The Head of Small Enterprises at Standard Bank says, although statistics vary, on average about 50% of all start-up businesses in South Africa fail within 24 months due to the inability and inexperience of their owners.
According to smallbizgenius on average, about half of all companies survive more than 5 years, while only about a third reach the 10-year mark.
Two of the major reasons of these start-up failures are the incorrect managing of finances and lack of proper bookkeeping. Everyone makes mistakes, no matter how diligent they are. It's all part of being human.
The following 7 small business bookkeeping mistakes are among the most common errors that cause small businesses to eventually fail. A few of them may surprise you.
1. Using One Bank Account for Business and Personal Use
One of the most important rules of small business finance is to never combine business finances with personal ones.
Before you even start operating your business, it's critical that you open a business checking account. This ensures that funds taken in by the business are used expressly for business purposes.
2. Not Keeping Track of Petty Cash
Many businesses have a "petty cash" drawer, which is used for small purchases such as office supplies, lunch room supplies and other incidentals.
If you do not keep track of this money, you may end up spending much more than anticipated on these smaller purchases.
3. Failure to Reconcile Bank Accounts
Delay in reconciling your bank accounts each month will cause panic.
Chances are, once you've done it a few times, 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.
If you do not keep your receipts you may forget expenses when preparing your tax returns. Besides this, failure to keep track of every purchase can lead to overspending without you even realizing it.
5. Operating Totally Paperless
In today's world, it's important to go paperless than ever before. It will help your business to become more efficient and improve the security on your information.
However, when it comes to bookkeeping, you're much better off leaving a paper trail as well. 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
Misclassifying employees can be a costly mistake when tax time comes around.
These classifications determine who is eligible for benefits and exactly what benefits you must provide, such as overtime pay and workers' compensation.
Final Thought
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.
If this sounds too complicated or time consuming, you always have the option to outsource.
The best way to decide what you want to outsource is to take a close look at your daily activities. Make a list of all the things you do, especially the ones that take you the longest and that you like doing the least.
These are the things that you’ll want to consider hiring someone else to do for you first.
Once you’ve compiled this list, carefully consider which tasks can easily be completed by another person and which ones require your personal attention. This will give you a good idea of which activities you can outsource and which ones you shouldn’t.
Keep in mind that you don’t have to do everything yourself, for it to be done right!
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