Unless you are an accountant or a fan of working with numbers, bookkeeping is probably not your favourite task. Adopting some good habits early can help you avoid costly errors when it comes to record keeping.
You probably keep a lot of the financial details of your business in your head: which supplier you need to pay, which customers are outstanding, etc. It’s understandable to do it this way, you won’t need to learn a new software, there is no danger of a system crash that loses all your data, and you can tweak your budget as often as you need without sitting down at a desk.
However, when you don’t have a system and processes in place, unpleasant surprises can pop-up, goals can be missed and important paperwork forgotten. Getting a better handle on your money can help you to make and keep long-term goals, smooth out the seasonal ups and downs of your cash flow and even improve your profits. It can also help you to stay out of trouble with tax authorities, suppliers, bank and other stakeholders.
Here are our five tips for small business bookkeeping.
Keep it separate
That new backpack for your kids isn’t a business expense, but your business cash was handy so you used it. Sure, you can pay back your business for a personal expenditure, or the other way around, but if you’re going to do it right you actually have to record an accounting transaction. Things get complicated fast, and you don’t need that headache. By keeping separate bank and cash accounts for business and personal, you’ll save yourself hours of work and make it easy to keep track of deductible expenses in one place. Some applications can automatically handle the behind-the-scenes accounting for crossover expenses, but even so, we recommend handling business and personal finances as independently as possible.
Call in a pro
Since the days of the abacus, accountants have been trusted and respected allies to small business owners everywhere. Their intimate knowledge of the profession as well as tax laws in their jurisdiction will save you money almost every time. I know how tempting it can be to save some cash and do it yourself, but it’s almost never more cost-efficient in the end. An accountant will almost always find more deductions and keep you penalty-free. On that note, the cleaner your records, the lower the charges of an accountant, so make sure you’re organized all year-round. But when things get technical or taxes are due, save yourself the money, time and headaches and call in a trusted professional.
Plan for Major Expenses
Be honest about the expenses that could be coming up in the next one to five years. Is it likely that you will need to upgrade your facilities? Is your office equipment on its last legs?
It is important to acknowledge the seasonal ups and downs of your business, and how they will affect your ability to spend during those times.
By making sure that you have forecasted for major upgrades, or peaks in staffing costs, you will avoid taking money out of the company in good months and finding yourself short in slow months.
Track Your Expenses
Expenses can be hard to track, which means that you may be missing tax saivings that you could have benefited from.
Business credit cards can be handy tools to make sure all expenses are kept together and tracked. As long as you keep up to date with your payments that is. To help prepare for audits, it is also useful for you to make notes in your calendar of the clients that you are meeting for each of those business meetings and events. This will help substantiate your expenses for your tax records, should you be audited.
Record Deposits Correctly
Whether it’s a pocket notebook and pencil, an Excel spreadsheet or financial software like Sage, make sure you keep track of what is being deposited into your business bank account.
You are likely to make a variety of deposits in your account throughout the year. From loans, to sales revenue, to cash infusions from your personal savings. If you cannot account for where each of the deposits have come from you’re leaving yourself open to paying taxes on money that isn’t income.
Set Aside Money for Taxes
You know that you’re going to have to pay taxes and you know when. So systematically put money aside for it. Unpaid taxes can incur penalties and interest. Such penalties and interest can in fact liquidate your business, so make sure the money is there when you need it.
By putting money aside each month, or each time a contract is paid, it will come as less of a sting when taxes are due.
Finally, don’t forget to get paid
This one seems pretty obvious, but you would be shocked at how many small business owners don’t properly track invoices and customer payments. If you’re not keeping proper records that you can make sense of at a glance, it could be months before you realize you have outstanding invoices. You could be collecting payments late, or missing some altogether.
Late and unpaid bills can hurt your cash flow. Assign someone to track your billing. |Put a process in place for if a bill goes unpaid. That can be issuing a second invoice, making a phone call and even levying penalties such as extra fees at certain deadlines.
Make a plan for if clients are 30, 60 and 90 days late. Remember, every late payment is an interest-free loan that hurts your cash flow.Make sure you’re properly tracking all payments due and recording when each invoice is paid, how long customers generally take to pay, and which customers you’ve had difficulties collecting payments from in the past.