Bob Gauvreau walks through the bookkeeping mistakes that tank small business cash flow. Mixing personal and business money, letting records pile up, and misclassifying expenses as overhead when they're cost of goods sold. Fix these and you keep the profit you actually earned.
Chapters
Bookkeeping mistakes that are costly that small business owners make. Failing to separate personal and business finances. So often what happens is business owners get involved in their business. They get started, they only have one bank account and they're pulling personal funds out because ultimately the business is being financially supported by them putting money in. And they're also being supported by pulling financial money out. We have to make sure that there's complete separation. Otherwise we don't really understand what expenses are business related and what are personal related. We need to understand what business expenses are in there so that we can see how the business is performing. So we do not want to have a conglomerate of personal and business. It has to be separated if you want good financial information. Failing to keep accurate records. I talk a lot about profit simple. And our idea of profit simple is the fact that bookkeeping needs to be founded on three main, main principles up to date. Being one and accurate, Being number two and reliable and understanding what it means being number three. The accuracy of your financial information is so very important. In fact, it might be one of the most important things that we have inside our business because those are the insights that we have related to how our business is performing. And we make decisions based on the accuracy and relevance of that information. If your information is not accurate and you're making decisions on false information, which could be super misleading and guide your business down the wrong path, accurate information gives you the confidence and the empowerment to make informed decisions. Failing to reconcile your accounts. A reconciliation process is essentially the verification that the information that's entered into your bookkeeping software is being accurate and being checked. It is our one way to essentially validate the information that's in there. Reconciliation says, here's what all of the statements say. So, for example, a credit card, all of the transactions that go through the credit card, they actually happened. Sometimes there's duplicate entries. During a reconciliation process, what happens is we identify duplicate entries. At the same token, we record entries throughout the month of things that should be happening on our credit card statement or on our bank statement. And if they don't show up on the statement, we can identify it at that point as well, saying that charge wasn't actually made. Sometimes our suppliers get really upset with us because the charge actually didn't go through when in fact they should have processed it on their end. A reconciliation process validates the information that's in there and the information that's maybe not in there that should be. This is our one check system to make sure that the accuracy inside your bookkeeping is Correct. And, and that we can rely on this information going forward. It's not classifying expenses properly or misclassifying them according to the category. So why is this important? Well, when we understand how our business operates, there's really two categories of expenses. One is a cost of goods sold, a variable cost, a direct cost that we incur those costs as part of delivering our revenue. The other side is we've got fixed expenses, which is more of an overhead. It doesn't necessarily go up and down based on our revenue volume. So we've got two different categories of expenses. If we misclassify these, we don't actually know how much our profitability is on every dollar of revenue or every job. And that is one of the greatest driving forces of understanding how your business is performing is to understand the profit margins that go into your business and what you're actually earning per every single job. And if we misclassify, we may not find issues and errors throughout the year. If we misclassify an expense, let's call it a meals and entertainment expense, if it's actually a travel and it goes into meals and entertainment, you could end up losing tax deductibility related to it as well. So your visibility on profit margins goes away. And your ability to deduct everything fully for tax purposes could also be an issue. Misclassifying is definitely an inaccurate way of reporting, and we want to make sure that we eliminate that because accurate numbers help enable us to make informed decisions. Failing to track accounts receivable appropriately. One of the last things we want to do as a business owner is provide a product or service that we should be charging and not actually collecting that money. So one of the challenges we see in business owners, especially in small businesses, is if we're not invoicing at the time of delivery, then we could be essentially missing out on revenue opportunities. I see it happen all the time, especially in, you know, the contractor world or the service based world. We do a service, we complete a service like let's say we're repairing a doorway. Somebody's called us in to do a quick job, it's maybe $200 and we go on to the next job and we never actually invoice it. We need to make sure that we have a system in place that helps us one, track that all of our revenue is getting build out. And number two, what revenue is being billed out is actually being followed up upon. We can't have a bookkeeping system that has handwritten notes of who owes us money because we're going to miss things, and it's going to ultimately lead to lack of profitability and lack of cash flow in our business, which is not a good outcome. So let's make sure that if we're doing a service or we're selling a product that we're tracking who owes us money, and we're following up consistently to make sure that that cash gets in our bank account. Failing to track accounts payable properly. This is an issue in a lot of small businesses when you think of being on a cash basis or an accrual basis. A cash basis means transactions are being recorded when they actually take place. An accrual basis means transactions are being reported when the activity related to them actually takes place. So, for example, if I buy something from one of my suppliers, let's say I'm buying some lumber, but I don't actually pay them cash. I want to record that at the time that transaction happens or that activity happens. So I'm expensing that in the right period. First off, a tracking. Tracking accounts payable properly will help make sure that our matching expenses and revenue are in the same period, give us great insights over our profitability. And second, it will make sure that we don't have any surprises that we owe people money. Because sometimes our suppliers forget to send us an invoice until three or four or five months out, which maybe we forget about it. And then if we have a 10 or $20,000 invoice come in at that time, we're a little bit surprised and maybe not proactively planning for it. So we want to incur accounts payable and record accounts payable as they're incurred versus when we're just paying item. Accounts payable are key in making sure that we're reporting effective numbers to make informed decisions.
