Bookkeeping
Proper bookkeeping is important for small businesses to track finances accurately and make informed decisions. Small businesses may not see the need to spend a lot of time or effort on it, but it can be the difference maker in helping business owners achieve their goals and understand the business.
Organized Record Keeping
Keep all receipts, invoices and bank statements together in one place. This doesn’t need to be a formal system or filing cabinet, but having documents accessible will make things easier if you need to refer back to them. Its best to organize by type or by month to help with accessing. Many of these documents are available electronically which further streamlines the process.
Separate Personal and Business Expenses
Open a separate bank account and credit card accounts for your business, or if you are a sole proprietor have a credit card that is only used for business expenses. This simplifies the tracking process and ensures tax compliance. It will also save your tax professional a lot of time – likely saving you money on costly hourly fees.
Track Income and Expenses
This should be done at least monthly, but depending on the nature of your business and volume of transactions weekly tracking may be more appropriate. It’s important to categorize expenses correctly for business operating and tax purposes. Some items that seem like expenses may be depreciable assets. Meal expenses are deductible at either 50% or 100% depending on the circumstances. Client entertainment is not deductible at all, but taking a client to a business lunch is 50% deductible. These are just a few examples of why it is important to categorize expenses correctly.
Create a Budget
Planning for revenue and expenses will help you more effectively manage your cash flow, labor needs and growth plans. Budgeting can be intimidating, but taking one small step at a time will help you get started. Start by listing all of your recurring monthly expenses like rent, utilities, cell phone, payroll, etc. Then list your expected revenue each month, by looking at prior years and upcoming projects and expected sales. If you’re not sure, track your revenue for a few months, and then apply the average to your budget. Continue looking at the budget vs. actual each month to improve your estimates. That’s it – you have started budgeting!
Tax Planning
Be sure to set aside a portion of revenue for taxes each month, so you have funds to make your quarterly estimated payments. If you are using a payroll service, make sure you have a process in place and funds to cover payroll taxes and required filings. Get up to date on your state’s sales tax payments and filings, the same goes for your local or county tax office. Even if your business does not own real estate or vehicles, you may still be required to pay taxes on business assets like computers, equipment and furniture.
Analyze Financial Reports
Understanding your financial reports will help you better understand the operations and financial results for your business. They can help drive insights and lead to data-driven decision making. The Profit and Loss Statement summarizes revenue and expenses for a given period of time. This is generally monthly, quarterly and annually. This can help you analyze whether specific products are services are profitable, and becoming more or less profitable over time. You can compare the P&L to results from prior periods to see if your business is meeting your goals over time. The Balance Sheet offers a snapshot of the business value at a point in time. It gives insight into the health of the business by showing assets, liabilities and owner’s equity. The Balance Sheet can also be compared to prior periods to see if the business is adding or losing value. The other key statement is the Cash Flow Statement. It shows how much cash the business is generated, and the ability to meet payroll and other expense obligations.
Use Financial Software
Financial software can be surprisingly affordable, depending on the size and needs of the business. It allows for automation of tasks like invoicing and expense tracking which will save valuable time. You can also connect your bank and credit card to import your transactions. This ensures an accurate and complete picture of your financial transactions. If you are using a spreadsheet or other manual process, it can be easy to forget to record an expense, or accidentally enter the wrong amount. The automations in financial software help prevent that.
Invest in Training or Professional Services
If you handle your own bookkeeping, it is well worth investing in training to understand the basics and for the software. Most software providers offer affordable training in their products and many accounting companies offer that as a service. This will help you ensure you are using the software correctly, can troubleshoot errors and get accurate results. If you don’t want to handle this yourself, or have the time for it, there are companies that offer these services. Some will charge by the hour, and others will charge a set monthly fee. Managing it yourself is fine, just make sure you have the dedicated time for it. Otherwise, it may be best to hire an employee or seek a professional services company that can take care of it for you.