5 Bookkeeping Mistakes Small Firms Make
1. Not Capturing Details of Day to Day Financial Activity Affects Profitability
Shoving one’s receipts in a shoe box and waiting till tax season to prepare and organize financial data is a bad practice and can reduce profitability. These are some of the repercussions:
- Cash Flow Unawareness: Having no records of your expenses means you do not know where you are spending money.
- Lost Receivables: You may miss out on collecting your receivables.
- Fines & Penalties: You may have to pay fines & penalties to CRA for lack of records.
- Higher Tax Accountant Bill: You pay more for your tax accountant as they spend more time on organizing your financial data.
- Inability to Benchmark: You do not know how well you compare to your peers in terms of return, costs, receivable days etc.
The list can go on and on….
Recommendation: The solution is to record your financial transactions properly and regularly, at least weekly. Recording is not enough, having details is also important.
- Multiple Tax Accounts for CRA: If you deal with multiple taxes, maintain separate tax accounts for reporting purposes. This will save time for your tax accountant, translating to lower fees.
- Measure Service Profitability: If you offer diverse services, maintain separate revenue accounts in order to track profitability of your services. This requires having a comprehensive Chart of Accounts (COA).
- Segregation for Trending: Similarly, maintain separate accounts for different types of insurance you pay. This will help you to track the trends of your insurance payments, and may help you to search for cost effective insurance options.
2. Losing Unique Tax Benefits Available For Your Business
Not tracking business expenses that you can write-off for tax purposes and being unaware of tax benefits can result in a higher tax bill.
Hire a bookkeeper who is aware about your industries unique tax benefits. Here are some legitimate ways you are allowed to reduce your tax bill and enhance your profits.
- Properly accounting for equipment, renovations, computer software can reduce your tax bill via capital cost allowance (depreciation).
- Issuing salary or dividends to family members (shareholders) in lower tax brackets can reduce your tax bill.
- You can convert your non-tax deductible mortgage interest into a tax-deductible interest on a business or investment loan. You can do this by using excess capital you have to reduce or eliminate your home mortgage, and then asking the bank for a business loan and invest the money back into your practice.
3. Inadequate Internal Controls Increase Risk of Losses & Theft
No business wants to believe that their wonderful staff members are capable of embezzling from them. Prepare for a wakeup call! It can happen to you.
Recommendation: Establish sound bookkeeping best practices. Here are a couple.
- Separation of Duties: No same person should do bookkeeping and depositing the money.
- Access Controls: Controlling access to your data via passwords, access controls can keep unauthorized users out of the system. Robust software, data encryption of your computers can also protect your data.
4. No or lack of budgeting means no control over costs, expenses, goals
If you don’t believe me, ask anyone who budgets what it has done for their finances. Chances are, you’ll find companies who used a budget to reach their financial goals.
Prepare a budget and monitor it. Work with a person who knows about your industry.
5. Having Unqualified People Be in Charge of Bookkeeping
Having trouble with back pains continuously? You need to see a specialist doctor. Having a tooth ache? You see a dentist. If you have a tooth ache, you don’t see a general practitioner, would you? Similarly, you don’t trust your financial data, and bookkeeping to an unqualified, unskilled person because it can cost you badly.
Recommendation: Hire a specialist bookkeeper who knows your industry, who is qualified, and has an accounting background.