Are you a small business owner looking to be more involved in your company’s financial management? Every business owner needs to be directly involved in their company’s finances, especially if it’s a startup. You can do this by keeping an eye on your small business bookkeeping.
According to the United States Bureau of Labor Statistics, over 50% of startups fail within five years, while 20% fail within the first year. One of the most crucial factors that contribute to business failure is the owner’s financial literacy.
As a small business owner, you need to understand better how bookkeeping is done. This helps you to organize your company’s accounting more efficiently. Check out our guide below on nine tips to help you improve small business bookkeeping:
1. Keep Personal and Business Finances Separated
This is one of the essential bookkeeping tips every new business owner should know. Unfortunately, it’s one of the most broken rules of bookkeeping. Even if you are a freelancer or a self-employed person, it’s advisable to separate your business and personal credit cards and bank accounts.
When launching your business, ensure you open a bank account that is exclusively for your business. This will help you eliminate the number of personal transactions carried out on your business account. Thus, the number of transactions your accounting team should reconcile will also significantly reduce, making their work easier.
Unfortunately, most small business owners tend to mix their personal and business finances. This leads to messy books, especially if half of all your transactions are personal. It’s also quite expensive and time-consuming to sort through all the personal transactions on a business account.
2. Ensure You Also Pay Yourself a Salary
S-corporations and C-corporations business owners are required to pay themselves a reasonable salary. The business owners should also pass this salary through the payroll system like every other company employee.
Unfortunately, most partners, self-employed business owners, and freelancers don’t pay themselves a salary. However, it’s advisable that these individuals also pay themselves a salary even though it’s not included in the payroll. The salary can technically be an owner’s draw.
Paying yourself a salary is an intelligent way to emphasize that you and your business are two different entities. It also reduces your temptation to mix personal and business finances.
If you don’t pay yourself a salary, you may find yourself dipping into the business accounts to pay for your personal expenses. These expenses include home utilities, groceries, and personal travel.
Instead of using the business account for your personal transactions, it’s advisable to have the business write you a check and deposit it in your personal account. This way, you will be using money from your salary to pay for any personal expenses.
3. Always Reimburse Yourself for Any Business-Related Expenses
No matter how hard you try to separate business and personal finances, you will always find yourself using personal finances for business purposes. Remember that all business finances must appear on the business account. Therefore, ensure your business writes you a check to reimburse you for the personal funds you used to pay for business expenses.
The business should separate the check from your salary. The process of reimbursement should be the same for all your employees. Ensure you write down the amount of money, what you used it for, the dates of purchase, and the purpose and attach all the required receipts.
The information listed will act as proof that the money was used and justify the reimbursement. Your business will then write a check to your personal account with the exact amount listed.
Reimbursement may be quite a challenging process. However, doing it right will ensure that your accounting team will deduct the expenses since they were paid for by check from your business’s account.
4. Always Track and Reimburse Business Mileage
Tracking and reimbursing mileage is one of the most underrated bookkeeping tips by most businesses. There is a standard rate per mile that your business can deduct for any business errands you run using your personal car. According to the IRS, you can deduct 56 cents per mile in 2021 for business mileage.
Track the miles used, dates, and the purpose of every business trip and request reimbursement from your business. The business will write you a check for the expenses and deposit it in your personal account.
However, be careful. The business is not entitled to pay for your personal car’s expenses directly, even if it’s for the fuel you used when running a business errand. You should only use the allowed 56 cents per mile permitted by the IRS to pay for your car maintenance and fuel.
5. Keep a Record of Your Receipts
While small business accounting systems don’t require receipts to categorize or identify transactions, the IRS does. The receipts are used for tax deductions when filing for business taxes. The best way to keep a record of all receipts is to have a file or folder for each vendor where you store the paper receipts.
You can also scan and attach a digital copy of the receipt to the specific transaction on your accounting software. This is an essential function included in almost all accounting programs for free. Keeping a clear and systematic record of all receipts is one of the best accounting and tax preparation tips.
6. Outsource Your Payroll Accounting
According to a recent study, over 50% of small businesses outsource their payroll accounting. You should do the same if you are running a small business. The process of withholding employee taxes, filing employee and payroll returns, and issuing paychecks are tiresome.
Outsourcing such accounting processes will take the burden off your shoulders. Most payroll service providers have software that will easily integrate with your accounting tools to ensure all the necessary entries are automatically loaded.
However, if you choose to outsource, ensure that you open a different checking account that is purely dedicated to payroll. This will ensure that the payroll service provider doesn’t have access to all your business’s finances through the primary account.
Additionally, a separate account will act as a soft landing for tough times. There will always be money to pay your employees even if your business account is overdrawn. One of the most demotivating factors for employees is a bounced payroll check.
7. Hire a Professional to Help Set up Your Accounting Software
While the market today is saturated with thousands of accounting software, it’s not easy to choose the right one and set it up. Accounting software tools are quite complicated to set up. However, if you find software tailored to your business’s accounting and bookkeeping needs, it will be more accessible and beneficial to your team.
According to a survey, over 82% of experts believe that a business should hire a professional to set up the initial installation of accounting software. This is especially important for small businesses and startups. Ensure you hire a professional to customize your product and services, accounts, customers, vendors, and invoices charts.
Remember also to ask them to show you how to make changes to these charts. After the installation, everyday accounting tasks such as paying bills and issuing invoices will be easier and more efficient.
8. Remember to Assign Your Accounting Tasks
Most of the above accounting tips apply to startups and small businesses, whether the owners prefer outsourcing accounting services or handling the bookkeeping themselves. However, before making a decision, it’s essential to decide how much work you are willing to take and assign other employees.
Below are essential bookkeeping tasks for new businesses:
- Producing monthly financial statements
- Closing books to prevent further entries
- Reconciling bank account and credit card transactions to statements
- Issuing checks to vendors
- Recording credit card charges and vendor invoices received
- Recording payments received from the customers
- Depositing the payments received from the customers to the bank
Most of the bookkeeping tasks are an essential part of your day-to-day business. Tasks such as paying bills and issuing invoices are pretty difficult to outsource. However, you can leave other monthly tasks such as closing the books, producing financial statements and reconciling the accounts to the professionals as they are outside your daily business operations.
9. Always Analyze Your Accounting and Financial Reports
Don’t always trust that your bookkeeping team’s reports are accurate. Mistakes do happen. Remember always to analyze the reports to pinpoint any errors.
The team’s job is to input all the data into the accounting software. The business manager’s job is to check the report created by the accounting system to help you better manage your company. Most small businesses often struggle with cash flow due to errors in the financial statements.
It’s essential for all small business owners to know how to read and produce a financial statement from their accounting software. This will help you better review your business’s financial statements and learn how to make adjustments.
Now You Know How to Improve Small Business Bookkeeping
Small businesses can’t eliminate the stress and headache of bookkeeping by outsourcing the function. Ensure you follow the above small business bookkeeping tips to organize and better operate your business. While outsourcing bookkeeping services is an excellent way to improve efficiency, you should also ensure that you take steps to make work easier for the accounting team.
Did you like this article? Check out other posts on our website for more informative articles.
