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.
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.
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:
- 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.
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.