The 12 Most Costly Bookkeeping Mistakes

When it comes to the tax system, everything needs to be that. We have a supportive argument as to why an item is deductible. My biggest pet peeve is that when people are operating their business, they don't have accurate records to make and support informed decisions. So this is a must. The number one tool I feel is available for small business owners is to budget out and build expectations of what they want to accomplish and then actually reflect back on it and say, did we do that or did we not? Foreign. Good day everybody and welcome, welcome, welcome to the Wealthy Entrepreneur Podcast. I will be your host, Bob Govreau here, founder and CEO of Govro Accounting Tax Law Advisory. And listen, I'm excited to do this episode today which we're going to call the 12 most costly mistakes that we see business owners make when it comes to their bookkeeping. I think this is an area where, where there's lots of ability to improve for every business owner. But before I jump into that, I just want to maybe chat one for one second about the Wealthy Entrepreneur podcast. This is a place where we dissect the elements that contribute to entrepreneur success, from mindset to leadership to profits and revenue. And again, what we're going to talk about today is going to be the 12 most common pitfalls that business owners see inside their business or that we see that helps them if we can eliminate them, helps give them better information that can helps business owners be more informed to make better strategic decisions and ultimately build their wealth and impact at a multiple of 10x their existing or their current levels. So listen, I want to jump right in here and I'm going to identify all these 12 pitfalls that we see when it comes to bookkeeping. And for those of you who are new here, you've probably heard me talk about Profit simple as our approach to bookkeeping, how we help business owners make profit, and making make profit simple. Ultimately, it comes down to a few things. It comes down to the fact that all of your financial information is up to date. Has to be up to date. If we don't know the score of the game, how do we know what strategy to put in place in order to win the game or to get ahead? Right, Right. We need to know the financial numbers inside your business, how it's performing, so that we can make adjustments along the way and continuously improve upon that. Now, although it's up to date, the second component is it needs to be accurate. We need to be able to rely upon this information to make sure that it is giving us the right detail to make informed decisions. Because if it's up to date, but it's misallocated in all the different categories and they're wrong and our gross profit calculations are wrong. So this is not going to be helpful for us in making informed decisions. So has to be up to date, but it has to be reliable. And then component three is really, how do we use this information? How do we understand what it's telling us so that we can make informed decisions? And that's really taking that information and saying this is what we can use as a guide. So it's three elements of it up to date, accurate, and we need to be able to interpret that information to make those informed decisions. Okay, as a principal, that's what we need to focus on. But here are 12 pitfalls that we see commonly inside small business. Number one, failing to separate personal and business finances. Listen, I see it all the time. Business owners, we know we want to deduct as much as possible, which is totally fine. I'm going to give you a framework that I use personally that really helps with this. We need to separate it. Everything can't go through the business account. It's. And here's why. Whether we're anywhere in North America, whether it's the IRS or the Canada Revenue Agency, whenever a government agency comes in and sees that you've got all these personal deductions, they're gonna deny them, all, right? Unless you can share with them how you've come up with these being business expenses or personal expenses. And my system is I have a credit card personally and I have a credit card for the business. And I wanna deduct as much as possible too, related to business expenses. But we have to have a really good argument for as to why this is going to be a business expense. And I do this and I only put the expenses through my business credit card that I know are justifiable expenses. So here's a really good example. Meals and entertainment. As one, you know, if I am going out for a meal with my family, it goes on my personal. If I'm taking a colleague out to lunch or a prospect out to lunch, that goes into my business account, I can show and substantiate personally that I've got meals and entertainment that are being charged on my personal and I've got meals and entertainment that are being charged on the business and that those two are being appropriately allocated based on the fact that they are business or they're not. Because if everything is going through one system, the government agencies are going to be like, nope, we, we want to see some element of how you're rationally coming up with this as an argument. And truthfully, when it comes to the tax system, everything needs to be that we have a supportive argument as to why an item is deductible. So that is, number one. Number two, failing to keep accurate records. So I talked about profit. Simple needs to be up to date and it needs to be accurate. So one of the major mistakes that we see is that, yeah, you know, a business has got a bookkeeper that's in there, they're keeping everything up to date. Or at least the business owner is being told that everything is up to date. But the moment I open up their financial statements, it's like looking at the Matrix, right? You may not see it when you look in there and you say, oh, look, all these numbers are in here. I don't know what any of this means, but so often I will jump in on a new prospect conversation and the business owner is saying, we're struggling to make money or to realize what it is that we can do better, better to make our business more successful. And I'll jump in to their bookkeeping documents. And there's misclassified expenses everywhere. And it's not up to date and it's so important. So with not keeping, you know, accurate records, we can't make informed decisions. So what we should be able to see when we're looking at our financial documents is consistency. You know, if we're consistently going up in revenue, we. We're likely consistently going up in cost of delivery. We should have consistent and flat overhead costs. Our rent expense isn't going to go up if our sales double, you know, unless we need more space, but it's not going to double every month as we continue to grow. This is something that we should see. Consistency. And the goal there is to create more gross profit, so more revenue minus cost of delivery and to keep our overhead costs flat. We. What that does is it increases the percentage of net income at the end of the day because our gross profit is going up and our overhead is staying the same. If you don't have accurate records, it will not tell you this. Your business financials will tell a story. They have to be accurate and reliable. And this would probably be, you know, my biggest pet peeve is that when people are operating their business, they don't have accurate records to, to make and support informed decisions. So this is a must. And listen, if you want our help, because bookkeeping can be completely outsourced and, you know, One of the challenges you'll see is that bookkeepers tend to leave. You know, if you hire a bookkeeper internally, they leave and then what? You can't go in and help do that and keep it up to date. You're having to find a new one. You don't know how to train them. Bookkeeping can be an outsourced function. So if you want to outsource your bookkeeping, create some consistency and have up to date and accurate information so you can make good decisions, reach out to our team. We're going to have a link below this podcast. Our team is happy to support you. And this is just one of the ways that we help entrepreneurs maximize their impact, is make sure that they have the right information to make the right decisions. Number three, as a pitfall in your bookkeeping is failing to reconcile your accounts. Now, as a business owner, you might go, I don't even understand what reconcile accounts means, but I'm going to walk you through this so that you know and you can ask your bookkeeper, how often are you reconciling? So reconciling means that we're matching up essentially the activity that goes through a statement. So whether it's a bank statement or it's a credit card statement, and match it up to the accounting books of what's going through, what's called a general ledger bank or credit card account, matching those two transactions up and saying, are there items on here that have been missed, and if they are, we're going to capture them inside the books, or are there items that are in the books that actually didn't take place, which are maybe a duplicated expense or item like that. So a reconciliation matches the statement to the general ledger inside the accounting to make sure that it's accurate. And a reconciliation process is something that is like your double check to make sure that your accounting records are right. I had a meeting last week with a new prospect, and they had told me that that they had hired a new bookkeeper back at the start of the year. And they were actually coming to us to say we think we need to replace her. But they came to me and said, well, no, she is in there every month and reconciling. And I said, great, that's fantastic. So for me, it's like your transition to us should be fairly easy. If everything's reconciled, it might be in the wrong accounts, so it might not be accurately reported. But if everything is in there that should be in there, I can easily fix that. And so what we did was I said, great, Can I just take control of your screen on the zoom call and just do a couple double checks? And I went back and you know, we're in September right now, so I went back and I looked at the last time it was reconciled and it was January at the start of the year. So it hasn't been reconciled in nine months. So what does that mean? The likelihood of it being inaccurate is 99.9% and very easily. When I opened up the profit and loss and I took a look at it, there were issues in there. So reconciliation is a must. It is your check to validate the information that is in the accounting records versus what's actually taking place. And there needs to be a follow up on that too, where if there are items that aren't matching, you need to identify them, which you do in a reconciliation process. But you need to follow up. Because one of the challenges, and I don't even think this is on my list, one of the challenges when we're reviewing, you know, the reconciliations at the end of the day is you've done the reconciliation, but all of those duplicate transactions or those transactions that never hit the bank account or never hit the credit card that, you know, the accounting records are saying they did, they're just being left there. These need to be eliminated because they're over reporting expenses and they're misrepresenting the accounting information. So reconciliations are key. But you have to follow up on any of those discrepancies and make sure that they're eliminated and resolved. Number four, failing to classify expenses correctly. We've talked about this a little bit, but here I want to give you a really specific example. So we work with a lot of contractors. We work with. We have pockets of businesses that we, that we do a lot of work with. And contractors are one of those specific pockets. So let's say construction company that builds decks. And I'm using this as an example because I think it's very relatable for everybody. So one of the examples would be that this company is going in and building a deck for my cousin Steve. And Steve has, you know, paid this $20,000 contract up front for this deck. And I'm the construction company and I come in and I'm paying for lumber and I'm paying for labor costs, and I'm paying for other materials, vehicle costs. So depending on how these expenses are allocated, you know, you could have the payroll in overhead saying that it was a management expense. You could maybe put some of the lumber or even the nails or gas Vehicle expenses. You could put that in overhead, too. Which would be wrong. Those would be wrong. And what this does is it makes us believe that we're making more profit on these jobs than we actually are. So in this case, you know, it might come back and say that your gross profit is 30%. And me as an advisor says 30% is a really good gross profit margin in that sort of space. But when I start reviewing it more, I identify that, yes, some of the labor cost is not included in that. The vehicle costs aren't included in that. So when we actually go back and we, we reprogram where these expenses are, we put them in the right categories, we then see that our gross profit is, you know, 11%, 11% there, and our overhead cost is 20%. That is not a profitable business. We need to look at, you know, whether or not we need to increase some of the controls over theft of materials. We need to look at our pricing, we need to look at our labor efficiency. You know, we have to look at our profitability because we should be on the 25 plus percent. And if our information is misallocated, it would give us false information. We would think our business is overly successful. And because our margins aren't being classified in the right way. So that is the issue when we misclassify expenses in the wrong categories. If it impacts our gross profit, we're being misinformed and misled by errors in our bookkeeping. Okay, number five, failing to track accounts receivable effectively. Listen, you know, one of the biggest challenges in small business is related to cash flow. And, you know, let's use that same example of the construction company. We're selling decks, 20,000, $50,000 fences, and, you know, we've generated $1 million of revenue. And maybe let's say we've got $300,000 of gross profit, we've got $200,000 of overhead. That leaves us with $100,000 net income at the end of the year. That sounds great, right? But here's the challenge. So if we are selling these projects and we're not collecting the money, so let's say there are three decks at $50,000 each that we've sold, we've delivered, we've paid for the products, materials, and as we've completed them, we haven't collected the money, which means there's $150,000 in accounts receivable, which means that if we take that, the fact that we haven't collected that cash, we've got $100,000 net income in My example, but we're out cash of 150. We're actually at a cash loss, loss of $50,000 because we've got $150,000 that people owe us. That could jeopardize the future success of your business. That could jeopardize your ability to make payroll to pay your credit card bills. So we need to make sure that our accounts receivable are being tracked. Because here's the thing, if people owe us money, the longer we let them owe us money, the less likelihood that we're actually going to collect that money down the road, right? If we get 30, 60, 90, 120 days out, people are forgetting about the value that you contributed because now they're just used to it. And now all it is is a nuisance that they have to pay a liability because they've already got all the benefit. Couple of things here. We need to move that benefit. We need to collect money before the full benefit has been transferred. Because after that point, there's a huge risk associated with that business. Right? And then the other part is those people who we do owe money, we have to have an administrative process of how to go out and collect that in a very efficient way. You know, in the contractor space, we have a great partnership with Jobber Jobber. You can use the software platform as you invoice to collect your money, and it will send out notifications and reminders to the customer. So you've automated some of your collection process using systems like this help increase cash flow into your business substantially. So there is number five, number six, failing to track accounts payable. So, like people owing you money, essentially, accounts payable are expenses that have been incurred that you haven't paid for yet. Here's a great example. So, and I'm going to just continue with the construction space. We all know Home Depot, right? So we have an account with Home Depot where we put all our materials on. And so for my deck, I'm spending $20,000 in materials on this deck for a $50,000 revenue. And what I do is I put the revenue through because I've collected the money up front. But I haven't paid for these Home Depot bills yet. And if I'm not tracking my accounts payable, that expense doesn't come into my accounting records until after the next month. So if I'm looking at my profit margins for this month, I'm missing all of those expenses in there. It's reporting that my gross profit's higher than it actually is. So maybe this is where we're at 30%, but if I actually put in the Home Depot expenses, we might be back down to that 10% range, which is very, very dangerous. So tracking accounts payable, matching those expenses in the period where we're incurring revenue is so very important as well. Number seven, failing to plan for taxes. Here's one of the greatest challenges I see, especially in startup businesses, is that the very first year that they have some financial success, they've essentially reinvested all of their cash back into their business to grow, bring in more equipment, bring in more staff. It's a matter of fact, and not necessarily a bad plan. We just need to make sure that we're planning for the tax liability. And regardless of where you are in North America, if you've got sales tax that's owing on that, you're collecting that as part of the revenue process. If you pay that out on hiring new employees or on buying a new vehicle or new equipment, you know, you could be outputting all of that cash and forgetting about the fact that you actually owe it to the government. So not only on the sales tax side, like in, in Canada, the hst, gst, but also on the income tax side. So knowing that, you know, based on the type of entity you are, I would highly recommend getting yourself in a corporate structure. If you're a sole proprietor, you could go all the way up again. Across North America, highest rates are about 58%. You could have a tax liability of 58% of your income. If you've spent all that money, it's going to put you in a really tough position to try and claw back out of that. So we need to have an idea of what we're owing to the government related to sales tax, gst, hst, also payroll tax, and the income tax on our earnings. So we need to make sure that we're planning for this because that type of surprise at the end of the year can really set our business back. Okay, number eight, not understanding payroll taxes. So here's a good example. In Canada, and I'm going to use this as Canada and United States, it's the exact same thing. There's two different ways that we, as a shareholder of a corporation in the us you would more so be thinking of a C corporation. We can pay ourselves a salary or we can pay ourselves a dividend. Now, if we pay ourselves a salary withholding taxes on that, you know, again, depending on whether you're in Canada or in the United States, there's, you know, employment insurance, there's workers Comp, there's pension plan contributions that are required in both countries. What happens is not only do you get a lesser check because they're withholding that from you as an employee, but they're also with making the company contribute to that as well. So what's happening is you get a lower check because the government's getting paid up front. And then your company is having to add extra benefits and contributions in here as well. That goes directly to the government. And understanding that those payroll taxes, there's ways that you can strategize and come up with a good compensation plan where you don't have to front all of that money to the government. In fact, if you think of a salary, for example, let's say you want to give yourself $1,000 a week after the government's taken their cut, you're likely coming out with, you know, 650 ish dollars, 600 out of that. Whereas if and, and then you have to pay $4 to the government and you get 600. So there's a cost there, right? Whereas if you did a dividend distribution for $600 get you the exact same amount, there's no amount owing to the government up front on a monthly basis. And you know, we look and we plan for the income tax effect of having a lower deduction in the business. But looking at those things, if we're trying to grow and maximize our cash flow in our business, a dividend compensation strategy is much more effective. And knowing that payroll taxes are due regularly, if not biweekly, monthly for sure. So we have to plan for those regular outgoing expenses as well. Inside our business number nine Overlooking tax deductions and credits. This is where I see a few issues in bookkeeping. Sometimes bookkeepers are not as aggressively deducting some items. And if, you know, there's no information related to it, they're immediately just putting it to a draw. Or a shareholder loan account, which ultimately doesn't allow the company to deduct them. But it also causes personal tax implications for the individual business owner. So this is an area that we have to stay on top of because, you know, I know as a business owner too, if we're three or six months away from when that transaction happened, I don't have a receipt. I likely am not doing a very good job of remembering what that expense was even for. So we need to stay on top of it right away and we need to avoid putting as many items to draws or shareholder loan as possible because it has negative deductibility outcomes for the Business, you know, those expenses could help bring our tax rate down. And also if they're personal in nature, or we're maybe they're business in nature, but we're being allocated those to personal use for draws or shareholder loan, that causes us personal tax pain as well. So the combination effect of those could be that upwards of 58% of extra cost if those expenses aren't being allocated to the right area. So making sure that we stay on top of that as well. Number 10, failing to budget. I look at this as the number one tool and tactic that small business owners could do to help plan out their future better. So why do I say that? Well, if you think of all the larger successful businesses, they've all got a budget for the company and they've got departmental budgets. And what this does is it gives a strict sort of guideline for the entire team to say, here's where we're allowed to spend, here's our expectations from revenue, for payroll, for advertising, all of those items. And if we don't have a benchmark to compare that to, we're just in the wild, wild west here, hoping for the best. But when we can actually build out the future that we want to create and we put that into a budget, we can actually benchmark that in our bookkeeping records to say, this is what actually happened, this is what we expected to happen. And the discussions that happen in that sort of analysis are massive. And it's a really great opportunity to build out what the future looks like and to make sure you stay on track on a month to month basis for achieving those goals. The number one tool I feel is available for small business owners is to budget out and build expectations of what they want to accomplish and then actually reflect back on it and say, did we do that or did we not? And do this on a consistent basis so that we can see if we're on the right track. Because the greatest opportunity to get on the right track is right now, not six months from now. And if we are looking at our financial results six months from now and saying, I don't think we really have been accomplishing what we wanted to, that's not helpful, right? This is what we want to accomplish. This is what's actually happening. We did or we didn't. Why did we or did we not? Let's get rid of the bad and let's reemphasize the good and let's move on to the next month. Massive tool, massive opportunity. Number 11, not reviewing financial statements. So listen, assuming that your Financials are accurate, they're up to date, and they're reliable and that you can use them to make informed decisions. We need to review them. There's power in these numbers to tell us how we're doing. We need to review them. What we recommend is to have a monthly financial report and analysis happening. So every month, once your bookkeeping is completed, you're looking at, here's your budget, here's your expectation, or if you don't have a budget, which I again, is the number one tool I feel. But we don't do a budget. We should at least be looking at it and saying, how do we do compared to last month? You know, let's reflect back and say, are we progressing? Are we making positive contributions towards reaching our goal? Because there's powerful information in there. Also, when we review it, we can identify issues that are happening now instead of six months from now to avoid any dangerous situations of our company failing without us even being aware of it. Okay, and number 12 is, and I'm going to make this a 12 a and b because it appears that I have 13 on my list. So 12 a is going to be not leveraging technology. So let's use technology like a QuickBooks Online. Let's use different softwares like Pluto to track our accounts payable and to be able to just click a button and make sure that they get paid online. Let's utilize technology to make sure that our numbers are accurate, reliable, so that we can make those informed decisions. And let's use a QuickBooks online to help support us with, you know, reconciliation processes in there to help make sure that that information is good information. But then, you know, the last one, which I'll say is B is yes, using this, having it up to date, having it accurate is all good, but seek out professional guidance and mentorship where you need help. If you don't understand what it means or how you can use this information to make informed decisions, reach out and talk to your advisors or your support network or even collaborating with other business owners. Obviously you can reach out to us, but super important that you use this information because it is very, very powerful. And if you can eliminate these 12 or 13 factors of bookkeeping pitfalls in your business, you will create a stronger business. And in fact, not only could you turn these pitfalls around, but you could actually make them the strengths of your business so that you are confident about the information and the financial performance of your business so that the strategies you're implementing are going to take your business to the next level. You feel confident because you know the information that's included that you're making these decisions based off of is valuable. It's accurate, it's reliable, it's up to date and you are making a stronger business by making those informed decisions. So let's eliminate these 12 costly mistakes. Let's make them our strengths in our business and continue to evolve into being a wealthy entrepreneur and a wealthy business owner. Guys, this is the Wealthy Entrepreneur Podcast. I'm Bob Govreau. If this is helpful to you, leave a comment Leave a Like Follow the Podcast we are going to be releasing a new podcast every single week in the middle of the week to help support business owners just like you to create a greater impact through financial profitability in your business and maximize your wealth along the way. Thank you so much for joining today. Leave any comments below. We're happy to jump in and answer any questions you have. Once again, this has been the Wealthy Entrepreneur. Thanks for joining us and we'll see you next week.