Bookkeeping Basics for Small Business
Even though it might not be the most glamorous aspect of running a business, bookkeeping should always be near the top of your to-do list. The very life of your business depends on your diligence in this area.
Every business, regardless of size, has to keep a detailed record of its financial activities in order to comply with the tax laws. The activity of making and maintaining these records is known as bookkeeping.
For small businesses, accurate and diligent bookkeeping is necessary. It not only establishes compliance with a number of IRS regulations and bank lending rules but also improves your ability to make operational decisions.
So where do you start? Here are a few basics to keep in mind when setting up a bookkeeping system. Follow this advice, and the numbers will work for you, rather than the other way around.
1. Choose a bookkeeping system.
There are two varieties of bookkeeping: single-entry and double-entry. Single-entry bookkeeping is a rudimentary system suitable for personal finance. Balancing your checkbook is an example of single-entry bookkeeping, as it involves a single account (checking) that is being debited and credited. Double-entry bookkeeping is more appropriate for business, as it tracks two accounts at a time. Say you sell a product: Double-entry bookkeeping records the transaction as a credit in your cash account, and a debit in your inventory account.
2. Get help.
If you're like most small business owners, you lack both the time and enthusiasm to keep a detailed ledger. Accordingly, find a good accountant in your area or take advantage of bookkeeping software to make your life easier. If you choose to use bookkeeping software, make sure you have a good accountant (who knows the software you plan to use) to setup your software before you begin using the software. This will save headaches and additional expense in the future (i.e., at tax time). It is always cheaper to pay for (invest in) the proper setup of your bookkeeping software in the beginning rather than having to pay someone to come in and clean up later on. A simple rule is that if your business is operationally complex, dependent on precise and timely records, or large, you should definitely engage professional help. Do you have a considerable inventory? Do your employees perform billable work on client sites? Do you expect to do $100,000 in sales this year? If the answer to these questions is yes, don't wait to get bookkeeping help.
3. Capture financial data.
Whether you delegate bookkeeping to a CPA (or other in-house financial specialist) or decide to use bookkeeping software, make a habit of holding on to everything: sales receipts, purchase orders, bank statements, etc. Create a dedicated filing system for every type of financial data.
4. Put financial data to work for you.
Do you know how much you spent on office supplies last month? Can you estimate how much business tax you'll pay next quarter? Can you forecast sales? Can you generate a list of non-paying customers? The answers to these and related questions come from categorizing the data you capture. Fortunately, this is where software can help. Small business-oriented tools such as QuickBooks and Peachtree will do the heavy lifting of categorization and prediction for you. NOTE: All bookkeeping software is the same. Make sure you do your research before purchasing your bookkeeping software so that you get the software that works best for your company. This helps your bookkeeping to go beyond administration and begins to offer your business insights that can speed up your cash flow, grow your revenues and better inform your decisions.
5. Handle the IRS.
The IRS likes records, paper trails, and audits; so should you. Certify all mail to the IRS, request return receipts and keep the correspondence record accessible in case of a dispute over your bookkeeping practices. Contact a local taxpayer advocate (http://www.irs.gov/advocate/content/0,,id=150972,00.html) in case of intractable disputes.
6. Leverage your books.
Good bookkeeping gives you credibility. Use it. Remember important audiences (such as banks and other credit sources) who may not get excited about your company based on its products or services, but who will be won over by a carefully-documented record of financial success.
7. Stay close to financial data.
Employing an accountant or delegating bookkeeping to an employee doesn't give you an excuse to separate yourself from the financial details of your business. As the owner, you are legally and professionally responsible for your business activities. You needn't spend hours every day poring over the books, but always have a big-picture idea of where the financial data is trending. This is another realm in which bookkeeping software can be advantageous, because it can give you custom views into your financial records. Using such software, you can decide to run and refresh basic reports every day, so that you can see important data captures (such as profit and loss, overdue accounts and monthly expenses) at a glance.
8. Ensure data validity.
Bookkeeping software and the assistance of hired help only go so far. Sometimes you will be the only person who can ensure the validity and timeliness of data. If an important customer's address changes, record it immediately in your bookkeeping system. Read through your vendor list to make sure that one vendor isn't listed by two names. Performing these small but vital acts of diligence, and training your employees to remain similarly alert, requires you to adopt a detail-oriented way of acting.
The devil of bookkeeping is in the details. Approach these details with a keen focus, and your bookkeeping will reveal crucial information about your business's health and vitality. Attention to financial details pays off, in both the short and long terms.