Building and maintaining a small business is no small task. Constant challenges arise and many don’t stand the test of time. But there’s one thing that business owners can do that will put them in the 18% of those who see long-term success.
According to research from The Hartford, nearly 82% of small businesses fail because of issues with cash flow management. This problem could be easily solved by one practice—bookkeeping. Ignoring this critical aspect of business management you open yourself up to tax issues, fraud risk, and financial statement discrepancies. In addition, ignoring bookkeeping can cause owners to miss financial opportunities like cost-cutting, investment, and more.
Keeping organized records of your financial data is a crucial foundation for the expansion, decision-making, and, ultimately, the success of your business. In this article, we’ll break down everything from record keeping and analysis to handling bank reconciliation and mastering invoicing. By the end, you’ll have the tools to actively help you navigate the complexities of financial management.
The pitfall of ignoring proper bookkeeping best practices
Before we dive deeper into the nuances of mastering your own bookkeeping system, let’s break down the pitfalls many small businesses fall into. Failing to keep track of all necessary records makes it difficult to verify expenses, monitor spending, and provide evidence for possible audits.
Furthermore, not tracking expenses can lead to significant cash flow issues. Skewed financial reporting can cause severely missed expansion opportunities. At worst, it can lead to fines and penalties. On the other side, overreporting can lead to overpaying in taxes and an inflated sense of financial health.
In essence, missing even the most minor details of your finances affects your bottom line and hinders wise decision-making. The good news is that the opposite is also true. Good bookkeeping practices will change the trajectory of your business. Here’s how to do it right.
Maintaining timely and accurate financial records
It’s critical that you not only maintain accurate records but that you track and store them promptly. All financial transactions hold essential data that communicates the state and activity of your financial health. Clean and thorough records made promptly mean the data is more likely to be accurate and have GAAP compliance. It also holds benefits for audits for overall tax burden and even managing budgets.
Tips for organizing and storing financial statements
Consistency is the key! You will want to get in the habit of recording all financial transactions. Sales, expenses, payroll, and taxes, should all be accounted for in a timely manner. Here’s how to ensure that your records are always accurate, organized, and up-to-date.
Choose a system that works for you
There are many methods of bookkeeping. As an accounting method, many small businesses choose cash accounting. Cash accounting records transactions based on when cash is received or distributed. Small business owners with fewer banking transactions and business expenses may consider utilizing a ledger and balance sheet to record income and expenses.
Organize and store financial information
Once you have a system, categorize and store every record of financial activity:
- Invoices
- Tax receipts
- Business loans
- Purchase orders
- Payroll statements
- Business expense receipts
- The company’s financial statements
For all accounting entries you have, be sure to include subcategories to track their purpose. For example, if you spend $80 at a tax-deductible business lunch, rather than simply labeling it a “business expense,” get specific. That way, you will know the amount and time to claim the tax deduction.
Publicly traded companies should follow official IRS guidelines for proper recordkeeping.
Embrace digital tools and cloud-based bookkeeping software
Cloud-based accounting software is vital in simplifying data entry, automating tasks, and collaborating with your bookkeeping team or service. It’s the best way to keep records organized and easy to access, analyze, or audit.
It’s also among the top generally accepted accounting principles today. Some of the top, industry-standard software to help streamline the bookkeeping process include:
Digitizing your records also eliminates the risk of losing physical records holding sensitive data.
Reconciling bank accounts and statements
The time for tax filing is coming soon. You start to go through your statements and then it happens! You see that a bank statement doesn’t match your own records. What do you do? This is where bank reconciling comes in. Bank reconciliation is a process where you compare bank statements with your cash accounts. This is a critical process in a business. When the cash balances match it maintains an accurate record and protects against fraud and penalties from an external audit.
Here is how to do it the right way.
How to reconcile bank accounts and credit card statements
Let’s divide this process into four steps: preparation, identification, investigation, and reconciliation.
Prepare your documents
First, gather your most recent bank statements and credit card statements. Make sure to have the same time period covered in both.
Identify and analyze the statements
Now, begin to match transactions. You will want to search for discrepancies like outstanding checks on your statements and deposits that don’t reflect records.
Investigate discrepancies
If you find any transactions that don’t match your records, investigate the root cause. Check for mistakes like typos, unauthorized charges, or missing entries. You may want to contact your bank or credit card company to resolve the issue.
Reconcile the statements
Once all transactions match and any outstanding checks are accounted for, compare the adjusted account balance on your records with the ending balance on your bank statement. If both balances match, the reconciliation process is complete and your business is properly managed.
As a final note, ensure that you set up a solid and regular reconciliation schedule. Weekly or monthly reconciliations are common practices for businesses to minimize errors encountered and ensure accuracy within deadlines.
Avoiding financial comingling with personal finances
One mistake that can paint an inaccurate picture of a business’s cash flow is mixing a personal bank account with business finances. Commingling personal and business finances can lead to longer sorting processes, discrepancies in audits, and an irresponsible use of funds. Conversley, keeping finances separate leads to informed decision-making based on accurate cash flow reporting.
How to keep business finances separate
First, open separate bank accounts and credit cards. Dedicate those accounts solely for business transactions. After this, develop a system for clear expense tracking. Here, you want to track and categorize expenses, no matter how small. To streamline the process, consider utilizing apps that track expenses.
Implementing a robust accounts receivable process
As a business owner, you’re responsible for managing your cash payments. Efficient accounts receivable management guarantees timely payments from your clients or customers. It streamlines the ongoing liquidity of your business which is dependent on recognizing, following up, and receiving outstanding payments. Here’s how to build a robust process.
How to streamline your invoicing
First, make all your invoices professional and clear. This gives you authority and builds a sense of trust with your customers. Make sure the invoice contains all necessary details like:
- Product descriptions,
- Service descriptions,
- Payment terms,
- And unit prices.
When sending your invoice, consider incentivizing early or on-time payments, like offering 2% early payment discounts when clients pay within the first week. After it’s sent, develop a system for following up on overdue payments. This can be as easy as setting up a polite automated or prewritten email reminder within a chosen time. Lastly, a good practice is to offer diverse payment options. Giving customers a convenient way to pay (credit cards, electronic checks, online payments, etc.) can boost customer satisfaction and speed up the payment.
Monitoring and analyzing financial data regularly
With a solid foundation of record keeping, reporting, and managing, it’s time to get into the practice of analyzing them. Regular monitoring and analysis of reports are vital for making informed business decisions. Financial reports provide a comprehensive view of your business’s financial health. By regularly reviewing and analyzing these reports, you can gain valuable insights into your performance, financial trends, and areas for improvement. Key reports to focus on include:
What items to keep track of
Understanding your small business’s financial landscape requires certain documents to be kept track of:
Balance sheets
Balance sheets are snapshots that provide a bird’s-eye-view of your company’s assets, liabilities, and equity at specific times. They essentially break down net worth as your business grows.
Income statements
An income, or profit and loss statement, summarizes your revenue, expenses, and net income over a period of time. Analyzing these elements allows you to identify trends and plan for budgets, resource allocation, and cost-cutting.
Cash flow statement
This report details the liquidity of your business over a set time. Monitoring this helps you understand how you generate and use capital. This helps promote financial stability and gives insights for planning future investments.
Developing a review schedule
To have a constant stream of real-time financial insights, establish a regular schedule to review reports. Depending on the volume of your transactions, decide on either monthly, quarterly, or annual reviews. Quarterly reviews are usually the best balance for small businesses. It can provide a relatively steady stream of financial analysis without the overwhelm of constant data. Combine your chosen schedule with an annual overview analysis. Relying only on annual reviews can create blind spots, but combining them can help create a full financial picture.
Collaborate with a professional bookkeeping service
Scaling a business with bookkeeping is an ever-evolving and complex task. For small business owners trying to focus on their business, a trusted partner can help take this load off and optimize your financial systems.
Benefits of outsourcing your bookkeeping tasks
Bookkeeping services, for example, Precise Ledger LLC, frees up time and lets you focus on growing your business. Working with a dedicated team of experts means you offload risk from having your attention divided.
They also ensure accurate and efficient financial management utilizing all the best practices we mentioned before and much more. You also save money by outsourcing since you don’t have to add another salary to your payroll.
When you outsource bookkeeping tasks to a trusted partner like Precise Ledger LLC you not only receive tailored solutions and customized plans, but you can save money with packages starting as low as $140 per month.
Invest in bookkeeping training and education
With online learning, you can effectively communicate with your bookkeeping team or service, learn to identify opportunities and increase your overall confidence.
To start your search for online courses to learn bookkeeping and accounting principles, some of the top options include:
- Udemy bookkeeping
- Coursera for QuickBooks software
- Corporate Finance Institute
- Reed Courses
- NACPB for certification
Education is a business owner’s greatest secret weapon. With bookkeeping being so vital to financial success, investing in training and education has powerful effects.
Conclusion: Master bookkeeping practices to grow your small business
Small businesses have some of the highest potential for growth out of any other sized business. The secret weapon to scaling is to practice a robust bookkeeping process. Recording transactions, reconciling bank accounts, streamlining accounts payable, and consistent monitoring are some of the best practices for gaining financial insights and course corrections. To strengthen your financial foundation, be sure to partner with the right professionals who will help you build a successful business.
Make Precise Ledger LLC your trusted growth partner
As a small business owner, you understand that effective bookkeeping is essential for making informed decisions, optimizing cash flow, and fueling your company’s growth. By implementing these bookkeeping best practices and partnering with a trusted professional service like Precise Ledger, you can take control of your financial management and unlock your business’s full potential. At Precise Ledger LLC, we specialize in providing tailored bookkeeping solutions for growing small businesses.
With packages starting at just $140 per month, our team of experienced bookkeepers can help you maintain accurate records, analyze financial data, and make strategic decisions to support your success.
