How to avoid common bookkeeping mistakes
Business cloud software trends
Over the past five years businesses around the world have put more and more trust into using cloud-software to run their business.
In 2016 the Business Use of Information Technology bi-annual report by the Australian Bureau of Statistics (ABS) reported that 60% of businesses relied on Cloud computing services. Only 25% reported using paid ‘cloud computing’ in the very same report released only two years earlier.
And in 2012, the term “cloud computing” was nowhere to be found in the exact same report!
Business owners who were originally unaware, wary or skeptical of putting their data ‘in the cloud’ are now using online software platforms to work in ways previously never imagined.
In the accounting space, Xero Accounting has been leading the way. And it’s been wonderful for business owners and accounting professionals alike. Because of Xero we’ve not only been able to start and grow a successful virtual bookkeeping practice, and work with clients all around Australia. But we’ve also been able to create income for our family and our staff.
Save on bookkeeping fees
But it’s not all roses for bookkeepers and accountants because we grew up in a world where business owners wouldn’t dream of doing it themselves or leaving it an unqualified person just to save a few dollars.
Accounting was considered an expertise and businesses were happy to pay to get it done right.
But with the rise of cloud accounting platforms like Xero, MYOB Online and Quickbooks Online, we’ve seen a corresponding rise of business owners opting to do it themselves, hiring a friend or family member, or engaging an existing admin person to take on their bookkeeping.
Usually this means that the bookkeeping can be completed at a far lower cost, or in some cases ‘for free’.
And why not? Of course business owners want to keep costs down, so doesn’t it make sense to cut costs in bookkeeping.
Unqualified bookkeepers cost business thousands
As cloud software continues to rise in popularity, we’ve also seen a rise in people who aren’t qualified bookkeepers offering ‘bookkeeping services’.
Many falsely believe that cloud software is so good these days, that it literally does everything for you. All you have to do is click a few buttons when they turn green. Right?
It’s no surprise, given the false promises made by accounting software companies, who claim that bookkeeping is ‘beautiful’, ‘easy’, ‘effortless’, that we’ve also seen a rise in ‘rescue jobs’ because of common bookkeeping mistakes.
When new businesses approach us for a quote, we start off by completing a Bookkeeping Health Check on their data file. And we consistently class 90% of those files as ‘rescue jobs’.
And we have reason to believe this is directly correlated with the trend toward the use of Cloud software, the falsely promoted ease of bookkeeping and the rise of unqualified people doing bookkeeping.
Bookkeeping mistakes in 90% of new client files
Bookkeepers use the term ‘rescue job ‘ to describe messy bookkeeping. A data file can contain numerous transactional errors which are caused by incorrect set-up or human-error in data entry.
Often the business owner is completely unaware of the lack of accuracy of the data. As they aren’t trained to identify issues they don’t know where to look, and even if they did it’s unlikely they’ll know what the errors look like.
However sometimes business owners come to us sensing that ‘something isn’t adding up’. For example see invoices on their payables report which they are certain have been paid.
Diagnose bookkeeping mistakes with a health check
When we complete a ‘bookkeeping health check’ we’re diagnosing the data file. And we do this by checking the file thoroughly, starting with the ‘usual suspects’: areas where mistakes are commonly found. And we document everything as we go, providing a detailed report on what’s happening in the file for the client.
From there, we then work with the client to prioritise the order in which the errors should be corrected, and discuss the costs involved.
Bookkeeping mistakes should not be ignored
Fixing data files sucks! Prevention is always better than cure. Sadly, the cost of fixing bookkeeping errors can be up to five times more expensive than doing it right the first time.
Often business owners will ask us ‘can we just leave the errors and start a clean start going forward?’.
And the reason they ask this is because ‘rescue jobs’ cost a lot!
In fact, our fee for rescue work is double regular bookkeeping fees because it requires a far higher level of expertise and experience. Going back in time trying to figure things out is more difficult, and it’s harder to get information.
So is it really worth spending the money and fixing it up?
Accurate bookkeeping is the best kept business secret
In the accounting industry there's a saying; ‘garbage in, garbage out’. And what that means is that if the small details going into the accounting file are wrong, the big picture reports will be wrong.
A simple illustration would be to liken a rescue job to a tangled extension cord. In the same way that the extension cord will still transmit electricity whether it’s tangled or not, it will be unable to be used for it’s true purpose: to extend the length of a cord as far as possible.
In the same way, the main purpose of accounting data is to evaluate the business’s past, current and future financial position and performance, to predict and plan for the future, and to ensure your business is compliant with business legislation such as Taxation, GST, Fair Work and Corporations laws.
If it can’t be accurately or effectively be used for that core purpose what’s the point?! No wonder business owners sometimes feel like they’re wasting money on paying a bookkeeper! It’s because they don’t understand the impact that the cheap option is causing them.
In addition the tangled extension cord is annoying because it’s hard to use or pack away. And there’s nothing more frustrating than logging into your Xero file to find out how much your customers owe you, only to discover that it doesn’t look right. You won’t be able to rely on that information.
And it’s also unsafe as the tangled cord is bent and can split, resulting in risk of electrocution. In the same way, your inaccurate bookkeeping can result in over or underpaid wages, taxes and other compliance. And this can result in hefty fines, expensive audits, legal issues and even imprisonment. Plus a whole load of unnecessary stress that goes with the territory.
In the same way that you can ‘ignore’ the knots in your extension cord, you can see that ignoring ‘small errors’ or poor quality accounting data, in an attempt to save a few thousand dollars, is unwise, and a huge risk to the business.
6 Signs Your Xero, Quickbooks or MYOB file contains Common Bookkeeping Mistakes
Don’t risk the future of your business by ignoring the key signs that your business is heading for failure or focusing efforts into unprofitable activities. And don’t miss tax deductions or opportunities to grow.
Here’s 6 Signs Your Xero, Quickbooks or MYOB file contains Common Bookkeeping Mistakes
- Payables and receivables reports don’t match what you think you actually owe
- Profit & loss statement shows a profit but you don’t have money in the bank
- P&L shows large amounts in an account called “General expenses”
- An account called Suspense is showing on your P&L or Balance sheet
- On your balance sheet there are accounts with negative (bracketed) balances (apart from Accumulated Depreciation and a few others) most balance sheet accounts should be positive (non bracketed)
- Payroll clearing, undeposited funds or electronic clearing accounts aren’t $0.
Once you have checked these areas, note down what you see. And then engage an experienced Registered BAS Agent to correct the errors, or to supervise the process.
When the data file is error free, you should seriously consider hiring a competent bookkeeper to ensure the data is accurately and efficiently recorded going forward. Or at the very least get some training for yourself or whoever is doing your bookkeeping. And have the data file reviewed by a BAS Agent at least once per quarter (at BAS time). That way you’ll be sure to find any errors before it’s too late, and snowballs into a much bigger problem.
Need help fixing bookkeeping mistakes?
If you need help working out the health of your accounts, or assistance fixing your bookkeeping mistakes please get in touch. We offer a free 20 minute consultation and can give you a quote. Read this post to see if Xero Cashbook is the right subscription for you.
Please consider Off The Hook Bookkeeping if you need a Xero Bookkeeper, who has had 20 years experience in Bookkeeping.
Otherwise if you have questions, please post them below.
Amy Hooke 😀