The world of bookkeeping can be confusing, especially for small business owners who are just getting started. From knowing the difference between accounts payable and accounts receivable to understanding which receipts should and shouldn’t be included in your ledger to even understanding what a ledger is, bookkeeping can be overwhelming.
Fortunately, many small business owners can adopt better bookkeeping practices by following three simple steps. These steps will go a long way in making your business run more efficiently, and they will make it easier for accountants to figure out the books come income tax season.
So what are the three tips for better bookkeeping — and, by extension, financial business success, regardless of your specific industry?
1. Separate Business and Personal Finances
Mixing business with pleasure isn’t a good idea in your personal life, and it isn’t a good idea in your professional life. While this can be a mistake that small businesses make — that is, they make no delineation between what expenses the business incurred and what expenses the person who runs the business incurred — it can be detrimental to the financial health of the business in the long run.
Separating personal expenses from business expenses makes it easier to track your business’s cash flow and makes your accounting more efficient. Additionally, it allows you to take advantage of all the tax deductions and benefits available to your business.
Furthermore, separating business and personal finances will also shield your personal assets (such as your home and car) from legal liability in the event of a lawsuit.
2. Follow Generally Accepted Accounting Principles (or GAAP)
If your company is publicly traded, you are already aware of the Generally Accepted Accounting Principles (or GAAP) as required by the Securities and Exchange Commission (SEC). You may also know the International Financial Reporting Standards (IFRS).
Both practices are merely standardized methods of financial reporting. They ensure that businesses beholden to investors follow a centralized rubric, which avoids financial disasters, especially when dealing with businesses in the foreign sector.
Your company doesn’t need to be publicly traded in order for you to understand the importance of following a centralized rubric. This will minimize confusion for third-party accountants (those who are independent firms, not directly employed by your company).
3. Always Maintain Common Financial Reports
Regardless of your company’s industry, every business must maintain three standard financial reports:
- Income Statement: This is the “master sheet” of all the company’s revenue streams, profits, and losses over a designated period (usually one quarter or three months)
- Balance Sheet: This is a sheet of a company’s profits and losses over a given day
- Cash Flow Statement: This statement records all of the cash coming into and out of your business over a designated period (usually one quarter or three months)
Potential investors need these three standard financial reports before investing in your business. Accountants can often handle your taxes with just these three bits of information, provided the information is reported correctly.
Bonus Tip: Use a Software System to Keep Track of Your Finances
Before computers were commonplace, small business owners tracked their finances manually. This labor-intensive process had more than its fair share of human error.
Today, however, no small business is complete without a sound software system that allows you to keep track of your finances efficiently and effectively. This will also benefit your accountant, who can reduce the likelihood of human error with computer-generated read-outs of your company’s financial situation.
Let Zabel & Co. Handle Your Accounting Needs
We know you have your share of accountants to choose from for your business. However, selecting an accounting firm like Zabel & Co. to handle your needs will put your business’s accounting in trustworthy hands. We have decades of experience helping businesses like yours and will happily help you, too.
Contact us today to learn how we can help your small business reach its financial goals. Schedule an appointment with one of our experienced accounting professionals, and let’s put your company’s funds to work for you.