As a small business owner, you may be taking care of your bookkeeping yourself. However, as you try...
Starting a business can be exciting. You plan to turn your passion into earning a living. You will be your own boss, set your own hours, control your own finances and your true destiny awaits. Simple, right? Well, not exactly.
One of the most crucial parts of running a successful small business is also one of the most mundane things about running a business — taking care of the finances. But to be truly successful, a business owner should at least know the financial basics. The first process that needs to be understood is bookkeeping.
The website, Dictionary, defines bookkeeping as “the work or skill of keeping account books or systematic records of money transactions (distinguished from accounting).” Basically, tracking all of your business’ financial transactions in a timely manner. These transactions include expenses and income from purchases, sales, and payments.The importance of bookkeeping
If you are still wondering why bookkeeping is important, consider these factors and the impact they have on your business.
Taxes
How much smoother will a tax audit go if you have a solid set of books to fall back on? The Internal Revenue Service requires businesses to follow specific requirements pertaining to financial records. It’s much better to stay prepared than to scramble to locate documents in a pinch.
Perhaps you aren’t being audited but simply need to file your tax returns. To avoid penalties and interest, a correct amount needs to be paid, on time. In order to do that, businesses need to know net profit. To get to that figure, you need your books updated to show your business’ total income and expenses. Providing your accountant with a current set of books will allow them to ensure your business is taking advantage of all possible tax breaks and deductions in addition to getting them filed on time.
Income and Expenses
Most business owners track expenses in some fashion to see where the money is going. It helps to see what are fixed and variable costs. It will be helpful for you to see how your business is performing or what is bringing in the most revenue. Possibly you want to know where you can look for savings, cost cutting measures or discover how to improve business performance. Having up-to-date books allows you or your accountant to create current financial statements that should clearly answer these questions.
Loans and lines of credit
Approaching a bank or other financial institution or investors will require you to have a current, accurate set of books. A complete set of financial statements including a balance sheet, income statement and cash flow statements, will be necessary to let lenders know how your business is faring.
Mistakes
Everyone makes mistakes but only the small business owners who stay on top of their finances are likely to catch them. Whether it is an inaccurate transaction or intentional fraud, it’s best to find the problem immediately and begin work to correct it.
The list of positive factors in support of maintaining timely, accurate bookkeeping is long. In reality, there aren’t any negatives when it comes to small business owners drawing a fine bead on their financial information.
Different types of bookkeeping systems
There are basically two types of bookkeeping systems — the single entry and the double entry method. If you are just starting out as a small business owner, the single entry system will likely suffice until your business begins to grow and you have more financial transactions and employees.
In the single entry system, credits and debits are recorded similarly to keeping a personal bank account register. Journal entries are recorded one time as either income or expense. Liabilities and assets are recorded and tracked separately.
As your business grows, you will want to transition to the more complex double entry system. In this accounting system, when a transaction is recorded to a journal, it is also entered into the general ledger as both a credit (to increase the revenue account) and debit (to increase the cash balance sheet).
Most accountants and accounting softwares utilize the double entry system. So owners who opt to outsource some or all of their accounting services will benefit from this more robust method.
Chart of accounts
If you’ve read this far and already decided you want to investigate accounting services for small business, Inspired Accounting has you covered. We offer a wide variety of services to meet your small business accounting needs.
But I want to encourage you to keep reading because even if you hire someone else to handle the books, you need to have a basic understanding of the bookkeeping process in order to make informed decisions to grow your business.
One of the most basic tenets you should be familiar with is categorizing and recording transactions also known as debits and credits. Debits detail money that has left the business while credits are money that have come into the business.
These transactions are recorded into a journal often known as the book of original entry using the double entry system mentioned previously. Accounts are then classified and divided into five major categories: assets, liabilities, equity, income, and expenses and transferred into a ledger or the book of second entry. The index of all of the accounts in a business’ ledger is known as a chart of accounts.
Creating a budget
Creating and following a budget will help you keep a handle on your company’s finances. To create an accurate budget, you will need financial information such as cash flow, sales totals and payments.
You may choose to use an online accounting system or budget app to make the process easier. However you decide to approach budgeting, keep these things in mind.
- Keep your personal and business finances separate. Set up bank accounts specifically for your business and don’t comingle funds. You need to be able to prove a distinction between the two for tax and liability purposes.
- Always track your expenses and income. Determine which expenses are variable and which are fixed. This will go a long way toward setting realistic budget categories.
- Look for ways to control cost, but build in funds to cover the unexpected.
- Compare your actual numbers with your projections and adjust accordingly.
Reconcile bank and credit card accounts
Small business owners should reconcile bank and credit card accounts at least monthly. Reconciling the accounts is simply checking recorded transactions against those on the account statement.
If a transaction was entered improperly or even fraudulently, you will catch it early and can work with the bank or financial institution to resolve the issue.
Find the right software
Finding the best software to fit your business’ needs boils down to which software fits your budget but provides the features you want and need.
There are plenty of accounting softwares to choose from including QuickBooks, Zoho, Wave and Xero to name a few.
You may also want to explore using a cloud-based system such as Google Drive or Dropbox to store digital records such as receipts.
Knowing when it's time to hire a bookkeeper or accountant
If your business is growing or you want it to grow, bringing on outside financial help may be exactly what you need. Making minor mistakes in your bookkeeping can domino into huge mistakes and may carry tax implications. Or maybe you are tired of having to devote the hours to bookkeeping that you would rather put toward growing your business.
Regardless of your reasoning, it doesn’t hurt to explore your options.
Get in touch with us today!
The team at Inspired Accounting stands ready to support your business as you work toward your goals. We offer a wide range of accounting, bookkeeping and CFO services.
Call us today to schedule a consultation.
