Your business’s bookkeeping is essential to maintaining a well-oiled machine with a sound financial engine. Being a little laissez faire with organization, recording, and tracking of your financials not only mean that you’re unaware of your profits and expenses, but sets you up for failure when tax seasons comes; it will be a scramble to take care of payments to the IRS and potentially a loss of a refund. Read the tips below to make sure you’re not running off of the tracks, and keep tip top shape.
There are two types of methods for tracking your business’s income and expenses, the cash method (sometimes called cash basis) and the accrual method (sometimes called accrual basis). Generally, you can choose the method of your liking; however, there are pros and cons to each. The essential difference between the methods is the in timing of when transactions are debited or credited to your account, whether it’s sales or purchases.
The cash method is common with small businesses. Income is counted when the cash or check is actually received, and expenses are not accounted for until they are actually paid.
The accrual method involves accounting for transactions as they are made; either the order is sent, the item is delivered, or the services occur, without considering when the money is actually received or paid. In short, it’s a matter of opening vs. closing of the transactions for your business. The accrual method causes difficulty in identifying when the sale/purchase occurred.
Most small businesses are free to employ either method, but if your business has sales of more than $5 million per year, or your business stocks an inventory of items that you will sell and your gross receipts are over $1 million per year, you must use the accrual method. Whichever you choose, it’s pertinent to know that these methods only provide a partial understanding of your business’s financial status. Even so, fully understanding the system you use will help properly track purchases, sales, and expenses.
You know that you need to track your business’s expenses for tax reasons, but make sure to file receipts not only in paper form, but electronically. Scan and upload them to a Drive, and multiple places for safety.
For the most accurate records, avoid cash. This way, your bank statements will act as a preliminary expense report. Print out your statements, highlight, categorize, and transfer to your spreadsheet or software.
Don’t let your transactions become a mess across multiple accounts – ensure your business and personal expenses are kept separate. The caveat: synchronize statements so that each one ends on or around the same day. You will get a more holistic view of your expenses each month, and avoid letting transactions or expenses fall through the cracks.
In conjunction with your impeccable paper trail, check your books weekly and accounts receivable monthly. Again, you don’t want errors and cash, fall through the cracks. Record deposits, specifically. Counting certain deposits as income, will become taxed, and you will pay more in error. Track invoices for this same reason, always using numbers in order and chronologically. Both deposits and invoices can be tracked individually, but also create a spreadsheet or use Quickbooks to isolate and organize. Upload all documents to a drive, so you’re ready come tax season.
As you track and document your cash flow, expenses, and financial status, plan for the major expenses you can foresee – and especially those you cannot. You will be able to plan for things like yearly and quarterly software and other technological upgrades, mark those in your calendar, but also set aside a reasonable amount of money for the unexpected. This can range from sudden understaffing, overstaffing, or a facility accident, or equipment malfunction. Saving a little emergency cash never hurts.
Another expense you can plan for is your taxes; track how much money in taxes your business pays yearly and plan for that, plus more if your sales are expected to boost, or other shifting circumstances that would cause you to have to cough up more to Uncle Sam.
Sufficient, and more importantly, effective, bookkeeping practices take time, planning, an eye for organization, and constant maintenance. If your business is a busy one, or earns at least a few hundred thousand dollars a year, you might hire someone to solely focus on its financials – the reward is more than worth it.