Keep Your Records Organized
One of the most important bookkeeping tips for small businesses is to stay organized during the entire year so you are not scrambling come tax time. Gather up and organize receipts and other required documentation, such as mileage logs. Gather documentation for furniture and equipment purchases. Check all the forms you receive for accuracy and report them on your tax return. Prepare to list all income received, including cash, checks, credit cards, PayPal etc.
Keep Your Personal Finances Separate
You should keep your personal finances completely separate from your business. When you start your own business, you are usually responsible for pretty much everything, which includes bookkeeping. To make life easier for yourself, a fundamental tactic to avoid a lot of confusion in the long run is to set up a separate bank account for your company.
You can keep them separate by paying all business expenses through your business account even if it means you are depositing personal funds to make the pay outs.
Doing this will save you a great deal of time and energy when sifting through your expenses, because you won’t need to filter out any personal purchases you have made. It’s also a good idea to have a separate bank card for your business, so when you’re going through your invoices and receipts, you will know that all the expenditure has gone on business-related items, helping you to speed up the bookkeeping process.
Create a Simple But Functional Chart of Accounts
The chart of accounts is a list of accounts that is used to categorize every financial transaction that your business generates. Your chart of accounts will reflect your entire operation which is why it is considered the backbone of your bookkeeping system. Setting up your chart of accounts correctly, even if you have to hire a bookkeeper or CPA to do it is one of the wisest investments you can make when starting your business.
Accounting software usually comes with a preset of list of accounts that will start you on your way, but as your businesses grows, you need to know how to modify your list. Some of the main things to remember when creating your chart of accounts are:
Set up accounts that you need and nothing more. Don’t over categorize.
Keep them generic. Instead of creating accounts with customer or vendor names, it is more functional to list an account per type of transaction instead.
Make sure to select the correct account type for each account, or there will be errors in your financial statements
Regularly Reconcile Your Bank Statements
What I see a lot of is when starting your first business, people using bookkeeping or accounting software and religiously recorded every expense but put off the reconciliations. When you are busy and kept putting reconciliations off the bank statements and bookkeeping to reconcile can be daunting. Of course, as the best lessons are the ones you learn the hard way, and there are usually a ton of mistakes: entering $1000 instead of $100, transposing numbers, a few forgotten items, etc. which all affects the bottom line. Moral of the story: whether you are using a bookkeeping software or doing it by hand, consistently reconcile your bank statements. Don’t learn the hard way.
Keep Track of Your Financial Data on a Monthly Basis
It’s important to keep track expenses based on month so you can evaluate peak seasons, anticipate future costs and growth. If you track monthly based on category of income, it can help you see what areas of your business are increasing, which are decreasing, and areas for potential improvement. You may also find areas where you should invest more and some that may be growing on their own. It’s important not to just track annual numbers, but monthly and quarterly to assess shorter term, as well as over time because there may be small fluctuations, but this helps you build using trends specific to your business.
Document & Deduct Expenses That Are For Personal/Business Use
If you use something for both business and personal purposes (such as a cell phone), you can deduct a percentage of the expenses on your tax return based on the percentage of business use, but you’ll need detailed call logs and other documentation to back that up. If you use your car for your business, keep detailed records and include your mileage log in your bookkeeping so you can deduct a percentage of your vehicle expenses on your tax return.
Detailed Inventory Records are Important
Small businesses often times don’t have the benefit of a large staff to take care of tasks like inventory tracking, which are important but often overlooked. Having a proper inventory tracking can help small businesses prevent employee theft, misplacement merchandise or duplicate orders. These records can also help businesses track customer shopping trends and ensure efficient buying in the future.
Separate Receivable Payments from Borrowed Loans
One of the most critical errors that can be made in bookkeeping is to confuse money received from clients with borrowed funds. Apart from both being cash that the business can use for operations, they have an entirely different effect on your bottom line. This is why it is a good idea to treat them as different accounts to avoid confusion that has the potential to turn into a financial crisis. Using an accounting software that can separate the two will make keeping track of both transactions easier.
Treat Your Checks Like Cash
Checks have the same function as cash but some business owners still make the error of losing track of each check they write. Even your cancelled checks have the potential to create serious errors in your books so it is important to document them well. The easiest way to solve this problem is to have a system in place to process and record your checks. The simple task of documenting and filing will overwhelm you if you wait for checks to pile up. Ensure you record them as you go, and it won’t cause you any problems in the future.
Take Control of Your Accounts Receivable
There’s nothing nicer than having a lot of sales come in, even if it’s on credit. However, the real challenge is converting credit into actual funds your business can use for its operation. If you are not able to manage your accounts receivable, then selling on credit will be more of a problem instead of an asset to your company in the form of a serious cash flow problems. Make sure to specify clear payment terms to your customers. Set strict deadlines and stick to them. Consider putting repeat offenders on prepay or deposit required. Chase every late payment, as each is essentially an interest-free loan until they are collected.
Plan for Major Expenses
Forecasting and creating a budget for your major expenses like inventory, office supplies, and repairs and maintenance can save you a lot of worry. Setting aside a contingency for these will help ensure that your business will continue operating and will not be marred by issues that arise from lack of inventory, supplies, and equipment. Remember to build up your reserves before you start taking money out of your business. Just because you have a money in the bank does not mean you need to spend it. Let it sit until you are ready to invest it properly into your company or to cover the ebbs and flows all business experience.
Plan for Taxes
Even taxes can be anticipated provided you keep track of your financial records properly. Setting aside a particular amount each month corresponding to your monthly sales will make it easier for you to pay your taxes, because you won’t have to outlay a large amount of funds at the end of the year.
Take Advantage of Small Business Tax Credits & Deductions
There are a number of small business tax benefits available to you as long as you maintain the proper records. Things like health care tax credits, auto expense deductions, charitable contribution deductions, and even software expense deductions are some of the possible benefits your company can qualify for. This is one reason why proper bookkeeping practices are essential; they will help you get the most out of tax credits and deductions. Be sure to ask a tax professional to advise you on which ones you can file for.
Creating an Audit Trail
An audit trail is a system that allows for a quick retracing of transactions in your business. This means that apart from meticulous recording, you also need a logical order when handling documents on a day to day basis. If you keep your invoices and checks in numeric order, not skipping checks or invoice numbers, as well as store your financial documents by date, you should be able to easily reconstruct your company’s finances going back one year or more. By creating an audit trail, you’ll also minimize most of the issues that businesses encounter during computer crashes, audits and tax filing.
Petty Cash Receipts are Important
More often than not, petty cash transactions deal with small, day to day cash transactions. However, they are highly susceptible to the risk of theft. When left unchecked, missing small amounts can turn into a large headache. Therefore, it’s important that these transactions be well recorded and documented each time you dip into petty cash. This is one of the best bookkeeping tips that you can get if you are determined to keep track of the company’s day to day expenses. It is also a good idea to reconcile your petty cash account routinely to quickly spot any inconsistencies and discourage theft.
Use the Appropriate Accounting Method
Before you can even start recording the simplest transaction, one of the first decisions you need to make is which accounting method you should be using for your business. Cash basis accounting means you record revenues when cash actually changes hands. It is a simple approach using a single-entry system that doesn’t need complex bookkeeping practices, but this is only ideal where transactions are on a strictly cash basis.
Accrual accounting on the other hand records transaction based on when money is supposed to change hands. It’s a more complex method that requires some time to learn but accurately keeps track of all transactions and how it affects your company’s assets, liabilities and income.
Avoid Paying Business Expenses in Cash
There are a number of drawbacks when you use cash to pay your suppliers. Among other things, cash payments are more difficult to trace so it will be hard to keep track of company spending, and you run the risk of missing deductible expenses. Additionally, without any records of purchases, monitoring write offs will also be a challenge. Make it a habit to use a debit or credit card or check payments when paying company expenses or making purchases. This method makes it easier to keep track of the amount spent, where it was spent, and when it was spent.