Produced by Shannon Brunning
Everyone makes mistakes, no matter how diligent they are. It's all part of being human. According to the Small Business Administration, over 50 percent of small businesses fail within the first five years of opening their doors. The two main reasons for this are poor financial management and lack of proper bookkeeping.
The following seven mistakes are among the most common errors that cause small businesses to eventually fail. A few of them may surprise you.
1. Combining Business and Personal Finances
One of the golden rules of small business finance is to never combine business finances with personal ones. Before you even open your doors to the public, it's imperative that you open a business checking account. This ensures that funds taken in by the business are used expressly for business purposes.
2. Forgetting to Keep Track of Petty Cash
Many businesses have a "petty cash" drawer, which is used for small purchases such as office supplies, break room supplies and other incidentals. If you make the mistake of not keeping track of this money, you may end up spending much more than anticipated on these smaller purchases.
3. Failure to Reconcile Bank Accounts
Don't panic when it comes time to reconcile your bank accounts each month. Chances are, once you've done it once or twice, it will quickly become second nature. Problems arise if and when the task is ignored for several months in a row.
4. Neglecting to Save Every Receipt
Some business owners make the mistake of not keeping receipts and relying on bank or credit card statements. But, failure to keep track of every purchase can lead to overspending without you even realizing it.
5. Going Completely Paperless
In today's world, it's easier to go paperless than ever before. However, without a physical paper trail you need to be extra cautious and ensure your records are backed up. Why? If everything is done by computer and you don't back up your files, there's always the possibility that you might lose everything if your hard drive crashes. Remember, when it comes to keeping track of small business finances, the simplest way isn't always the best way.
6. DIY Bookkeeping
In an effort to save money, many small business owners attempt DIY bookkeeping. If your budget doesn't allow you to hire someone, even part time, consider hiring someone on an "as needed" basis. The money you spend usually comes back to you several times over, considering the possible mistakes a bookkeeper will undoubtedly avoid.
7. Misclassifying Employees/Subcontractors
Misclassifying employees/subcontractor can be a costly mistake when tax time rolls around. These classifications determine who is eligible for benefits and exactly what benefits you must provide, such as overtime pay and workers' compensation.
Now that you're aware of these common bookkeeping mistakes regarding small business failure, your chance of being successful will likely be much higher. Of course, nothing is guaranteed. But, in this case, knowledge is power. The more you stay on top of your finances, the better off you'll be.