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Top 5 bookkeeping mistakes that cost businesses money and impede their growth?

Jean Chung

Jean Chung

MBA, CGA, CPA

Bookkeeping might seem easy to a lot of people. And, it is, if you understand the rules of bookkeeping and accounting standards. If you don’t, things can get messy fairly quickly. You can end up creating more work for yourself by making mistakes. You can also increase your risk of being audited by the CRA. 

If you’re not an expert, at least make sure you choose the right bookkeeper or accountant for your business. 

Small business owners tend to have bookkeeping done by one of their family members (usually in an attempt to save money). However, this can serve to be costly for the business if mistakes are made, and proper rules and regulations are not being followed. 

Below we’ll explain why it’s so important to do bookkeeping right for your business, and what can happen if you don’t. 

Reduce the risk of being audited by filing taxes properly (with good bookkeeping records)

All business bookkeeping and accounting records must be in compliance with the rules and regulations that stem from different levels of government in Canada. Of course, you will need to file your tax returns on time and make payments promptly if you owe money to the government. 

However, messy books and records are one of the triggers that can raise suspicion with the ‘taxman.’ If things don’t look right, you may be prone to get audited. 

If you’ve never been audited by the CRA before, you can ask someone who has, and they’ll tell you about the pain and stress of going through a process like that. It can be costly in terms of time and energy. If your books are not in order, and you have to spend hours looking for things, it can take even more out of your time, and drag on for days. 

In the unfortunate case where your books are not in compliance with legislation, you can be subject to a penalty or interest on late payments by the CRA. You can even be ‘red-flagged’ in case of a repeat offense, which will require another audit!  

You can learn more about the CRA auditing process at the following link:

CRA Business Audits 

The best way to avoid this issue is to hire a designated, professional accountant, or bookkeeper. They can properly set up and maintain your books. They are specifically trained to do this job. They also retrain every year in order to stay up to date with the latest tax laws. 

It would be unfeasible for a business owner to spend as much time as accountants spend learning the intricacies of tax law. So, don’t take for granted what they can do to save you from trouble down the road.

See more on our blog: “What are the tax deadlines for 2021?

View a clear picture of your company’s financial health 

Maintaining proper bookkeeping of your business makes it so much easier to track the profitability and financial position of your business. The financial statements of a business comprise the income statement, the balance sheet, and the cash flow statement. Below, we’ll explain these three documents, which every business owner should know about, and have on hand. 

Income Statement

The income statement is also known as the profit and loss statement. It tells you how much money your business is making or losing. With the right income and sales records, you will be able to tell which products or services you should focus on, and which ones you should scale back. If you take a cost center approach to your business, you will likewise be able to tell which of your divisions are making money, and which are not. You can therefore make business decisions accordingly. 

Balance Sheet

A balance sheet will show you the financial position of your business at a specific point in time. It will tell you the story of your business since you started. Also known as the “statement of financial position,” a balance sheet is made of three main sections: assets, liabilities, and shareholder’s equity. If you are properly invoicing your clients on time and applying for their payments accurately, you will be able to see who owes you money and who has an outstanding debt with you. 

Conversely, when you buy products from vendors, the balance sheet will show how much money you owe. It will also tell you how much inventory you have on hand. 

Statement of Cashflow

The statement of cash flow tells you how much money is entering and leaving your business. There are three main streams of activities that it deals with: operating activities, investing activities, and financing activities. 

When you know how much money will be coming in and leaving your business from those three sources of activities, you can better project what you’ll have leftover at the end of each month. This is your cash flow. It is the lifeblood of your organization and it can help or break your organization. It will help if you can get a good grasp of it. When you read the cash flow statement it will tell you whether or not you can spend, or reinvest in your business.

Check out our blog on the “7 benefits you need to know about cash flow forecasts.” 

Understanding financial statements are such an important aspect of being a business owner. But, if you are not keeping your financial records up-to-date and accurate, your business can be like driving at night without the lights on. You need them to make financial decisions and formulate business strategies.

Avoid extra costs to clean up bookkeeping records and (i.e. don’t rework when you can do it right the first time!)

Mistakes in bookkeeping can also result in clean up work at the end of the financial year. If it’s not done right, to begin with, your accountant will have to do it. This can be costly for your business due to the amount of time it will require on the accountant’s part.

Now think about cases where a business has not had its books done properly over a number of years and has not been filing taxes on time. This would be a nightmare scenario. The company will have to spend money on clean up work, all while facing the risk of being audited by the Canada Revenue Agency (as explained above).

Not only that, some people don’t separate their personal and business records. This can be a major headache for a business down the road. Since eventually all business and personal expenses must be segregated. The solution to this, however, is simple: make sure you have one bank account for your business and one for your personal needs. This will reduce the amount of clean up and rework required by an accountant.

When you look at it from this lens, you can see that bookkeeping mistakes are an additional, unnecessary cost to a business. It is usually cheaper to just hire a professional in the first place, rather than to DIY something so complex and heavily regulated. Once your external accountant goes through the general ledger details at the end of the year, they may require that additional adjustments be made to correct some of your bookkeeping entries. In some cases, they might just be re-classified transactions. 

Check out our blog: “ Why do you need a year-end bookkeeping package checklist?”

Focus on expanding your business

If you know your bookkeeping is being done properly, then you can rely on the financial information that is provided to you. Furthermore, you can then spend more time focusing on other, value-added aspects of your business. For example, growing sales and acquiring new clients. 

If instead, you have to spend hours fixing bookkeeping mistakes or digging up ‘lost’ information for an accountant (or worse, the CRA), you won’t have time to focus on growth.

Maximize your tax deductions

Sloppy bookkeeping can also mean that you are not taking full advantage of all the deductions that are available to small businesses in Canada. 

Sometimes this loss can be due to a lack of knowledge, or just an oversight (since business owners have many other things on their mind). For example, did you know that you are allowed to deduct up to six parties per fiscal year if all your employees are to attend? Did you know that if you were engaged in some Research and Development (R&D) you can potentially save with some tax breaks? How about sending your employees to two conventions to acquire new knowledge and network with people in the same industry? You can claim some of these travel expenses.

In other cases, small businesses will try to deduct things that are not allowed by the CRA. For example, deducting personal expenses in the name of a business is not legitimate. It can yield penalties. However, sometimes there is a crossover, and it can be hard for a business owner to determine what is actually a business expense, and what isn’t. This is where an accountant’s advice is needed. 

On this note, remember that if you get audited, you will need to provide paperwork to show that your deductions were actually used for business needs. You will have to go on the basis that the CRA is correct until you prove them wrong. So supporting documents are vital to support your deductions. Going through an audit is just not worth it if all you’re trying to do is save a few bucks.

Check out our blog on “What are the top 11 deductible expenses for a small corporation?

Proper bookkeeping is just common business sense; accounting mistakes are preventable!

There are many reasons to avoid bookkeeping mistakes. If you don’t, then you will likely spend more time and money fixing flops. In that case, you won’t benefit from trying to do it yourself without proper training. This would not be good business sense. It is well worth the expense of hiring an accounting expert.

Even if you do decide to outsource your accounting to a professional, it is still important to choose a bookkeeper carefully. Otherwise, you may end up paying someone with poor bookkeeping habits. This can put you in the same position you were in before, except with further unnecessary costs.

As a start, make sure the person you hire has the necessary qualifications and experience needed for the job (they should be CPAs, or working for an accounting firm run by CPAs). 

Freelance bookkeepers and part-time accountants can be affordable options!

If you fall in the boat of being a small business owner trying to save on costs by doing your own bookkeeping, there is some good news. You can hire a freelance bookkeeper or part-time accountant. They can help set up your systems, and bill only when you need advice or correction. 

Doing this on a month-to-month basis will save a lot of trouble compared to leaving it to your year-end. Whatever road you decide to take, either to do the bookkeeping yourself, hire an in-house accountant or outsource to an accounting firm, don’t leave this till tax time. Get started on the right path, and you’ll have fewer issues that steal your time later.

Professional accountants and bookkeepers can also help by giving you a personalized, monthly, and year-end checklist of what needs to be done by you. This way, you will be less likely to miss the important steps of closing your books, and less likely to make mistakes.

If you live in the Alberta area, we are Calgary accountants that work as little or as much as businesses need us to. We’d be happy to take a look at your current bookkeeping setup and advise on a strategy from there. Trust us: doing this in advance of tax season is the way to go!

Set up your free, Calgary bookkeeping consultation a.s.a.p!

Disclaimer:

The information in this blog is not intended to provide legal, accounting, or tax advice. It is intended for informational purposes only. You should obtain professional advice from your accountant or lawyer before acting on any information in this blog.