Bookkeeping is a reality for all small businesses. Many small business owners cringe at the thought of taking care of this task of day-to-day operations. At Pursuit, we recommend QuickBooks to our borrowers to help manage their bookkeeping and finances. While QuickBooks does a great job at bringing the daunting task of running a business’s finances down to anyone’s level, there are still many opportunities for errors. Here are the top 10 most common mistakes we see business owners make in QuickBooks:
1. Confusing account names
The chart of accounts is an organizational tool that allows you to create a listing of every account in your business. You will typically list balance sheet accounts (assets, liabilities and owner’s equity) and the income statement accounts (revenue and expenses).
Perhaps the most widespread issue with business owners’ QuickBooks accounts is confusing account names. Think about your QuickBooks accounts like folders that you file your receipts in at your office. Your accounts become your expense categories when you print off a profit and loss statement, and the categories of your balance sheet. When the names of your accounts aren’t well thought-out, these resulting financial statements can be very confusing for outsiders to understand.
Also, when it comes time for you to enter information into your QuickBooks account, you might enter an expense into the wrong account if the names aren’t clear and understandable. Having an accountant or professional set up your chart of accounts before you begin using your QuickBooks platform helps to bypass this issue.
2. Not reviewing your financial statements
For people without a background in finance, balance sheets can be quite confusing. Entering numbers as negative values when they are supposed to be entered as positive values is a common mistake. This is because it is often counter-intuitive.
For instance, we see all types of debt as obligations for us to pay someone back. That’s why when entering our credit card balance into QuickBooks; it would make sense to enter it as a negative amount. In reality, all new debts entered into your QuickBooks account should be positive amounts. As a rule, most of the data you will enter into QuickBooks will be positive values. When in doubt, check the QuickBooks help resource or ask a professional.
3. Inconsistent information
As a business owner, you’re given a lot of leeway in terms of how you would like to classify certain types of costs for your business. For instance, you can choose to put certain expenses under fixed operating expenses or include them within cost of sales. Whatever you choose to do, the most important thing is to make it a rule and stay consistent.
Issues arise when business owners change their method of classifying expenses from one period to the next. When it comes time for the business to go and raise more money, their financial statements will show unusual fluctuations in expenses, and the ratios that investors and creditors use to decide whether to extend money will be affected.
4. Misusing the undeposited fund account
Many business owners are shocked to find a confusing figure in their balance sheets called “undeposited funds.” Unaware of how it got there or how it got to be such a large figure, business owners often must seek out professional advice to identify this balance.
“Undeposited funds” is an automatically generated figure in a business’s balance sheet to account for money that has been received, but has yet to be deposited into the business’ bank account. Seeing this amount in your financial statements doesn’t necessarily mean there’s an error, but if the figure starts to grow large, it may be a sign that money actually being deposited into the business bank account isn’t being recorded properly.
When your customers send their payments, open up the deposit module, and record all payments in the software.
5. Tracking sales taxes inconsistently
Businesses have different ways of treating sales taxes. Some businesses charge their customers a fixed price including sales taxes, and therefore record sales tax collected as a subcategory of revenue and sales taxes paid as a business expense. Other businesses charge their customers a base price and then add sales to their bill, excluding sales taxes from both their revenue and their expenses.
Either of these methods work, as in both cases sales tax is collected and then remitted one-for-one to the tax authorities. A problem arises when businesses include sales taxes within their revenues and don’t include it in their expenses, or vice versa. When this problem arises, the business’s profitability is either being reported falsely low or falsely high.
Choose to either include sales taxes in both your revenues and expenses, or choose to leave it out of your revenue and expenses entirely.
6. Forgetting to balance accounts receivable and accounts payable
When a business is owed money by its clients or owes money to a vendor, those balances are recorded in QuickBooks under accounts receivable and accounts payable respectively. This helps to keep track of money that has been earned, but yet to be paid, and money that is owed and (ideally) will be paid shortly.
A problem that arises is when money is collected from a client who is paying off your receivable, but that receivable balance isn’t reduced in QuickBooks. This problem results in financial statements falsely indicating that the business isn’t getting paid on time, or isn’t paying its bills on time.
As a rule, when you collect a payment that was previously billed for, or pay off a vendor who gave you some time to make that payment, always check to make sure corresponding receivables and payables are adjusted.
7. Bank account connectivity
Most businesses link their bank accounts to their QuickBooks accounts. This allows transaction information to be automatically downloaded from the bank account into QuickBooks. QuickBooks uses rules, set by the business, to classify transactions into appropriate accounts in the platform.
It’s important to carefully set up these rules when first establishing a business QuickBooks account, and to periodically review. Since the process is automated, any erroneous classification will happen continuously, and can quickly amount to a lot of work for the business owner or bookkeeper to correct.
8. Incorrectly handling loan payments
When businesses receive a loan, it needs to effectively record the payments it makes to keep the loan balance up to date. Every payment on a term loan has a component that is paid towards interest and a component that is paid toward principal.
Businesses sometimes neglect this and either record the entire payment as principal or as interest. Doing so creates an illusion that the business is either paying back its loan faster than anticipated or slower than anticipated. Whenever recording a loan payment in QuickBooks, remember to “split” the amount between principal and interest. This keeps the loan balance in QuickBooks as accurate as possible and can help when it comes time to raise more funding.
9. Product and cost mismatch
When used effectively, QuickBooks provides helpful insights into products’ and product-category performance. By matching product names and product category names within the business’s “Items” list in QuickBooks with its inventory, these comparisons can help businesses determine which items to keep, which to sell more of, and which to stop selling.
When businesses don’t line up these inventory and items definitions, the quality of information that they can get out of their software is reduced down to the overall profitability of all products.
10. Hiring an unknowledgeable bookkeeper
If you decide to delegate the task of managing your QuickBooks account, make sure that you hire the right person for the job. Professional bookkeepers are skilled at managing a business’s chart of accounts and entering the right information in the right place.
On the other hand, many people could have experience using QuickBooks in different capacities. For instance, your recruit might have experience as an office manager and exclusively dealt with entering expenses into QuickBooks.
While this experience is helpful, it only represents a portion of the total knowledge base needed to run a business QuickBooks account. Hiring the wrong person can cost your business more than you can imagine. For example, inaccurate financial information and reporting can prevent you from obtaining the right financing your business needs to operate.
Having a good financial management system is key to the success of your business. Do not underestimate this very important part of your business. Most importantly, do not fall behind in your QuickBooks entries and reconciliation. Regardless of the size and complexity of your business, as a small business owner you will need to track a significant amount of information.
QuickBooks keeps track of your sales, expenses, inventory, assets, and liabilities. By using your accounting software correctly and avoiding these common mistakes, you will have accurate financial information on hand at any given time to inform you of your daily operations and help you in decision making.