Bookkeeping isn't the most compelling aspect of running your business, and 2020 might have put you further behind. Here's how to make good accounting habits and stay on top of your finances this year.
"I can't wait to update my financial records and bookkeeping" is a sentiment rarely expressed by small business owners. For many entrepreneurs, staying on top of finances is a tedious, time-consuming task that they often put on the back burner. Because running your business often requires you to wear many hats, it's easy to fall behind on bookkeeping.
While the turbulent atmosphere of 2020 didn't make it any easier, there are strategies you can use now to find your financial footing and keep your finances up to date throughout the year. Catch up and stay on top of your business financials by adopting these key bookkeeping practices.
1. Put bookkeeping on the schedule.
The first step in catching up on your bookkeeping and keeping your business finances up to date is to just take a deep breath and get started. There's no shame in taking time to get organized, even if you've fallen behind. Schedule a couple of hours each day to focus on updating your books and organizing your financials into a format that can be used to file taxes.
While a host of other tasks might jump ahead of bookkeeping on your list of priorities, setting aside time each week to review the books can give you critical insight into the financial health of your business. Reviewing a basic snapshot of your revenues, expenses and cash flow provides necessary data to inform your business decisions.
Blocking out time on the schedule at least once a week – preferably in the morning, when your mind is fresh – is optimal for taking on the tasks of updating your bookkeeping software, reviewing your income and expenses, managing your accounts receivable and payable, monitoring cash flow, and paying bills.
2. Track and categorize expenses.
Make it a habit to review your bank statements and categorize transactions to determine how they should be classified. Is it an office supply, rent, or insurance? Keeping your books up to date by tracking purchases and payments helps you track your cash flow in real time and develop sound money management strategies for day-to-day business operations.
Scanning and digitizing receipts is a good way to record, label, and categorize each expense so they are correctly logged. Ultimately, this can help you avoid missing tax write-offs or overstating expenses on your tax filings. There are document management software apps that make this easy to do anytime, anywhere.
You can also use a business credit card to ensure your personal expenses do not get mixed in with your business expenses. The great news is that many business credit cards sort expenses by category, which can simplify your expense tracking.
Expense tracking has a bottom-line impact for business owners. If you don't account for legitimate costs, you could be increasing your tax liability, which ultimately eats into your profits.
3. Use accounting software.
Cloud-based software like Xero and QuickBooks can also help you keep your books up to date by allowing you to download transactions directly and save the time of manually entering data into spreadsheets and reconciling every transaction. Accounting software like this can save you time and money, automating many bookkeeping functions such as tracking daily transactions, running payroll, and managing invoices. Many major banks integrate with these software solutions, allowing you to link and download your bank account transactions and any business credit card transactions, which can make it easier and more efficient to classify transactions.
These software products provide a secure, central repository of financial data that you can easily access without sifting through piles of paperwork. Many of these products offer packages geared toward small business owners, providing a variety of templates for common business processes, such as invoicing and budgeting.
Software goes a long way in automating the process; however, to get a clear picture of business finances, you'll need to make sure the information you enter is accurate and up to date. [If you're looking for this type of solution, start with our reviews and picks for the best accounting software.]
If your business has few transactions, investing your time in learning a new software program today might not make sense. In this case, you can enter the transactions in an Excel spreadsheet, but be sure to classify these transactions so that tax filings are accurate.
4. Consider outsourcing your bookkeeping and financial management.
Can't find the time? Don't let this be an excuse to fall behind in your bookkeeping. Small business owners who can't keep their books up to date themselves should consider hiring a bookkeeper or turn to cloud-based online solutions to manage and monitor their finances.
Online bookkeeping solutions do your bookkeeping for you at a reasonable price. These online services provide both the cloud-based accounting software and technology necessary to automate the process, as well as skilled, certified bookkeepers to ensure consistency and accuracy. These robust platforms offer the data and analytics you need to make more informed business decisions and remain competitive.
For example, online bookkeeping solutions can connect your bank account and credit card transactions to track your expenses and cash flow, providing a clear picture of your financial performance to inform your business strategy. This data can also help you track key performance indicators and make wise, timely business decisions.
Cloud-based accounting software allows small businesses anytime, anywhere access to their financial data and provides a whole suite of tools to help you stay on top of your financial management. Cloud technology is often perceived as a solution designed only for large enterprises. In reality, cloud-based bookkeeping and accounting subscription services are an affordable way for small business owners to improve their operations by saving on infrastructure, gaining the flexibility to scale up or down with business conditions, and eliminating the need to keep up with the latest versions of software.
Technology solutions that automate accounting, bookkeeping, and tax-filing functions can give you more hours in the day to focus on higher-value activities. This technology does the monthly bookkeeping, which gives you a monthly profit and loss statement in addition to a balance sheet. It can also keep you compliant with the IRS and take care of your annual corporate tax returns. You can see your revenue and profitability trends over time, which can help you become more financially literate about the health of your business. Automation speeds up repetitive accounting and bookkeeping processes and improves accuracy and efficiency.
If you don't practice good bookkeeping habits, it's easy to lose sight of your business's performance, miss out on tax deductions, and accrue a bookkeeping backlog that can negatively impact your cash flow.
In contrast, small business owners who keep their books up to date reap the following benefits:
- Tax-ready financials
- Better position to secure a loan to grow your business
- Insights for data-driven, timely decision-making
- Insights to monitor and manage cash flow
- Ability to track overall growth and performance accurately
As an entrepreneur, you probably started your business to focus on something you are passionate about – and this passion is likely not for bookkeeping. While bookkeeping is a necessary evil for all, consistent financial management is critical to long-term business success.
Resolve to start this year with these good bookkeeping practices, which include scheduling time for bookkeeping, tracking and categorizing expenses, using accounting software, and possibly outsourcing your bookkeeping and financial management. These best practices will allow you to maximize tax savings, spend less time managing finances, and devote more time to innovating and growing your business.