Poor bookkeeping can be the difference between success and failure. Something as simple as not tracking your cash flow can lead to terrible financial issues that can put your business at risk. When you understand the basics of bookkeeping, you can increase the odds of your business not only staying above water, but actually thriving.
But who has the time or even the interest to pay close attention to bookkeeping? You do. Here are seven steps to proper bookkeeping and why they’re important to entrepreneurs like you.
1. Choose an Accounting Method
You can choose between either a cash or accrual accounting method. For cash accounting, transactions are only recorded when cash is exchanged. The accrual accounting method records income at the time of billing.
2. Always Retain Source Documents and Receipts
There’s all kinds of receipts and documents that will be required to keep including:
Receipts for –
- Anything you buy to run the business
- Business meals or lunch/coffee room supplies
- The materials needed to produce your product
Statements and Reports for –
- Promissory notes for bank loans
- Statements from credit card companies
- Payroll checks/deposits and timecards
Every one of these sources is crucial to well-balanced books. The IRS requires the records to be available in case of an audit, so a practical, organized method of storing these will make that fit easily in your busy day.
3. Categorize Your Documents and Receipts
It’s not enough to simply just keep your receipts or transactions. You need to indicate what the expense was used for. You have to prove it was related to the business, especially less obvious receipts like a record of a business lunch.
If it’s not obvious what a receipt is for, make a note on the transaction before filing it away. This way everything is accounted for and you won’t be distracted later trying to remember and explain.
By keeping entries up to date, you’ll reduce errors and never overlook outgoing cash that will need to be explained. You can also use an app on your phone to snap receipts and record them.
Every day transactions
Date – either weekly or monthly – To store receipts from normal obvious things – office supplies, job materials, utility bills, and similar items simply store in a folder for that time period. There is a low likelihood that these will be needed so skip organizing these unless it becomes important.
Larger, Long term arrangements
Liabilities – Long-term liabilities, such as a line of credit, SBA backed long term loan, or insurance or lease agreements should be kept separately for easy reference. All of these have requirements and due dates that will impact cash flow.
Asset Purchase documents
Any purchase over $2,500 – IRS requirements for these items are more particular. Store these receipts or invoices together and provide them to the CPA to be properly included in the tax return presentation and depreciation calculation.
Foundational Business Documents
Permanent Records – These include Operating Agreements, By-Laws, S Election acceptance, Stock Records, Annual Meeting minutes, Employee manuals and similar foundational documents. These are legal documents that will be required to apply for loans, respond to audits, inform potential investors, document employees’ dismissal, and to run the business based on the rules set up by the owners. These generally indicate the owners self made rules and directives on how the business should proceed. Any advisor – CPA, attorney, banker – should be provided these documents to assist in keeping the business on track and intended.
4. Track Your Receivables
This is the fun part. People give you money. It’s surprising how many entrepreneurs drop the ball when it comes to their receivables. You can send out invoices, but it can’t stop there. You have to create a system that allows you to track your invoices, log when payments are received and know when payments are coming in late. An effective system allows you to:
- Send out invoices with a numbering system for tracking
- Track the dates invoices go out
- Record received payments
- Send out auto-reminders for late payments
- Record special payment agreements such as allowing 30-day payments, or perhaps having an installment option
- Unless the core business is financing, in our opinion, payments should come before work is done or product is given. There are a few industries where this is not possible, but unless there truly is NO other way, collect automatically as part of the agreement. This will let you reward your customers with lower prices and more of your attention as you won’t be distracted by collecting from less desirable customers.
- Have simple reports by customer, by product line, and by time period to allow you to make responsible management decisions.
The more of these steps you automate, the better handle you’ll have on your receivables.
5. Get the Right Software
Software such as QuickBooks makes everything easier. Investing in a good system saves money down the road. Work with your accountant to find the right software for you all as a team. With a small business financial coach, you can learn how to use your software and become more effective at bookkeeping basics.
6. Use a Tax Accountant for Taxes
Taxes! They’re one of the two certainties in life. You’d be surprised how much you can miss or unknowingly do wrong when it comes to taxes. An expert will find the legal ways you can reduce your errors, while also providing valuable input on how you can reduce money owed.
Understanding tax deductions gets tricky and an expert will make sure you can save on your returns. Owning the business gives additional opportunities to save on taxes, but proper management is essential. This requires a great relationship with your tax advisor even before you begin the business so that typical mistakes are avoided and your business efforts bring the best results.
These steps help you keep on top of your basic bookkeeping. You’ll understand your cash flow and your accountant will have what they need to balance the books.
If you’d like to take your small business financials to the next level, take a look at our Business Compass Program that teaches you the habits you need to control your financials all year long and contact us for Free 30-Minute Introductory Call.
For more valuable articles like this one, visit our Entrepreneur’s Guide to Small Business Accounting.