July 9, 2021 | Last Updated on: August 1, 2023
Most small business owners are passionate about what they do — focusing their time and energy on the things they make, products they sell or services they provide. When it comes to bookkeeping and accounting — not so much. They simply don’t like maintaining financial records and analyzing spreadsheets.
Still, number crunching is a necessary part of doing business. It’s the only way you can determine whether your operation is succeeding or heading in the wrong direction. Think of the financial records you maintain as a scorecard for your company. It can make doing the math seem more like a sport and less like a boring chore.
Here’s everything you need to know to set up your business accounting system correctly, maintain it over time and use it to figure out whether your business is winning or losing the race against the competition.
No matter how small your business is, even if it’s a sole proprietorship or mom-and-pop shop, never maintain a single set of books for your business and personal life. Mixing the two is one of the biggest mistakes made by small businesses. It leads to confusion and other issues that are only magnified over time.
Open a business checking account as you start up your business. If you already own and run one and haven’t done this, rectify the issue immediately. Also get a separate business credit card for you and any employees who make business-related purchases.
Tip: Setting up a unique credit account for your business will not only make it easier for you to track your business expenses, it will also help you build your business credit rating.
If you’re not a bookkeeper, or don’t have an accounting background, investing in a consultation with a bookkeeper or accountant could be one of the smartest moves you ever make. They will provide the advice you need to set up your business finances correctly and maintain them over time. Even if you plan to handle most things on your own using off-the-shelf software, they will be able to offer tips and ideas on how to do things correctly. Plus, if they’re involved in your bookkeeping system set-up, they will be better able to step in and help when you have issues in the future.
Small business owners are busy people. But you already know that. So why waste time entering data and reconciling it in spreadsheets? Use automated business bookkeeping software, ideally cloud based for universal access and to ensure there’s an off site data backup. Connect it with your online banking interface. Once you do this, you’ll always have up-to-date account records. Optimize all this by connecting in your point of sale (POS) and payment systems. It will help you rest assured all the financial pieces of your business are completely synced up and it’s operating as smoothly and efficiently as possible.
Once you get your systems, software and accounts set up, put time on your calendar to review everything regularly. It will help you avoid bounced checks, missed payments, overdue invoices or numbers that don’t add up. The issues you encounter when you review your accounts may not be your fault. They could also be the result of mistakes made by your customers, financial institutions, accountant, suppliers and others. Keeping track of things on a frequent and consistent basis will help you catch mistakes as they happen, allowing you to fix issues before they become major problems.
Tip: Reviewing your records and accounts regularly will not only help you find mistakes, it could also help you identify hacks and cybersecurity problems while they’re taking place.
Weekly (or more frequent) financial reviews will help you catch and fix immediate issues. It’s also important to do an in-depth review of your bookkeeping and accounting records at the end of each quarter, and an even deeper one when your fiscal year is over. The longer-term reviews will help you identify broad trends, including things like increasing or declining sales, year-over-year revenue trends and bill paying patterns.
Tip: If you’re not sure what to look out for when you review your business finances, your accountant can help. If you can afford to, include them in the review process. They may be able to provide valuable insights based on their experience working with other clients.
When things get busy, it can be difficult to remember to record financial information. Everyone believes they will be able to recall every dollar they spend and why they spent it. Of course, it’s not true.
You can make it easier on yourself if you use imagery or scanning software to keep track of records. Also, request digitized receipts, when possible. And as we mentioned earlier, use a dedicated credit card for all business purchases. That way, you can always track things online and download records when you need them.
Do you find it challenging to monitor employee hours, track overtime, keep on top of paid time off and get the data you need to pay the people who work for you on time? It’s a significant challenge for many business owners, but it’s an easy one to solve. Simply implement an automated time tracking system in your organization. Software packages are available for most industries. If you find one that links to your bookkeeping and banking software, and you should be able to cut the time you spend on payroll and related record keeping by a lot.
Tip: Many small businesses outsource their payroll and human resource functions. If they’re eating up too much of your time, it could be worth exploring your options.
Are your clients paying you on time? If you’re not sure, you could be putting your business at serious risk.
It’s critical for small business owners to regularly monitor their accounts receivable, which involves checking the status of your outstanding invoices. It’s the only way to know whether customers are paying their bills on time and take action if they’re not. You may be able to set up a payment plan for those who are dealing with financial challenges, or cut your losses on those who will never be able to catch up. Most small businesses have limited cash flow, and getting paid on time will help protect you from running out of cash and being forced to borrow money, find a new investor or close down.
One of the most avoidable issues small businesses often have to deal with are tax problems. Nothing is worse than getting an unexpected letter or bill from the Internal Revenue Service (IRS). That’s why it’s important to stay on top of current tax regulations and deadlines, not just on the national level, but also for your state and metro area, as well. Most business owners aren’t tax experts, and don’t want to be. If you outsource any part of your small business accounting, make it an expert to handle your taxes.
You know the impact your personal credit rating can have on all aspects of your life. The same is true of your business credit rating. It’s a good idea to check it regularly to ensure it isn’t going down, which could be a sign of financial issues that you need to deal with, fraud or a hacking incident.
In the end, you probably didn’t get into business because you wanted to be a bookkeeper. But, keeping track of your business finances will be the only way you can rest assured your business is sound and well positioned to take on the competition.
