Bookkeeping Basics for Small Businesses

As the owner of a small business, you understand the need to be financially organized. This means managing your books well, including tracking your collections, debts and any investments. For many businesses, the reason they fail to thrive is due to a lack of good financial management. Even if you plan to hire a qualified accountant, it is important that you understand the basics of bookkeeping to keep your business on the right path.

Basic Financial Analysis

Using your business records, you should be able to determine a few key points about your business.

• Are you making money, or losing it? How much?
• Is your business financially sound?
• Is there potential financial hardship ahead?

Good bookkeeping will make sure that you know the answers to these questions. While a tax preparer or accountant might be able to file your taxes or prepare your financial statements, they will be unable to do so without an accurate set of financial records. To assist you, there are various bookkeeping options available in terms of software.

But in order to make sure you are staying on track, it is important to work with a qualified accountant. They can review your records and alert you to potential problems before you have to deal with the IRS.

Keep Accurate Records

In order to keep your business successful, you have to spend time on the administrative tasks, such as bookkeeping. Here are just a few of the reasons why this task is valuable, even if it requires you take time away from selling your product or service.

• Monitoring the Health of Your Business – Without having a clear financial picture, you cannot really understand how healthy your business truly is. It gives you the ability to see if your sales are going up or if it’s really your expenditures on the rise. You can also spot expenditures that might be much higher than they should be and work to make changes to reduce that expense.
• Decision Making Capability – Without accurate records, you will hard-pressed to make solid financial decisions for your business. Simply put, you would be unable to judge the financial impact of one course versus another.
• Obtaining Financing from a Lender – Most lending institutions will want to see financial statements, such as an income statement, cash flow budget or balance sheet before considering giving you funding. These statements should also include the impact of their loan, meaning these forward thinking statements should document the additional expense and how it effects your bottom line. They want to make sure that you are running your business in a way that guarantees their funds will be repaid.
• Budgeting – A budget helps you to forecast your cash needs, as well as your expenses. If you are seeking financing by a bank or investor, a budget can demonstrate that your business is stable. But to have a meaningful budget, you must be able to build it out of sound financial information from your daily bookkeeping.
• Complying with Federal and State Payroll – Payroll and all the associated taxes, rules and regulations can be daunting. This includes reporting and paying your payroll taxes on time, then reporting the information to the appropriate agencies on a quarterly basis, before issuing W-2s and reporting to the government your annual information. Good records can make this much less complicated.

Recordkeeping: What Does It Entail?

As we have seen, there are plenty of reasons why we need to keep accurate books. However, in order to do so, we need the proper tools. These include a daily recording of transactions, maintaining your general ledger and cash records.

Additionally, you might need to maintain an accounts receivable and accounts payable ledgers. However, beyond these basic tools, you can confer with your accountant or tax preparer about filing your income tax return. Another area where an accountant can be helpful is in preparing your financial statements, at minimum annually. Other businesses find that they want to have financial statements prepared more frequently, such as monthly or quarterly. This is dependent on your particular business needs.

If you need to submit sales tax to your state, then you also might find it helpful to work with your accountant to close your books on a monthly basis. By working to keep your books accurate, you can make sure your business is thriving. At the same time, you can be sure that you are meeting all of your business’ financial and tax obligations.