A CPA’s Take on 5 Bookkeeping Best Practices for Small Business Owners
When you start a business, you have a million things on your mind. And, while bookkeeping may not be the first subject to bring you a warm, fuzzy feeling, the practices you implement early on and maintain as your business grows are deeply intertwined with your short-term and long-term financial success.
As a CPA, I see a myriad of bookkeeping methods and variations in my daily work, which means I’ve seen everything from groundbreaking innovation to disastrous pitfalls. To help small business owners start out with their best foot forward in reaching their goals, I'd like to share 5 bookkeeping best practices that can help you keep your small business on the right track.
#1 - Create an Organizational System with the Present & Future in Mind
One of the most fundamental hills to climb when starting out for business-minded individuals is how you’re going to keep your financial records organized. If you’re gathering all your supporting documents, such as receipts for business-related expenses, banking records, and tax payments, at tax time, you’re much more likely to miss a deductible opportunity in the scramble. While you should maintain all cash and inventory books and relevant correspondence permanently, it’s best practice to hang on to these supporting documents for a minimum of seven years. It’s important to implement a filing and storage system that works for your specific needs and allows you to easily locate items if you need to in the future, whether for tax, audit, or other purposes. And you want to keep scalability in mind. As your company grows, you want to ensure the process will support that growth.
#2 - Go Digital & Automate Manual Processes
Scanning your supporting documents and storing them in a cloud-based application is also a best practice. Not only does it eliminate paper and the room required to physically store files, but - especially when you have a standard naming convention - it also makes for a quicker search turnaround and efficient sharing process if you need to securely send files to your advisors, CPA, or lenders. Bookkeeping software is a great way to house your records and track your income and expenses all in one place. You can also delegate the job to another employee, a remote contractor, or an outsourced representative by simply giving them the appropriate level of access to help you. There are a lot of user-friendly programs available for small businesses. QuickBooks is a household name, and companies like FreshBooks offer options that cater to small start-ups. Bookkeeping software can help you streamline your bookkeeping practices, gain better visibility over your potential and progress in meeting your business’s financial goals inside of your designated budget.
#3 - Keep Your Personal and Business Finances Separate
There’s an invisible line we inherently draw between our business and personal lives. We try to keep our personal problems out of the workplace, and we try to keep the stresses of work at bay at home. The same principle applies to your finances. It’s vital to keep these separate to avoid confusion later on down the road. Keeping separate files and separate cash flow can reduce the chances of audits or mistakes with expenses. Whether you’re a single member LLC, sole proprietor, family operation, or have visions of becoming a conglomerate, it’s best practice to have separate business and personal bank accounts. It’s going to help you reconcile your accounts, file your taxes, access outside lending, and maintain a balanced budget.
#4 - Stick to a Realistic Budget, and Use It to Forecast Ahead of Big Decisions
Setting a budget is definitely a must. If it’s a business or a personal endeavor, your budget is your roadmap with the best route to get there. Without a spending plan, it’s tough to move forward and thrive. And without a solid budget as a foundation, it’s tough to get a clear view of the future when you need to make a significant business or financial decision. It’s crucial to set realistic goals, so you operate within your means and stay on target financially. You want to be able to use your budget to help you look ahead based on different scenarios and outcomes, projected earnings, and revenue and expense forecasts. When you’re looking at short-term and long-term goals alike, forecasting will give you an idea of where you want to be and how you can get there, whether it’s a month from now or in ten years.
#5 - When the Time Is Right, Don’t Be Afraid to Outsource
As a business grows, owners often find they are weighed down by the administrative functions. Outsourcing your company’s bookkeeping can be a cost-effective way for you to return your focus to your products, services, and customers. You can let go of the process without letting go of your confidence in the accuracy of your books. And you can receive professional services and expert advice without the training time and the employee benefits expenses associated with hiring a full-time employee. You can keep some of the heavy payroll expenses off of your books and be backed by a professional that can assist with budgeting, forecasting, and all your bookkeeping needs. If you have questions, need help getting organized, or are ready to talk about outsourcing, let’s chat!
Karla Brannen is a discerning provider of tax planning and compliance services, including services bearing multi-state intricacies. Her panoramic approach to bookkeeping and CFO services enables her to address multi-faceted and unique client needs. Karla works with individuals, their trusts and estates, and small businesses, and she provides tax filing services for employee benefit plans.