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WHY GOOD BOOKKEEPING WILL SAVE YOUR BUSINESS

3/15/2017

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Keeping good books is essential in running a successful business.  Small business owners are notorious for keeping bad books.  The “shoebox method” is not a method.  The truth is that some people are good about the numbers and some are not.  You should be concerned enough about the numbers to spend some time dealing with what you have.  Sitting down and going through the numbers can make a significant difference.

If you do not know what is going on with your business, you are not in control.  You cannot keep the numbers in your head or allow others to be in control of your accounts and run a successful business.  Believing that the person who files the business tax returns should also keep watch of the business finances is a common and disastrous mistake made by many small business owners.  

HAVE SEPARATE ACCOUNTS

It is common knowledge that your business should have a separate checking and savings account from its owners.  While most small businesses do that, what almost all of them still do is use the business bank account to pay personal expenses.  I am going to go on the record and say DO NOT USE THE BUSINESS TO PAY FOR YOUR PERSONAL EXPENSES.  Now that, I have stated the official policy, anyone who has worked with or for a small business knows that this happens.  All of the time.  Even IRS knows.  That is why small business owners are like sand at the beach for IRS auditors.  

Since we all know what is happening here are a few tips: (1) keep track of the personal expenses paid and show them as “draws” or “income” to the person who the expense was paid; (2) in your banking software (or manual ledger) keep a separate line item for those expenses so that you know how much is being paid to the owner through this method; (3) if you “reimburse” the company, show this in the books, do not just treat it as a wash and; (4) figure out why you need to use the company bank account for expenses.  The most obvious reason is there is a cash flow problem but there may be something else going on.    

USE ACCOUNTING SOFTWARE  

It is importing to have some method of tracking the numbers.  There are a variety of accounting software out there.  Whichever you choose, make sure it is user friendly and it can handle the overall needs of your business.  It is important to properly research the various options and talk to people who utilize the software.  It can be a significant investment so you want to choose wisely.  

Having some type of filing system to organize receipts, statements, bills and banking statements, will help to manage everything.  You should track as many things as possible.  The reality is that as a small business owner and the manager of all things in your business, it is impossible to track money the same way a major corporation does.  As with anything in life, pick your battles.  Keep track of your receivables.  

If the businesses finances customers, know who owes the money and when it is due. Keep track of petty cash.  Instead of having a cash box, consider having a pre-paid credit card that allow you to review statements.  This helps keep better track of the cash which can easily become unaccounted for.  Now that there are apps for everything in your life, if you are on the go all of the time you can use your phone or tablet to keep track of certain expenses the accrue while you are out of the office.

USE A SAVINGS ACCOUNT TO HOLD TAX FUNDS

Another problem that small business have is paying taxes.  They typically forget to save the money to pay taxes and end up spending it on other matters thinking that they will be able to pay it later.  However, it is best to set up a several savings account and transferring the sales tax payments to the savings account every week so that you have the funds available to make quarterly payments.  The same can be said for the quarterly or yearly Federal Taxes that are owed.  Tax payments for employees, social security and income taxes should be calculated and put aside.

RECONCILE YOUR BOOKS
Of course it is pointless if you never take the time to look at any of it. Reconcile your books once a month (it does not have to be at the beginning or end of each month).  If it works best for you to reconcile the June books on July 20th, then do so.  Just make sure you do it every month.  Each quarter you should evaluate your profit and losses (P&L) and determine if the business is meeting its financial goals.  

The analysis should not end with just seeing a positive or negative bank account.  Money in the bank does not mean there is a profit and having a low bank account (or a negative one) does not mean that there is a loss.  The P&L will summarize the income and expenses over a period of time.  The basic use of the P&L is to examine the company’s profit and losses.  
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    Author

    Shahara Wright is an experienced and highly sought after business law attorney and business strategist.  She is the author of From Entrepreneur to CEO and host of the CEO Collaboration Circle.  Shahara founded The CEO Effect, LLC to work with small business owners who want to implement strategy to build capacity.  

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