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Small-business owners know that smart money management is one of the most crucial aspects of success, regardless of how much revenue a company brings in. How you keep your books can make or break your business, because those records are the only true representation of your profits and losses.
Building a consistent bookkeeping practice can feel daunting, particularly if this is your first rodeo. But it doesn’t have to be difficult or painful, especially if you build healthy habits into your routine from the get-go.
As you establish the financial side of your business, here are five best practices to keep in mind when creating a functional bookkeeping system.
1. Consider hiring a professional
If you’re stressing out over the idea of handling your own books, don’t worry: You don’t have to do your own bookkeeping if you don’t want to. In fact, Ed Hattrup, owner of financial consulting firm Bald Ginger, urges small-business owners to consider outsourcing their bookkeeping “as soon as they become a real business.”
“It’s something to take off of your plate, and make sure you’re doing it right,” Hattrup says. “At best, business owners get the job done at the expense of their time and energy. At worst, they can’t even tell how much they make each month, and their books are a disaster.”
Instead, Hattrup encourages his clients to focus on the creative and strategic aspects of their business, and leave the tedious work to trained professionals. “Go focus on being good at what you do,” he says. “It is a better return for your business instead of doing bookkeeping.”
But Dori Eversmann, owner of bookkeeping practice Chastain Partners, believes small-business founders are fully capable of managing their own books, especially if cost is an issue starting out.
“Founders are typically smart, and [handling my own bookkeeping] is what I would do too,” she says. Eversmann encourages business owners to follow IRS guidelines on tracking transactions and to save all receipts for seven years.
Eversmann also suggests that small businesses schedule periodic check-ins with a financial professional such as an accountant, certified public accountant or bookkeeper, to make sure they’re on track to avoid nasty surprises come tax time.
When is it time to hire someone?
If you do decide to outsource your bookkeeping, both Eversmann and Hattrup have suggestions on what qualities to look for in an individual or a firm.
“Find someone you get along with and who will partner with you on your long-term goals rather than just filing your taxes,” Hattrup says.
Eversmann encourages owners to look for the following qualities in a bookkeeping professional:
A good fit on personality and values, since you’ll be spending a lot of time with this person.
Responsiveness, for all the times you have a last-minute, urgent question to resolve.
Someone who communicates well with your vendors, employees and clients alike.
2. Separate your personal and business expenses
Separating your finances should be one of the very first steps you take after you incorporate your business. It can be tempting to leave this task for later, especially when you have a million other items on your to-do list, but keeping your personal and business transactions benefits you in multiple ways, including:
Avoiding blurring the lines on expenses that could trigger an IRS audit.
Limiting your personal liability in the event that your business is sued.
Simplifying tracking your business expenses for bookkeeping purposes.
Hattrup encourages all of his clients to address little details from day one in order to start off on the right foot, such as transferring internet bills from a personal to a business credit card.
Additionally, opening business accounts will allow you to build and develop business credit, which is similar to but separate from your personal credit history and score. Your business credit score can get you lower rates on your insurance policies and increase your borrowing potential.
Business credit is particularly useful if you have major expenses or investments coming up and can allow you to apply for a line of credit as an alternative to seeking out a traditional business loan. You can even earn some bonus perks on certain new accounts.
Finally, Eversmann recommends setting up an accounting-exclusive email address as soon as you begin operating. “This way, you’re not cluttering up your personal inbox, although you can still set up reminders for yourself whenever revenue comes in, for example.”
Many business checking accounts and credit cards offer sign-up bonuses for opening new accounts that meet certain requirements. The value of these bonuses can exceed $1,000 in some cases, and some rewards can even be used toward personal travel.
3. Track your revenue and expenses
As a small-business owner, individual transactions matter — but so do your overall financial trends. When you track and categorize your expenses and revenue streams, you and your financial advisors will be able to identify different areas of strength or growth based on historical data. It’s a good idea to sit down from time to time and review these trends from a high-level perspective.
Robust accounting software programs can be extremely helpful on this front, since they are specifically designed to help you track both one-off and recurring expenses. However, plenty of small-business owners utilize basic spreadsheets such as Excel or even rely on a pen-and-paper ledger. Establish a process that works well for you and stick with it.
You may also find invoicing and payroll software beneficial for multiple reasons, including for logging your inbound and outbound transactions. These tools can also automate your recurring profits and costs, effectively freeing up more of your time.
4. Schedule regular bookkeeping times
With everything else you’re juggling as a small-business owner, it’s tempting to keep postponing your books. After all, you’re in business because of your proficiency in your field, not because you enjoy bookkeeping (unless, of course, you offer financial services).
But the best way to keep up with your accounts is by scheduling consistent times designated for balancing the books. An easy practice is to set aside a block of time whenever your credit card statement is due and combing through that month’s transactions to ensure they are accurate. This should typically take an hour or two and will simplify your life come tax season.
Eversmann maintains that a business is ready for a bookkeeper when there’s enough accounting to reconcile to make you hate the process. She suggests tracking the time it takes to evaluate your books every month to see what your tolerance is.
“Lots of people set that breaking point at three hours [of] work”, Eversmann says.
5. Budget for major expenses and set financial goals
You may be well equipped on a day-to-day basis. But what if you need to come up with a down payment for an office or need to purchase new equipment and software to help you build your business? Planning for major expenses can help you best utilize the business credit and resources available to you while giving you peace of mind.
Similarly, an accurate representation of your current bookkeeping will allow you to forecast realistic financial goals for your business to hit over the next quarter or year.
Develop a bookkeeping system that works for you
At the end of the day, all of these suggestions are just that: guidelines and best practices for simplifying bookkeeping so that you can focus your attention on growing your business. If any of these steps don’t work for you, adapt them or ignore them altogether and figure out a process that suits you and your team. After all, the best system is the one that you’ll stick with for the long haul.
» MORE: 25 best small-business apps
Bookkeeping and accounting software
QuickBooks Online $30 per month and up. Read Review.
FreshBooks Accounting $15 per month and up. Read Review.
Sage 50cloud $47.25 per month (when paid annually) and up.
Wave Financial Free (add-ons available).
Xero $12 per month and up.
Zoho Books $0 per month and up.