Every business needs to set up a bookkeeping system. The actual system is not as important as being contemporary with your records. I use a bunch of programs and systems to track client’s income and expenses. It depends on the client and what shape their records are in when I get them. Some bring me computer files or reports, others use spreadsheets (paper or electronic) and too many bring me a bag of receipts and bank statements for their taxes. I wouldn’t recommend the last options.
To me there are two reasons to keep contemporary records. The first is taxes, of course. This is the info your preparer will need to prepare your business tax return. The best time to make notes and secure receipts is at they time you get the income or spend the money. But more importantly, don’t overlook that you need to know how your business is doing in order to make decisions to stay in business. That’s why you need to keep your financial books up to date. You or I can re-create your books from receipts and bank statements for taxes. But that doesn’t help you in June to know how much income you took in from a special promotion in May. A good set of books should do that.
Besides keeping your financial records up to date, I have a few other suggestions.
- First, it has to be a system that you will do. Bookkeeping doesn’t have to be complex. You don’t need the fanciest, most expensive accounting program on the market. Most small businesses don’t need thousands of report options or any other bells and whistles. But they do need a system they will use.
- Don’t be afraid of breaking down income and expenses into sub-categories. Otherwise, how do you know how much you have spent on radio vs. TV advertising?
- Keep larger purchases separate and well documented. It’s easy to lump a printer or office chair in with the pens and paper under office supplies, but don’t. Create categories for big equipment, small equipment, software, anything else that you expect to last for a while. These need to be depreciated or may qualify for special treatment.
- Keep your receipts even after they are in your system. And don’t rely on credit card statements as a proof of an expense. All you are getting is a vendor or cleaning house. The documentation is the actual receipt.
- This is not a place to skimp on professional help. Even if you are going to keep the books yourself, pay for an hour of a professional’s time. Make sure you understand what you will need to track and how business finance works.
- Keep your personal and business finances separate. I’ve talked about having a separate check book for the business. But what about credit cards and savings accounts. There may be a rare occasion that you have pay for a business expense out of a personal account or personal from a business so learn how to handle them properly.
A key to keeping your business going is to track its financial health. It actually doesn’t take much time or money if you do it as it happens. And if you get behind, don’t panic; just take the time the catch up.