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Bad Bookkeeping Can Ruin Small Businesses

When you are laser-focused on business growth, bookkeeping might not be your top concern. Perhaps you set those invoices and receipts aside, figuring you’ll file them later. But without an accounting system in place, business owners run the risk of making small errors that can lead to major headaches later. Here is a look at some of the most common bookkeeping errors – and how to fix them.

Small business bookkeeping: the basics

Before we dive into the accounting errors that can derail your finances, it’s helpful to first take a closer look at the basics of small business bookkeeping. Bookkeeping procedures refer to all the accounting procedures you use to create and record your business’s transactions:

  • Recording profits and losses

  • Recording cash flow

  • Issuing customer billings

  • Paying supplier invoices

  • Building the balance sheet

  • Tracking payroll

One of the most important factors is consistency, with controls in place to ensure all recurring transactions are recorded the same way. This helps down the line both when filing taxes and helping auditors.

Common bookkeeping errors

Unfortunately, it’s all too easy to fall into a few common accounting traps. Here are some of the most frequent bookkeeping errors, as well as why they’re so dangerous for your business.

1. Procrastination

A little goes a long way when it comes to bookkeeping. This is probably the easiest mistake to make when your normal business to-do list is miles long. If you leave all of your bookkeeping to the last minute, you’ll end up with an impossible workload along with greater chances of making mistakes. It’s also important not to procrastinate when it comes to filing your taxes. You’ll pay the penalty in late fees.

2. Leaving out smaller expenses

You might be consistent when it comes to logging major expenses and incoming payments, but don’t forget about the smaller receipts. Small expenses can add up over time to form large, significant amounts. Every financial transaction, great and small, needs to make its way to your general ledger. This prevents errors on the balance sheet and financial statement. Most business expenses are also tax deductible, so you could be missing out on potential write-offs to reduce your tax bill if you don’t track everything.

3. Failing to track labor accurately

Once your business has grown large enough to hire employees, labor will become one of your most notable expenses. It’s important to track employee hours carefully for fair, accurate pay. Payroll errors can take a serious toll on employee morale, increasing turnover as a result. You should also track labor for auditing purposes.

4. Mixing business and personal finances

This is one of the bookkeeping basics for sole traders and smaller start-ups. When you’re just starting out, you might find it easier to work from a single bank account. However, you really need to set up a separate system for your business both for tax and logistical purposes. Otherwise, you’ll waste time trying to sort out business transactions and could make expensive errors on your tax return. This could lead to serious consequences if you’re chosen for an IRS audit.

5. Not keeping long-term records

It’s important to check current IRS regulations to see how long your business must hold onto its tax records. Some records must be stored for three years, while others must be filed away for as long as seven years. It’s also helpful to have these long-term records on file for future reference. You might want to compare year-on-year profits to show investors or examine past expenses to see where you can cut future costs.

How to fix bad bookkeeping

We’ve outlined some of the most frequently seen bookkeeping errors above. Recognizing these is half the battle. When looking at how to fix bad bookkeeping, most mistakes really boil down to not putting the proper filing systems in place right from the start.

One of the best ways to prevent bookkeeping errors is to use the right software. Accounting software like QuickBooks or Xero automate bookkeeping basics on your behalf. All you need to do is set up your account, and the system provides a central hub for generating, managing, and tracking your accounting paperwork.

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