and damage to employee morale. A mistake in payroll filings may draw the focus of tax authorities, leading to an audit. Establish a payroll system that automatically calculates taxes and deductions.

Do keep up with deadlines and pay employees according to the current tax law. Suppose your small business payroll is becoming a burden. In that case, you should explore the possibility of outsourcing payroll or hiring an accountant to manage this part of your business. An accountant can also help you comply with tax laws and employee benefits regulations.

9. Track Outstanding Checks Regularly

Another reason business owners should regularly reconcile bank accounts is to track outstanding checks. Having exceptional checks on the books for weeks or months can give the impression that the account has an artificially inflated balance.

Business owners who spend based on cash in the bank run the risk of overspending, which can result in overdrawn bank accounts and bounced checks.

10. Monitor Accounts Receivable and Payable Closely

It can be challenging for small business owners to keep track of their AR and AP, but it’s an essential task, particularly as the business grows and the tracking becomes more complex. Cloud-based accounting software can help you track AR and AP and enable an approval process for invoices submitted by vendors.

You must also monitor past-due client invoices and ensure other business functions are aware when a customer stops paying bills. The right software can easily resolve these communication issues.

11. Avoid Commingling Business and Personal Expenses

One of the most common and potentially costly errors business owners make is commingling business and personal expenses. Doing so may not seem like a big deal, particularly if the owner isn’t drawing a salary.

However, in the event of a lawsuit, mixing your personal and business funds can void the liability protection of your business formation. To keep your funds separate, there are two key steps business owners should take.

Open a separate bank account for the business. Ensure it’s a business checking account and includes the business name.
If you pay for a personal expense from your business account, ensure your bookkeeping accurately reflects the transaction. You can reimburse your business or record the price as an owner’s draw.

12. Record Transfers Correctly

Business owners sometimes transfer funds into the business account, and the accounting software will automatically code those funds as income. These funds should be coded as an owner’s investment, and you may need to make that change manually on the books.

Failing to do so will overstate your revenue.

13. LLC Owners Shouldn’t Be on Payroll

Owners of LLCs, sole proprietorships, and partnerships often make the mistake of adding themselves to the payroll. However, in the case of an LLC, owners are not permitted to be W-2 employees. Instead, they should be paid via an owner draw or distributive share.

Corporations can pay the owners on the payroll as regular W-2 employees. If you own an LLC and need to be on the payroll, you can solve this problem by making a one-time change to your business formation.

14. Communicate With Your Finance Team Often

Whether one person keeps the books or a team handles the accounting, business owners must communicate clearly and regularly with everyone involved in finance. Communication is fundamental to adequate bookkeeping because it keeps everyone on the same page.

If you’re shifting from doing the books to working with a bookkeeper, realize that these functions must work like a machine to keep the business healthy.

15. Negotiate Vendor Terms

Many small-business owners purchase items for their businesses from the same vendor month after month. If this is your practice, contacting your vendor and building a personal relationship with them is a great idea.

Even if your purchases are relatively small, you can still call and ask questions. If you get to know your vendor personally, you can negotiate reduced pricing or longer payment terms, which could increase your business's cash flow.

Why Bookkeeping Matters More Than You Think

woman writing - Common Bookkeeping Mistakes

1. It Gives You A Clear Picture Of Where You Are Going

You may be able to see your bottom line by glancing at your bank balance, but the ups and downs in your account are also telling a story.

Are you in profit?
Are sales up?
Are your expenses too high?
Shall we take a guess?

Paying attention to your financial reports is a great way to get to know the story of your business.

2. Claim The Right Deductions For Your Expenses

Owning and operating a business comes with some perks. You can write off travel expenses, phone, utility, and internet bills. But taking advantage of these benefits is impossible if you've been keeping your personal and business expenses together.

3. It Helps You Catch Errors

You will be buried in paperwork if you wait until the year-end to reconcile your financial transactions. You won’t know if the bank made a mistake until you’re buried in it!

Equally, you'll never know if any errors were made in recording your financial transactions until it's too late. This can prove costly in both time and be more challenging to reconcile months later than if you’d caught errors immediately.

4. It Makes Financing Your Business a Lot Easier

Are you considering your next funding round, or applying for a loan or line of credit? If your books are not up to date, it's a lot harder to secure. Having well-kept books gives lenders or investors a clear idea of your business’s financial state.

It allows them to make financial projections about your company’s ability to pay off your loan in the future. Professional Bookkeeping can give you what you need to take that next step in growing your business.

Haven: Financial Management for Startups

Let your business take flight while Haven manages your financial runway. Built by founders for founders, we handle everything from daily bookkeeping to complex tax filings, R&D credits that put cash back in your pocket, and fractional CFO services.

Join 400+ startups who've saved millions in tax credits, countless hours of administrative work, and never missed a filing deadline - all while accessing 24/7 Slack support from CPAs who understand the unique challenges of growing businesses.

Book a call today to learn how our dedicated team can help you focus on building rather than bookkeeping.

When to Bring in a Bookkeeping Professional

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1. DIY Bookkeeping Takes Up More Time Than You Can Afford

According to a Gallup poll, 39% of small business owners work more than 60 hours weekly. Don’t take your own time for granted. Overworking leads to burnout, and every minute you spend on a task has a dollar equivalent.

Start tracking how much time you spend on bookkeeping per week.
Using an online calculator, determine how much your time is worth and determine how many “dollars” you spend on bookkeeping per month.

Compare your “salary” as your bookkeeper against the price of professional bookkeeping. Once you treat the time you spend on bookkeeping as an actual expense in cash, you’ll have a better idea of whether you should keep doing it.

2. Your Books are Never Up to Date

When you fall behind on bookkeeping, your books stop reflecting the actual state of your finances. That makes it more challenging (sometimes impossible) to understand cash flow and accurately gauge the health of your business. For instance, if your Cost of Goods Sold (COGS) hasn’t been updated in six months, you can’t subtract it from your revenue to determine how much profit you’ve earned.

This means you’re blind to how much money you’re making and the steps you can take to increase your income. What’s more, if your books aren’t up to date, you’ll have a ton of catch-up bookkeeping during tax season, making a typically stressful time of year even more difficult. With a qualified bookkeeping solution, you can expect to receive monthly financial statements, which will help you understand where your money is going and coming from.

3. Your Accountant Does Your Bookkeeping

Some entrepreneurs leave their books untouched throughout the year, then deliver their expenses and bank transcripts to their accountant during tax season so they can be done retroactively to file a return.

It may seem simple to deal with an unappealing task, but we advise against it.

‍Here’s why:

When you don’t have up-to-date books during the year, you can’t use monthly or quarterly financial statements to guide your business decisions.
It’s a waste of money. Certified Public Accountants (CPAs) generally charge more per hour than bookkeepers. You could end up paying more for bookkeeping services than you need to.
An accountant won’t necessarily provide you with retroactive month-to-month financial records.
Detailed business records are essential for securing loans, bringing on investors or partners, or selling your business.

Whatever bookkeeping solution you choose should offer you regularly up-to-date books, an affordable rate, and detailed records.

4. At Tax Time, You Send Way Too Many Emails to Your Accountant

Here’s how tax season should look:

The financial year ends at midnight, December 31. Whoever does your bookkeeping hands off your financial records for the year to your accountant. Your accountant uses those records to file your taxes. Later, you receive a tax refund.

The end.

Your tax season won’t look like this if you hand off messy or incomplete books to your accountant. You’ll likely be caught in an email or phone back-and-forth as you puzzle your way through a year’s worth of uncategorized expenses and income.

Having your accountant file taxes should feel like a quick hand-off, not a prolonged arm wrestling match. A comprehensive bookkeeping solution can help.

5. You Missed Out on Tax Write-offs

Suppose you just found out that, since your home is more than 50 miles from your place of work, you’re allowed to deduct some of the commuting costs. That’s excellent news. Only now are you thinking about all the years you spent without filing this deduction, the extra money you could have saved, and how you could have spent it. Images of an in-ground pool dance in your head.

The sooner you know about small business tax deductions, the sooner you take advantage of them, the sooner you’ll benefit.

The Roles of Bookkeepers and Accountants in Expense and Tax Management

Part of a bookkeeper’s job is to take every business expense you incur and categorize it properly. In doing so, they can spot obvious deductible expenses such as mileage. An accountant with experience in your industry is most qualified to give you comprehensive guidance regarding tax write-offs.

However, many business owners only talk to their accountants during tax season. A good bookkeeper who understands your business’s needs can help you throughout the year. Having your accountant file taxes should feel like a quick hand-off, not a prolonged arm wrestling match.

6. Your Cash Flow is Unpredictable

Ever have that sense that you’ve got money coming your way from clients, but you’re not sure how much it will be, or when it will arrive? Or do you come up with an empty wallet when it’s time to pay freelancers or contractors?

You need cash flow statements. A cash flow statement tells you how much money other people owe you, and how much money you owe other people. It’s like a crystal ball that shows you the future of your bank account. With a proper bookkeeping solution, you can get monthly updates on your cash flow.

7. You’ve Had Security Problems With Your Computer

When you use your computer to track and store financial information, you must be 100% certain that it’s secure and stable. In May 2017, the WannaCry ransomware attack hit over 230,000 computers in more than 150 countries worldwide. WannaCry encrypted victims’ data, making it inaccessible, and demanded Bitcoin payments to make it available again.

Losing years of financial info is bad enough. Research from MalwareBytes also reports that over 90% of home computers have been infected by spyware at one point or another. If you’re doing your bookkeeping on your home computer, there’s a good chance someone else has (or will eventually have) access to your business’s financial info. Use a free utility like AVG to scan your computer. If it detects malware, it’s a sign that you either need to beef up your security measures, or hand off the burden of bookkeeping security to a pro.

Book a Call to Learn More About our Accounting Services (Trusted by 400+ Startups)

When it comes to your business’s financial health, it’s easy to get overwhelmed with all the day-to-day details. Especially when you’re trying to grow your business and there’s so much to keep track of.

That’s why having a team like Haven to manage your bookkeeping can make a huge difference. We take care of everything from daily bookkeeping to complex tax filings and R&D credits that put cash back in your pocket, and fractional CFO services.

Our dedicated team lets you focus on building your business while we handle the financial runway to get you to your next destination.

24/7 Slack Support from CPAs Who Get Startups

When you work with Haven, you’re not just getting a team of expert bookkeepers and accountants. You’re also getting 24/7 Slack support from CPAs who understand the unique challenges of growing businesses.

We know what it’s like to be a startup, and we’ve been through the financial ups and downs ourselves. Our team is here to help you navigate the complexities of your business’s finances so you can make informed decisions and get back to running your business.

Join 400+ Startups Who’ve Saved Millions in Tax Credits and Never Missed a Filing Deadline

With Haven, you’re joining a community of over 400 startups that’ve saved millions in tax credits and never missed a filing deadline. We help you get organized to take advantage of every financial opportunity. Our team works behind the scenes to ensure your accounting is accurate and up-to-date so you can focus on your business and not worry about the financial details.

Book a Call Today to See How Haven Can Help You

If you’re ready to stop stressing over bookkeeping and get back to focusing on your business, book a call with Haven today. We’ll help you understand how our dedicated team can support you and your business so you can reach your goals.

15 Common Bookkeeping Mistakes We See Businesses Make