Most business owners are not accountants by trade and only have a loose understanding of financial management. Furthermore, many small business owners lack the funding to hire a bookkeeper full-time, let alone a full-time accountant. As a result, small businesses are missing out on the benefits of retaining a designated bookkeeper on staff.
Even if you can’t afford to hire a bookkeeper, you can adopt the record-keeping practices of one to enjoy some of the benefits of top-notch bookkeeping. This post will explore several ways small business owners can keep better track of their finances and take on some of the duties of a bookkeeper.
Bookkeeping vs. Accounting: a Quick Explanation
As far as business is concerned, bookkeeping and accounting deal with financial management. However, it would be a mistake to confuse one for the other. Bookkeeping and accounting are not precisely the same thing, and the best way to describe the difference between them is to look at what each is concerned with.
The primary focus of bookkeeping is to keep detailed and meticulous financial records of the day-to-day business transactions. In this simple analogy, bookkeepers gather, sort, and store a business’s financial data.
The primary function of accounting is to prepare a business’s finances for taxes and help businesses formulate their big-picture financial strategy. In our analogy, accountants process and analyze the financial data gathered by bookkeepers.
Bookkeeping Vs. Accounting: the Takeaway
Instead of thinking of each as separate roles, consider them complementary to one another. In a nutshell: bookkeepers compile data, and accountants analyze it. As a small business owner, if you can keep accurate and meticulous records, then you’ve accomplished half the battle.
That brings us to the point of this post:
Being Your Own Bookkeeper
It will require some extra work, but managing your business’s finances correctly from the start will set you up for future success. Make sure you are doing the following:
Stay Up To Date On Invoices
Keeping track of your invoices is the only way to ensure you are getting paid. If you don’t have many employees (or are the only one), it can be an overwhelming task to track and record invoice data, but you must set aside the time to do so, or you can fall behind and lose out on vital income.
Regularly Monitor Your Accounts Receivable
You can’t tackle your accounts payable (AP) if you lose track of your accounts receivable (AR).
Accounts payable refers to the money your business owes lenders and suppliers. It tracks the money you need to pay for the essential services and materials your business needs to operate. If you are a screenprinting business, the money you need to pay your ink supplier would be filed under accounts payable. In order to make these essential payments, you also need to track your accounts receivable.
Business owners should pay extra attention to accounts receivable—or the money you expect to earn from payments for your goods and services. Your business can’t function healthily if the amount you owe is consistently larger than the amount coming in. If you have more than 10% – 15% of your accounts past due, then you need to change your strategies for getting paid.
Keep Track of Deductibles
This needs to be bolded for emphasis. Familiarize yourself with what business expenses you can write off come tax season. Many new business owners aren’t aware of all the expenses they could have deducted from their taxes. This lack of knowledge costs small business owners thousands of dollars annually.
A good bookkeeper will keep every scrap of information pertaining to financial transactions. Start keeping thorough and meticulous financial records to save your business thousands of dollars or more a year.
This helps on the other end, too, if you ever get audited. Poor financial records won’t help your case if you get flagged by the IRS.
Generate P&L Statements Quarterly
Large businesses must generate quarterly P&L statements under the law. Though small businesses aren’t required by law, there are many benefits to tracking your profits and losses regularly.
P&L statements give a perspective on the material strengths and weaknesses of your business over time. Having this larger perspective helps you adjust your business plan accordingly. If you haven’t been tracking P&L, start doing so ASAP.
Draw a Clear Line Between Personal and Private Accounts
A final word of advice—if you haven’t fully separated your personal banking account from your business account, you need to now. When first starting out as a business owner, the line between what money belongs to the business and what money is yours is often relatively thin.
Separate it as soon as possible. This not only helps keep your private finances from being directly tied to your business, but it makes your business more legitimate.
About the Author
Roni Davis is a writer, blogger, and legal assistant operating out of the greater Philadelphia area. She writes for Pittsburgh criminal appeals lawyer Todd Mosser.