Top 6 Small Business Bookkeeping Tips For Steady Financial Success

Introduction

Efficient management of your small business accounting can help establish your success. Keeping your accounting and finances in order should be an achievable goal. You’ll not only save time but also money. Bear in mind that organizing your accounting takes effort and time. Furthermore, you require a solid plan. Nevertheless, these invaluable small business bookkeeping tips will help you maintain efficiency.

Separate Business from Personal Banking

All new business owners must make it a priority to open a new bank account for their business, preferably an account with online access, to keep business funds separate from personal funds. Always remember to separate your personal accounting from bookkeeping for your business. It will only take up precious time. If you have hired a bookkeeper to keep your business books, always ensure you don’t make them do your personal accounting.

If you need to use business money for personal expenses, just do a bulk transfer to your personal account on a regular basis like once a week so that the bookkeeper isn’t having to deal with a million small personal transactions and making you pay for their time.

Savings Account

Also, open a business savings account and set aside money from your business earnings every month to pay your quarterly tax. Calculate a percentage (25-30%) of your income and transfer it over before you spend it.

Online Bank Accounts

Bank accounts with online accessibility is the way to go now. It is quicker and easier to login online to make payments and keep up with the bank reconciliations in your bookkeeping software, than to wait for the bank to post a statement or writing out checks/cheques to make payments.

Recognize Business Vs Personal Expenses

Drawings (Personal Expenses)

A sole trader or proprietor will most likely withdraw funds from the business account for personal use (drawings). This can be done in place of paying themselves a salary. A good practice is to transfer one amount on a regular basis, such as once a week, from the business account into the personal account. The personal account is then used to buy the groceries, books, toys etc.

The business account can remain nice and tidy with only business transactions and the one regular drawing amount. This will also avoid the temptation to allocate a private expense to the business.

Private vs Business Expenses

A business owner needs to know and recognize what type of expenses can be claimed against the profit to reduce tax, and what can’t be.

  • An expense that is directly related to the operation of the business and towards producing income is usually tax deductible.
  • An expense that is for the owner’s personal pleasure is not.
  • Mixing personal and business does not mean a full claim for business can be made. This includes taking a client out for lunch or buying them gifts.

If in doubt about whether or not to claim an expense, contact your accountant or tax department.

Funds Introduced

Sometimes the owner will use their personal funds for business purchases. These can and should be brought into the business bookkeeping system through bookkeeping journals so that all the expenses are being claimed thereby reducing the amount of tax to pay at the end of the year. Don’t forget to let your bookkeeper know about these expenses and keep all the receipts and invoices for them.

Choose the Right Bookkeeping Software

The type of bookkeeping software you get will depend on what you need out of it. Many software providers offer different levels, here are some examples:

  • Cashbook
  • Ledger and Cashbook
  • Ledger, Cashbook and Inventory
  • Ledger, Cashbook, Inventory and Foreign Currency Transactions
  • Ledger, Cashbook, Inventory, Foreign Currency Transactions and Point of Sale

At a bare minimum, you need a Cashbook. You can keep a Cashbook in Excel, or even in a school exercise book.

Organize Your Business Documentation

Keeping the documentation for all business transactions is a high priority. They are called accounting source documents. Keeping them enables:

  • Easy tracking for any future queries that might pop up
  • Proof (to an auditor or tax man) of what occurred

Most tax departments require businesses to keep the documents that back up their tax claims for a minimum of 5 and often 7 years. These are documents such as invoices, receipts, wage records, etc. Search the internet for your local tax department website and type in something like how long to keep records.

The only way to keep the records is to have a very well-organized filing and archiving system. A box or basket full of randomly placed papers makes it much harder to locate what is needed and will cause an unnecessary waste of time not to mention frustration. There are three basic filing options available:

  • The paper system
  • The electronic system on your computer’s hard drive
  • Online documentation storage

Keep Track of Cash Payments

Any cash received should be paid into the business bank account or petty cash before spending it. It can be tempting to take the cash right away to purchase supplies but this might cause a mess in the bookkeeping system. For example, the bookkeeper/owner might:

  • Forget which customer paid the money which can lead to some embarrassment if the customer is phoned some weeks later for payment… and they have already paid! It could also appear as tax evasion because the income is not being declared in the system.
  • Forget to include the purchase in the books – these expenses definitely need to be entered into the accounts to help keep your taxes down!

Being forgetful about the above will result in the bookkeeping system not reflecting a true record of what has occurred.

Learn to Understand Monthly Bookkeeping Reports

It’s surprising how many business owners have no clue if what they are doing is working until it’s too late i.e. they suddenly find themselves with no money and huge debts. You can avoid this scenario by being pro-active about keeping your bookkeeping system up to date and producing reports at least once a month.

Keep on Top of Your Sales Invoicing

As soon as a job is complete, or at least by month’s end, prepare and send out the customer invoices so that the income can start rolling in, thus keeping the bank balance healthy and enabling payments to suppliers to be made when due. The importance of invoicing customers in good time is a lifeline for the business because this is where the money is at. Keep at it and be organized about it. Of course, this does not apply if the business is operating on a cash basis without extending credit to the customers because the cash will be coming in at the time of sale.

Outsource Your Bookkeeping When It Becomes Too Hard to Handle

If you, the business owner, are also doubling as the office administrator/ bookkeeper and finding the bookkeeping too hard or don’t have enough time to do it, then outsource the whole lot. Outsourcing is:

  • Cost Effective: Because you only need to pay for a couple of hours of work a month opposed to paying a regular wage
  • Accuracy: You are getting that necessary professional work done on your accounts so you can be confident they are correct

It can take a professional bookkeeper 2 to 4 hours to process one month’s worth of bank transactions, finalize a bank reconciliation, and produce a set of reports. You can outsource as little or as much as you want done.

See Also: Top 5 Ways a Bookkeeper Can Save You Money

Below is a list of the most common tasks that are a part of the bookkeeping process. You can ask a bookkeeping professional to carry out only one task or a combination of tasks whilst you or your employed office person does the others.

  • Enter transactions to the cash book, to the correct account codes with the correct sales tax options
  • Process bank reconciliations for the main account, savings accounts
  • Prepare sales invoices
  • Enter purchase invoices
  • Prepare a creditors report and upload batch payments to the bank
  • Prepare a sales report and keep in contact with overdue debtors
  • Process payroll and set up payments to employees
  • Process payroll tax reports to the tax department and set up payment
  • Process sales tax returns and set up payment to the tax department
  • Prepare the monthly reports
  • Advise you on the actual state of your business finances and give you ideas on how to improve cash flow.

The great thing about experienced professional bookkeepers is that they are usually in a position to give you great business advice over and above your day to day bookkeeping needs such as:

  • Investigate new software and advise if any are a good fit for your business
  • Attend business meetings with you and your banker and help explain the accounts to the banker if you find it a little difficult 
  • Help prepare your annual budget and cash flow reports
  • Train your office employees

Organizing your accounting will save you money and time while making your business more successful. Perhaps even more important, it will be less stressful. Need help organizing your accounting and bookkeeping? Monily’s team of qualified professionals are ready to help you focus your time and energy on running the show, while we keep business books for you. If you are looking for a reliable bookkeeping and accounting service, you’ve come to the right place.

How to Read and Understand the Balance Sheet

If you want to know the health of a business, understanding balance sheets is very important the balance sheet should be your go-to statement. The balance sheet offers a deep look into how the business is performing. The balance sheet helps investors decide whether or not to invest in a business. Business owners can use the balance sheet to draft a strategy. Employees can also read the balance sheet (if provided access) to improve performance across the organization.

For all this to happen, every individual associated with a business (owners, investors, and employees) should know to read and understand the information in a balance sheet. This piece is a balance sheet 101 for those looking to understand balance sheets. We look at the mechanics and components of a balance sheet.

Let’s Start by Knowing the Balance Sheet

A balance sheet is designed to balance assets, liabilities and equity. Among all the financial documents, a balance sheet tells you about the company’s worth or book value through all the assets, liabilities, and equity. Depending on the preferred frequency, a balance sheet is prepared monthly or quarterly.

What’s the Purpose of a Balance Sheet?

Why does a balance sheet exist, you ask? Simply to offer a summary of a company at any given time. It a 360-degree-look at the financial standing of the organization with the help of a breakdown of assets, liabilities, and equity. The purposes of a balance sheet vary, depending on the person reviewing it.

When reviewed internally by a leader, stakeholder or employee, a balance sheet, simply put, gives an idea of how well or poor the business is performing. Using that information, business decisions can be made to make improvements and correct mistakes and failures.

When an external individual (such as an investor) reviews the balance sheet, the purpose it serves is to provide information on how the company’s assets are financed and what resources are at its disposal. Potential investors can then use this information to assess the outlook of an investment. They can also check up on the liquidity and profitability of the company.

In a third scenario, external auditors review the balance sheet to make sure the company is adhering to reporting guidelines and laws.

Components of a Balance Sheet

It’s easy to identify the components of a balance sheet. There are only two: assets and liabilities. There is a formula that explains a balance sheet in the simplest of ways.

Assets = Liabilities + Equity

This means that a business’s assets must always be equal to the sum of its liabilities and shareholder equity.

But reading and understanding balance sheets isn’t just about knowing the aforementioned equation. To be able to read and truly understand the balance sheet, one needs to know what its elements mean. So, here’s what you need to know to read a balance sheet.

An Understanding of the Types of Assets

There are two major types of assets in any business: current and non-current.

Current Assets

Current assets are items of value a business owns that will be converted into cash in one year. These include:

Inventory: Businesses that sell physical goods usually have finished items, raw materials, and in-progress products

Accounts receivables: A company can have short-term payments that are owed to it. An example of this is a credit sale made to a vendor or customer.

Cash: This includes currency, checks, and bank accounts

Non-current Assets

In contrast to current assets, non-current assets are those that are acquired or built for the long-term and are not cashable within one year. Tangible and intangible assets are both included in this.

Tangible Assets: A company’s property, equipment, machinery

Intangible Assets: Assets that have to physical presence such as copyrights, patents, and goodwill.

Understanding Liabilities

The next step in reading and understanding balance sheets is to know how to examine the business’ liabilities. These are the financial obligations of a business that are owed to suppliers, vendors, and lenders. Similar to assets, liabilities are also current and long-term.

Current Liabilities: These are obligations that are due to be paid within one year. They include short-term borrowings and loans (often regarded as accounts payable) and interest on a long-term loan.

Long-term Liabilities: These include debt and non-debt obligations that are owed and to be paid after one year (from the date of the balance sheet).

Equity (or Capital)

The initial amount of funds that were invested in a business is called shareholders’ equity or capital. When a business decides to reinvest its net earnings (after paying taxes) back into the company, this amount is then entered into the balance sheet and the equity account. As mentioned above, the balance sheet needs to balance. Total assets must always be equal to the sum of total liabilities and equity.

Know the Ratios When Analyzing a Balance Sheet

After you have started understanding balance sheets basics, knowing the importance of financial ratios for greater analysis is necessary. When discussing financial ratios, certain formulas are utilized to understand the position of the business and its operations. These financial ratios are a solid way of knowing the company’s financial performance and efficiency. In certain cases, some financial ratios are calculated using data from multiple financial statements.

The main ratios that utilize information from a balance sheet are activity and financial ratios. Ooof! Heavy words. But let’s simplify them for the sake of clarity.

Activity ratios: These focus on how well a company manages its operating cycle (consisting of inventory, payables, and receivables). You can tell a lot about the business’ operational efficiency through these.

Financial strength ratios: These include debt-to-equity ratios and working capital and offer insight into the performance of the business in terms of its financial obligations.

See Also: Future Of Accounting

A point worth noting about the balance sheet is that it offers an overview of the business’ financial standing at any single point in time.

Conclusion

Similar to the cash flow and income statement, a balance sheet works as an important tool for potential investors looking to pour in funds into the company. The sole purpose of a balance sheet is to provide a glimpse of the assets and liabilities of a business. However, for business owners and investors alike, it is important to understand how to read a balance sheet. If owners and investors are to make informed decisions, knowing the basics of a balance sheet is all too important.

Accounting 101 for Small Business Owners

If you’ve just launched or are about to launch your online store, congratulations! It takes uncommon passion and perseverance to get to where you are today.

However, as you know, business ownership is a constant flood of satisfying milestones coupled with expanding to-do lists. With your launch, you’ll need to get on top of the accounting tasks that come along with owning a store.

This list of small business accounting steps will give you the confidence to know you’ve covered your bases and are ready to move on to the next item on your business to-do list.

1. Open a bank account

After you’ve legally registered your business, you’ll need somewhere to stash your business income. Having a separate bank account keeps records distinct and will make life easier come tax time. It also protects your personal assets in the unfortunate case of bankruptcy, lawsuits, or audits. And if you want funding down the line, from creditors and investors alike, strong business financial records can increase the likelihood of approvals.

Note that LLCs, partnerships, and corporations are legally required to have a separate bank account for business. Sole proprietors don’t legally need a separate account, but it’s recommended.

Start by opening a business checking account, followed by any savings accounts that will help you organize funds and plan for taxes. For instance, set up a savings account and squirrel away a percentage of each payment as your self-employed tax withholding. A good rule of thumb is to put 25% of your income aside, though more conservative estimates for high earners might be closer to one third.

Next, you’ll want to consider a business credit card to start building credit. Credit is important for securing funding in the future. Corporations and LLCs are required to use a separate credit card to avoid commingling personal and business assets.

Before you talk to a bank about opening an account, do your homework. Shop around for business accounts and compare fee structures. Most business checking accounts have higher fees than personal banking, so pay close attention to what you’ll owe.

2. Track your expenses

The foundation of solid business bookkeeping is effective and accurate expense tracking. It’s a crucial step that allows you to monitor the growth of your business, build financial statements, keep track of deductible expenses, prepare tax returns, and legitimize your filings.

From the start, establish a system for organizing receipts and other important records. This process can be simple and old school. For American store owners, the IRS doesn’t require you to keep receipts for expenses under $75, but it’s a good habit, nonetheless.

To open a business bank account, you’ll need a business name, and you might have to be registered with your state or province. Check with the individual bank for which documents to bring to the appointment.

Starting your business at home is a great way to keep overhead low, plus you’ll qualify for some unique tax breaks. You can deduct the portion of your home that’s used for business, as well as your home internet, cell phone, and transportation to and from work sites and for business errands.

Any expense that’s used partly for personal use and partly for business must reflect that mixed use. For instance, if you have one cell phone, you can deduct the percentage you use the device for business. Gas mileage costs are 100% deductible, just be sure to hold on to all records and keep a log of your business miles (where you’re going and the purpose of the trip).

3. Develop a bookkeeping system

Before we jump into establishing a bookkeeping system, it’s helpful to understand exactly what bookkeeping is and how it differs from accounting. Bookkeeping is the day-to-day process of recording transactions, categorizing them, and reconciling bank statements.

Accounting is a high-level process that looks at business progress and makes sense of the data compiled by the bookkeeper by building financial statements. As a new business owner, you’ll need to determine how you want to manage your books:

You can choose to go the DIY route and use software like Quickbooks. Alternatively, you could use a simple Excel spreadsheet.

You have the option of using an outsourced or part-time bookkeeper that’s either local or cloud based.

When your business is big enough you can hire an in-house bookkeeper and/or accountant.

With so many options out there, you’re sure to find a bookkeeping solution that will suit your needs.

4. Set up a payroll system

Many online stores start out as a one-person show. When you’ve reached the point where it makes sense to hire outside help, you need to establish whether that individual is an employee or an independent contractor.

For employees, you’ll have to set up a payroll schedule and ensure you’re withholding the correct taxes. There are lots of services that can help with this, and many accounting software options offer payroll as a feature.

For independent contractors, be sure to track how much you’re paying each person. American business owners may be required to file 1099s for each contractor at year end (you’ll also need to keep their name and address on file for this).

5. Investigate import tax

Depending on your business model, you may be planning to purchase and import goods from other countries to sell in your store. When importing products, you’ll likely be subject to taxes and duties, which is worth noting if you run a drop shipping business. These are the fees your country imposes on incoming goods. Learn about importing goods into the US and Canada, and the associated taxes, so you know the rules from the get-go.

Also, if you’re importing goods, a duty calculator can help you estimate the fees in your own business and plan for costs.

6. Determine how you’ll get paid

When sales start rolling in, you’ll need a way to accept payments. If you’re a North American store owner on Shopify, you can use Shopify Payments to accept credit card payments. This saves you the hassle of setting up a merchant account or third-party payment gateway.

If you want to accept credit card payments without using Shopify Payments, you’ll either need a merchant account or you can use a third-party payment processor like PayPal, Stripe, or Square. A merchant account is a type of bank account that allows your business to accept credit card payments from customers.

If you use a third-party payment processor, fees vary. Some processors charge an interchange plus rate, typically around 2.9% + $0.30 per transaction. Others charge flat fees for each transaction, while some have a monthly membership model for unlimited transactions.

7. Establish sales tax procedures

The world of ecommerce has made it easier than ever to sell to customers outside of your state and even country. While this is a great opportunity for brands with growth goals, it introduces confusing sales tax regulations.

When a customer walks into a brick and mortar retail store, they pay the sales tax of whatever state or province they make the purchase in, no matter if they live in that city or they’re visiting from somewhere around the world. However, when you sell online, customers may be in different cities, states, provinces, and even countries.

8. Determine your tax obligations

Tax obligations vary depending on the legal structure of the business. If you’re self-employed (sole proprietorship, LLC, partnership), you’ll claim business income on your personal tax return. Corporations, on the other hand, are separate tax entities and are taxed independently from owners. Your income from the corporation is taxed as an employee.

Self-employed people need to withhold taxes from their income and remit them to the government in lieu of the withholding that an employer would normally conduct. For American store owners, you’ll need to pay estimated quarterly taxes if you’ll owe more than $1,000 in taxes this year. Canadians have it a little easier; if your net tax owing is more than $3,000, you’ll be required to pay your income tax in installments.

9. Calculate gross margin

Improving your store’s gross margin is the first step toward earning more income overall. In order to calculate gross margin, you need to know the costs incurred to produce your product. To understand this better, let’s quickly define both cost of goods sold (COGS) and gross margin.

COGS. These are the direct costs incurred in producing products sold by a company. This includes both materials and direct labor costs.

Gross margin. This number represents the total sales revenue that’s kept after the business incurs all direct costs to produce the product or service.

10. Periodically re-evaluate your methods

When you first start out you may opt to use a simple spreadsheet to manage your books, but as you grow, you’ll want to consider more advanced methods. As you keep growing, continually reassess the amount of time you’re spending on your books and how much that time is costing your business.

The right bookkeeping solution means you can invest more time in the business with bookkeeping no longer on your plate and potentially save the business money. Win-win!

See Also: Top 4 Benefits to Hire a Tax Pro To Prepare Your Income Taxes

Starting a business can be an overwhelming process, but if you follow this list, you’ll have your new store’s finances in order from the beginning. From opening the right type of bank account to determining how much you’ll bring in per product, these tasks will all contribute to your business’s success, now and as it grows.

Top 4 Benefits of Hiring A Tax Professional for Your Business

Taxation at its core is a stressful word. Let alone having to manage payrolls and maintain books with all transactional records that follow it, is an entire world of complications. Unless you love managing, numbers and playing around with them, which can still make your confrontation with filing your income taxes an uneasy ordeal.

With changing policies and the government introducing new tax laws and reforms, it might not be the best decision to manage your small business’s taxations and income taxes on your own.

Even if you are working from home and think you have got your taxes under control, unforeseen errors and problems always pop in which are even harder to trace and fix on your own. Due to all of the problems that a person can face, there is an entire educational field dedicated to train and equip people with the skills needed to manage accounts and finances, otherwise known as CPAs or Professional Tax Consultants. The field always presents a comparison between filing taxes yourself v professionally. It is not always smart to micromanage especially in areas that control a great portion of your business’s well-being.

See: Local CPA VS Cloud Bookkeeping

This article helps you understand the benefits of hiring a tax professional, and what better way of getting it then virtually with businesses such as Monily that, live and breathe taxes and bookkeeping.

Save On time

Here is a riddle for you, what can fly without wings? That is right; the answer to that riddle is what almost every business owner and entrepreneur lacks. There are not enough hours on the dial for you to be done with all of the tasks of the day. Add-on having to manage your business’s books on a daily bases. Include your transactions, expenses and take care of the receipts to latter feed them in to the system. Why handle all the practical details that go in your business? When you can hire a professional tax consultant through taxation services in Houston such as Monily. 

When you hire the services of tax consultants, especially virtual ones you save up greatly on time, by spending it focusing on the growth of your business, and managing its day-to-day activities rather than spending that precious time bending over your accounts trying to figure some sense out of the numbers. These are just of the benefits you get when you hire a tax professional.  

Services like Monily, work on everything from getting you tax ready to maintain your books on a day-to-day basis and bring the benefits of hiring a tax professional to the table. Leaving you ample amount of time to get on to what really matters, bringing in business and growing it. Just like every business owner your accounts are an important aspect of your trade, instead of getting into it yourself, you could simply look at the graphs demonstrating your expenditures and receivables on a user friendly and easy to understand display, in-turn saving on, yes, you guessed it, Time.

Nothing goes missing

Do you wonder what does a tax preparer do? You know those pennies you miss out to write in your books that go completely unseen. Well they can make a huge difference when you are filling your income tax. Another benefit of hiring a tax professional is that they go through your books and keep them updated can save you a whole world of trouble.

What you add as deductibles and what is not in your best interest given the new tax reform can be tricky, there are now certain things that cannot be added, and instead they might cause greater problems if you do include them. However, having a professional manage them and guide you through them can save you the hassle and you do not skip on anything.

Highly skilled and competent, yet another benefit of a tax professional being hired

There is a reason why you are as good as you are in your business. It is because you have the necessary skills, experience and are competent at what you do. Sure, you can be multi-talented, but the touch of someone that really knows what he or she is doing makes a lot of difference.

Wanting to manage or control all aspects of your business is good, but only when you let people with the right skills to handle the tasks and get it done, with you just overseeing them. A business is only as good as its people, that is very true and has been the cause of success and failure for many businesses. When you work with CPAs, you know you have the best of people that are well qualified to manage and handle your taxes for you. Businesses that offer virtual accountancy services give you a team of highly skilled and very professional people to manage what might be a pain-staking task for you.

Virtual CPA’s Less Expensive

As all professionals on a consulting capacity are heavy on the pocket, accountants can cost fortunes to hire and keep, especially for small businesses; it is an added expense that you do not need at this point, or ever. On the other hand, virtual Certified Public Accountants, that are generally managed by externally cost pennies on the dollar compared to their counterparts. Your business’s financials are also solely dependent upon the expertise of a single accountant. Yet when you hire a tax professional, you get an entire firm taking care of your business’s expenses and maintaining its books up to date. At the end it is a win-win situation you get to spend less on a service that your business needs, and in turn get a better job done, than you otherwise do when trying to do it on your own.

Ending Thoughts

Having an auditor or a CPA on your panel, helping you manage your money and business towards stardom, is a business essential. You might try to manage it on your own, but the only way to actually make a success of your start up is, if you have enough time to devote to it.

The smarter way to go about a problem is to fix it before it becomes a problem. You might be great at accounts, taxations and bookkeeping but at what expense though. Now that you know how taxes can take up so much of your time and the benefits of hiring a tax professional, be smart make the right choice: let the professionalsprepare your income taxes while you worry about the more important aspects of running and managing your business.