A client arrives with a box bursting with receipts. Call it the little shoebox of horrors. The client requests that the accountant make sense of the expenses and revenues all the while keeping the taxes and the accountant's fee to a minimum.
I’d like to say it doesn’t happen, but it does…and in many different forms from the literal shoebox to berry boxes to grocery store bags. My favorite is the plumbing contractor who used a box from a toilet he installed.
There is no doubt that keeping the books of your business or even your own personal finances can be daunting at times. I will be the first to admit it’s the last thing I want to think about at the end of the day. However, the benefits of having a system easily outweigh the investment of time and/or cost of accounting software or support.
First of all, there are 3 burning questions everyone wants (and needs) to know:
1. How much cash is in the bank?
2. Am I making any money at all?
3. What will I/we owe in taxes?
Now ask yourself, can you really answer any of those questions by using a shoebox? Of course not!
So the goal is to design and implement a system that’s easy to use and gives you the information you (and your advisors) need. Here are some tips to keep in mind:
1. Save Money AND Time
Your system doesn’t have to be sophisticated – what counts is that you have a system that works for YOU. Something computerized (Excel, Quicken, Money, QuickBooks, Peachtree, etc.) will give you the most bang for your buck. Most of these programs not only keep things organized and routine, but can also help you with planning for the future and help you make sound decisions. But a manual system on paper can work just as well. The key is to have an accurate record of what happened. Most transactions are routine and recurring...if you keep the routine, things will go well and without that much effort.
2. Lost Tax Deductions = Lost Money
Track your important categories of income and expenses. Think about the information you need to make informed decisions. Then, add to that, the information that others need from you as well (i.e. tax authorities, your investment or business advisors, loan officers, etc). It’s always easier to track more detail and summarize, than it is to get the details later.
3. Manage Your Cash Flow
Keep a check register and reconcile your bank account every month. Looking online at your bank account each day WILL NOT tell you how much cash you really have available! Reconciling your account will show you what checks and debit card transactions haven’t cleared and also catches any errors the bank makes in processing (and they do happen). Keeping a check register also gives you the ability to track the ebbs and flows of your cash during a particular time frame which can be useful in planning.
4. Preserve Your Business Structure
Treat a business as a separate entity, which it is! Keep your business and personal affairs separate. Set up separate bank accounts and do not intermix business and personal transactions. Don’t pay your personal expenses from the business and vice versa – instead write a check to or from yourself or your business. As much as possible, business owners should pay themselves a regular salary…not what’s needed or what’s available.
5. Review Reports Monthly
Run reports at least monthly with both monthly and year-to-date activity to see where you are. This is the easiest way to see whether you are making money. It will help you identify if your spending or income is off course, see where improvements can be made and make informed decisions for the future. You can also compare against prior years and budgeted amounts. If you don’t know what’s happening and why, how can you change it or improve it?
6. Schedule Time
Block out time once a day or once a week to give attention to your finances. How much time you need depends on whether you are doing all the recording of transactions yourself or have someone assist you. If you stay current on bookkeeping, the time required will drop significantly.
Most important, having your finances in good order reduces stress. Now that’s something no one can complain about!
Stephanie Artino, CPA is a principal and shareholder of Metcalf Hodges, a Certified Public Accounting and Business Consulting Firm in Bellingham. Stephanie is director of the Firm’s business advisory services, designed to help small and medium sized businesses grow and reach their personal and professional goals.