If you’re like many small business owners, you may tend to keep many of the financial details of your business in your head or through handwritten notes. While keeping mental and handwritten records of expenses may seem easy for a number of reasons: there’s no danger of a system crash losing your data, you don’t have to learn any complex new software, and you can adjust your budget as often as you please, without sitting down at a computer. This could lead to a myriad of problems down the road, not the least of which is an IRS Tax audit. This blog provides some key bookkeeping tips for small business owners and entrepreneurs.
That said, there are plenty of potential pitfalls that can arise from not keeping detailed financial records on the physical plane. For one, it’s easier to be faced with nasty surprises — never a good thing when it comes to your business’ finances! Incomplete or altogether absent financial records can cause you to fall short of your goals for your business and miss important deadlines, which can put the legal or financial status of your business in jeopardy.
As the leader of your business, it’s important to get a handle on your money. Keeping detailed, easily accessible records can help you make and meet both short- and long-term goals, as well as provide a paper trail to illustrate the effects of specific changes you make to your business. Dedicated bookkeeping can help even out the seasonal ups and downs of your company’s cash flow, and may even increase your profits! It can also keep you out of hot water with the IRS, a place no entrepreneur wants to find themselves.
You don’t need to be an accountant to keep good financial records. Bookkeeping may seem complicated, but even the most spreadsheet-averse of entrepreneurs can find a method of bookkeeping that works for them and their business. Here, we’ll discuss our three top bookkeeping tips for small business owners.
We cannot emphasize this enough: tracking your expenses is completely, utterly essential if you’re an entrepreneur, full stop. Not only does having a handle on your spending help you make wiser financial decisions, expense tracking can also help you save money at tax time: many business expenses are tax-deductible, and you could be leaving money on the table by not documenting those expenses.
So, what is the best way to track your expenses? There are a number of methods, but for our purposes, we’ll keep things simple. For starters, using one credit card exclusively for business can help you keep an (albeit basic) accounting system with minimal effort. Most credit card statements categorize your expenses, so you can see which outlays correspond with which business activities.
Consolidating all your business expenses on a single credit card can help ensure that all of your business expenses are accounted for as well. Think about it: if you use that credit card to pay for all business expenses, you’re less likely to, for example, pay cash at Office Depot and lose the receipt, thereby forfeiting the tax write-off you could have claimed. Those reams of paper and packages of highlighters can add up!
Another good habit to get into is to keep records of things like business trips, client lunches, coffee meetings, and other business-related events. You can do this in a physical manner with a notebook or day planner, or you can keep electronic records via your phone or laptop (there are even automated options available as a downloadable mobile app). Keeping records of the purpose of those expenses you’re tracking with your business-only credit card can help substantiate the expenses you claim in the (unlikely) event of an audit.
Estimates are better than no information in a pinch, but they aren’t a reliable method and can serve as a red flag for the IRS. No one drives precisely 5,000 business miles in a year, for instance, so the IRS knows that number is an estimate. If you are audited, you won’t be able to claim any write-offs that you can’t substantiate, so make sure you can back up the expenses that you claim!
Since we brought up the mileage example in particular, let’s talk about business mileage tracking for a moment. If you drive your car at all for business outside your normal office, you should be tracking that mileage so that you can deduct it when you file your taxes. You can do this manually, or you can use an app to automatically track your mileage and categorize trips according to whether they’re on business or for personal reasons.
Regardless of the method you choose to use to track your mileage, you should include the date and purpose of the trip, any notes about the trip, the starting location and destination, and the total mileage of the trip. This information will make your records IRS compliant in the event of an audit, putting you in the clear!
It’s critical to keep track of your invoices in order to maintain your cash flow; unpaid or late bills hurt your business and detract from your income. While it can be helpful and even beneficial for you to assign billing responsibilities to someone else in your organization, this is totally doable if you’re flying solo or freelancing.
The most important thing you can do to make sure invoices are paid on time is to implement a process for issuing a second invoice, reaching out by phone, and perhaps levying penalties like late fees after a set deadline. Your plan should include procedures for what to do when a client is 30, 60, or 90 days late.
It can be tempting to feel like you’ve taken care of billing once you’ve sent the invoices, but follow-up is just as important in your billing routine. When you think about it, every late payment is an interest-free loan to the client. It directly impacts your cash flow and needs to be addressed. Make your late payment policy and then stick to it.
Making sure you record the source of deposits can help keep you from paying taxes on money that isn’t income. You likely make many deposits throughout the year in the form of loans, sales revenue, and even cash infusions from your personal savings. The trouble comes at the end of the year, when you or your bookkeeper tally up those deposits and include non-income deposits, thereby inflating your income and causing you to pay more in taxes.
Avoid this by keeping a record of the sources of your deposits. This can be in anything from a notebook to an Excel spreadsheet to a specialized accounting software such as Quickbooks. Regardless of the method you choose, the important thing is to be consistent — you’ll have better success by habitually recording all deposits than you will with erratic record keeping.
No matter how you choose to keep your business’ financial records, the takeaway here is to be consistent in your bookkeeping. Whether you track your expenses and income manually, digitally, or automatically, the important thing is that you’re doing it, and doing it regularly.
Following these bookkeeping tips for small business can certainly help you stay ahead of the game. Let’s face it, most small business owners didn’t’ pursue their passion so they could do the books on nights and weekends. More often than not, it’s best to leave accounting processes to the professionals lest you end up on the wrong end of an IRS audit. While software like Neat can help you establish sound practices for record keeping and expense and spend management, it’s not a substitute for an accounting professional. In fact, Neat maintains a live directory of accounting and bookkeeping pros on its website to help connect small business owners with the right resources if and when they may need them.