It is a well-known fact that most small businesses fail, many in the first year. The main reason they fail is they lose money. Unless you’re a billion dollar venture-funded corporation, you won’t survive long losing money.
If you own a small business and want to succeed, you owe it to yourself to pay attention to the numbers. Much can be gleaned from the financials. But if you didn’t major in accounting then your statements may as well have been written by an alien.
Steps to Simplifying Your Bookkeeping
- Legal Structure – Start by having a lawyer setup your business for the legal structure that works best for you. Many of the steps below are more difficult if this is done later. Some of your bookkeeping entries will be dependent on your legal structure, so get this completed asap.
- Separate Business From Personal – Now that you have your legal business name setup, you can open up your bank accounts in your business name and apply for a business credit card. This will keep your business transactions separate from your personal transactions. Keeping financial data separate will make it easier to see how your business is doing financially and is a major accounting principle. Many small business owners have difficulty with this step, but it is as easy as don’t use your business accounts for personal expenses. If you need help with this, consult with a CPA or bookkeeper.
- Record all your business transactions – The easiest way to do this is by having your bank accounts and credit card accounts for your business connect with your accounting software for automatic uploads. This eliminates manual entries and virtually guarantees you’ll post everything to your financial statements, making them accurate.
- Paying Your Bills – This covers many areas. You need to make sure you don’t overspend by comparing your expenses to a budget or industry standard. You also want to watch the timing of your payments, so that you maximize cash flow and not pay expenses too early or too late. It’s easy to charge everything thinking that eventually you’ll have enough revenue to pay off your credit card balance, but this can land you in trouble. The goal is to pay off your balance each month, but if you must carry a balance because of initial start up costs, set a goal to make more than the minimum payment, thus reducing your debt every month.
- Collecting From Customers – If you’re lucky, your customers pay you up front for your products or services. But sometimes it’s necessary to allow your customers to pay later. This is great if it generates more revenue and your customers are great at paying on time. But if this isn’t the case, you need to set up a system to handle delinquent payments. It starts with giving your customers payment terms like net 30 (means they must pay the balance due 30 days after the invoice date). If you don’t, you’re telling them they can pay whenever they want, and they will. What if they still don’t pay? Then you need a collection process. Write out how you will handle these situations. For example, after 30 days past due call the customer. After 60 days past due, cut customer off for future purchases. After 90 days past due, send them to a collection agency. After 180 days, write off the account to bad debts expense.
- When to add Employees – It’s tempting when you start a business to add employees so you don’t have to work 100 hours per week. But if you add people too soon and the revenue doesn’t increase or even drops, you can be in a world of hurt. So when should you add someone? A good rule of thumb is to add $250K of gross profit for every new hire, or take their total cost (wages plus benefits) x four. So, if you currently have a gross profit of $100K with just you, add a second person when you increase your gross profit to $350K.
- Taxes – With the desire to run a profitable business comes the necessity to pay taxes on those profits. Like a paycheck, the government wants their money when you receive it. So for a business, this usually means paying taxes with estimated quarterly payments and then doing a final payment when the tax return is filed at year end. There are significant penalties and interest for not paying taxes on time and the government has sufficient power to grab that money. So it is important to pay your taxes on time and pay the correct amounts. Your CPA or tax professional can help determine the amount of taxes to pay and how to pay them (frequency and method). A good rule of thumb for most small businesses is to set aside 15% of every dollar of profit for taxes and transfer this money to a dedicated bank account so it can’t be touched. Then, when taxes are due the money is available for payment.
- What is Good? – When you’re just starting your business and you look at your financials, how do you know whether they are good or not? You can start by comparing them to a budget, to a prior month or year, and to industry norms. Next, look at your largest variations. If you’re losing money is it due to lack of sales or too many expenses? Start there. When you’re just starting, look to allocate your profit as follows (this can be adjusted later): Draws 50%, Operating Expenses 30%, Taxes 15% and 5% Profit. Compare how you’re doing to these totals.
- Outsource Your Bookkeeping and Taxes – If this all seems way over your head or you simply don’t have the time, consider outsourcing these tasks to a CPA, tax professional or bookkeeper. For a few hundred dollars a month, you can outsource all of your bookkeeping and not have to hire anyone. If these tasks are taking you 80 hours a month to do and you can spend $400 for a bookkeeper, you’ve just opened up all of that time for yourself. If you value your time at say $100/hour, you’ve saved yourself $7600/month (80 hours x $100/hour less $400 bookkeeping fee).
- Apps to Use – There are many apps (some free) that can simplify your bookkeeping. For bookkeeping the best is QuickBooks Online. This is the industry standard for bookkeeping for small businesses and is done online, so your data is backed up with high level security and available to both you and your CPA/bookkeeper. Cheaper alternatives are Excel (if you have it) or Google Sheets (free) or Wave Accounting (free). Have your CPA or bookkeeper help you set it up for your business with the categories specific to your industry. Much of the work after the financial software is setup is getting the supporting documents you’ll need to justify your numbers. The easiest way is to have an application like Hubdoc grab the documents for you and send them to QBO, or you can take a picture of them with your phone and send to your financial software. QBO and Wave have that ability. Mile IQ is a great free app for your phone to track your business mileage.
Hopefully this was helpful to you with some ideas to simplify your bookkeeping. For most small businesses, it is a good investment to delegate your taxes to a CPA that specializes in small businesses and outsource your bookkeeping to a professional bookkeeper.
If you would like to contact me about handling your bookkeeping for you, please click the button below to get in touch with me and I will schedule a call with you to discuss further.