Bookkeeping can be a love-hate word. For us, it’s a love, but for many small business owners, it’s the latter. Keeping up with the books is a necessary component of running any business, but the task can become overwhelming for a small business owner due to time constraints or lack of knowledge. Proper bookkeeping and tracking of your business finances can help to avoid cash flow issues and can give you the data you need to make decisions about your business’s future. Below are five bookkeeping rules we recommend all small business owners review for a better back office.
1. Establish internal bookkeeping processes
This is the number one bookkeeping rule, and the first step to setting up your small business books. As a small business owner, you must create a system or enlist the help of a financial expert to establish internal bookkeeping processes. Bookkeeping processes can include:
- How to record expenses
- Approval steps for paying employees and reimbursing expenses
- Managing timely bill payments
- Projecting cash flow
- Cloud-based accounting apps or tools to incorporate into the business
If you’re just not sure where to start, or what processes to establish, consulting with a business bookkeeper can provide the guidance you need to get on the right track. If your business is already up and running, it’s not too late to standardize your procedures. Establishing solid internal bookkeeping processes can prove to be incredibly valuable as your business and team grow.
We find that incorporating cloud-based accounting apps into the business back office can help to ensure protocols and processes are adhered to, and can frequently save you valuable time by automating processes.
One thing to remember is that by establishing internal processes you are also establishing processes that will protect your business from both internal, and external fraud and theft. No one person should have control over both writing and signing checks (unless you are the sole owner).
2. Review finances monthly
With cash going in and out, it is critical to review your finances on a regular basis. For small businesses in the beginning phase, or those with fewer transactions, reviewing finances on a monthly basis may be enough. For businesses that are in a period of growth, or have a substantial number of monthly transactions, weekly or even daily reviews may be necessary. Restaurants, for example, will likely need daily review to ensure all transactions are properly accounted for.
- Gain control. The more hands in your books, the closer you need to monitor your books.
- Ensure accuracy. Things can fall through the cracks, which can lead to big problems at year-end.
- Save time. Reviewing your books monthly means you are well-prepared for tax season.
- Saves money. Less clean-up work for your tax accountant can help to reduce tax preparation costs.
- Get your accountant excited. Yes, it truly makes us happy to see our clients following best practices.
3. Keep business and personal finances separate
Surely you’ve heard the phrase “don’t mix business and pleasure.” Well, this is especially true for your bookkeeping. Even if you are the one and only employee of your business, you should still maintain separate bank accounts and credit cards. Doing so will not only help in keeping your books clean but also ensures you are able to maximize the IRS-approved tax deductions for your business expenses.
If you own multiple businesses, it is necessary to maintain separate bank accounts for each business. Do you own multiple short-term rental units for Airbnb purposes? Each property should maintain separate accounts as well. When using a cloud-based accounting app, you can view the entire business (i.e. all properties) in one app as a whole, but also break the numbers down separately to give you the information needed to assess financial health at a glance.
4. Keep a backup of business financial records
In the event that the IRS decides to examine your financial records more closely, it is vital to have detailed records of your books. In the past, maintaining the necessary records required filing cabinets full of past tax returns, invoices, receipts, and every other relevant tax document. The generally recommended time to hold on to past tax and financial records is six years. In most cases, the IRS audits no more than the three years prior. However, if substantial errors come to light, they do have the ability to audit six previous years.
Imagine six years’ worth of all relevant tax documents and business financial data. This is one of our top reasons for recommending cloud-based accounting apps for our clients. Aside from the benefits of automation, accuracy, and ease of use, when all of your financial information resides in the cloud, you eliminate the need to keep paper files on hand. If for some reason the IRS decides to audit your business, your books will be easily accessible, and organized, resulting in a less stressful audit process.
5. Properly classify employees, expenses, and income
Proper classification is crucial to the accuracy of your business books. If you’re unsure of how to classify employees, contractors, types of expenses, and sources of income, this may be an area to enlist the help of a business bookkeeper. Having the right accounts and understanding will help to lay the foundation of your books, so it is crucial to be set up properly from the start.
Paying employees (part-time or full-time), contractors, and freelancers will all be done in different ways, making it necessary to classify them properly.
Classifying expenses is important due to the fact that in most cases, your expenses will be partially or fully deductible. If you fail to properly classify your expenses, you may be missing out on tax-saving opportunities.
For tips on deductible business expenses, download our free guide here.
Utilizing a cloud-based accounting app, such as Xero, can ensure that once your processes are in place, recording future transactions is simple, and can be automated. Cloud payroll apps, such as Gusto, are powerful time-saving tools for employee time-keeping, pay, and payroll taxes. Within the app you can categorize employees, making sure payroll taxes are paid accordingly.
Not only are these five bookkeeping tips important to a business back office, but they will also help you make well-informed decisions about the future of your business. Without accurate, clear data, your business decisions will be a shot in the dark. Setting up a solid bookkeeping foundation is crucial to your business’s success. If you’re not sure where to start or are feeling overwhelmed, send us a message. Our team of business cloud accountants can work with you to understand your business books and offer ongoing support depending on your needs.