Whether you’re a seasoned business owner or you’re a complete newbie, bookkeeping is both critical and often confusing.
Keeping your business’s financial records organized and well-documented is necessary. It’s a useful skill because it’ll give you financial clarity, and help you make informed decisions with accurate insights into your business’s finances. You’ll be more productive and efficient once you have the right system in place for your business.
We break it down step by step, give you some actionable advice, and highlight some of the common mistakes people make and how to avoid them.
Step 1: Separate Personal and Business Finances
Begin by setting up a dedicated business bank account to clearly distinguish between your personal and business finances.
This gives you a crystal-clear picture of your financial landscape, minimizing confusion and optimizing bookkeeping efficiency. Establish a routine of reviewing and categorizing transactions to maintain a clear financial boundary. Neglecting this can lead to you inadvertently using business funds for personal expenses and makes it really tough to track business transactions accurately.
A study by JPMorgan Chase reveals that 82% of small businesses that fail experience cash flow problems.
- Separating your finances lets you actively mitigate the risk of cash flow problems that plague many failed businesses. Many successful startups attribute part of their success when they started to maintaining clear financial distinctions. Your success story starts here.
Step 2: Choosing the Right Bookkeeping Software
88% of thriving small businesses actively use accounting software to keep their financial records in order. (source: GetApp)
Using accounting software is not some trend, it’s absolutely necessary in 2024. The right software simplifies complex financial tasks, fostering an environment of efficiency and accuracy. Make sure you choose bookkeeping software that seamlessly aligns with your business needs, and prioritizes user-friendliness to ensure your chosen software becomes an asset and not a hurdle.
- Your choice of bookkeeping software is a strategic decision that’ll start you off on the right path for financial success, so make sure you test the software before committing and choose one that’s easy to use to streamline your bookkeeping.
Step 3: Choose Your Accounting Method: Cash or Accrual?
When you start doing your bookkeeping, the decision to go cash route or accrual route might feel like you’re looking at a paper map not sure which road to take.
- Cash Accounting: transactions are recorded only when the sweet exchange of money takes place. It’s like a direct line from the books to your wallet. If you bill a customer today, you only put them in your books when they hit your account.
It’s a straightforward approach that’s ideal for startups and small businesses.
There’s no need to juggle IOUs or payables, and you instantly know how much money you got. Some make the mistake of seeing the simplicity of it as an excuse to be disorganized. So make sure you don’t forget to track what’s coming or going.
Regularly reconcile your bank statements to ensure your books and your accounts are in sync.
- Accrual Accounting: is where you record the income when you send the bill to your customer, and enter it as accounts receivable. The same goes for your expenses – they only go into your books once the bill arrives, labeled as accounts payable. It gives you an overall view of your business’s finances, and that’s why bigger, established businesses often prefer it.
It captures income and expenses when billed, offering insights beyond the current cash flow.
Some people dive into accrual accounting without recognizing its demand for meticulous record-keeping. You have to stay organized with your accounts receivable and payable.
If you want to keep it simple, choose cash accounting because it provides a real-time view of your finances. But if your business starts to grow, accrual accounting might be waiting for you. It’s about understanding the options and choosing what suits your current business needs.
Step 4: Choose the Right Tools For Your Business
Every transaction you make needs to be accounted for, categorized, and documented.
This isn’t just about recording the numbers; you’re building a solid record for your business. Imagine you’re running a pizza shop, your books need to have categories like “revenue – pizza sales” and “expenses – pizza ingredients.” You want to know which pizza is bringing in the dough and which one’s eating into your profits. (pun intended)
There’s 3 options when it comes to tools:
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- Cloud Accounting Software
These tools can be powerful.
However, if you don’t have a lot of bookkeeping experience (or don’t have time to learn), they might become a double-edged sword. Stressing you out more than helping you, and you could end up with your accountant telling you that you’ve been messing up the books.
2. Spreadsheets
You can do it old school and use spreadsheets if you know what you’re doing.
It’s free, it’s customizable, but it can be meticulous, time-consuming, and you’re completely responsible so make sure you don’t make any mistakes or overlook any transactions.
3. Outsource it (Psst. Choose Gemini):
If your time is more valuable to you then you’ll want to outsource your bookkeeping.
That’s where we come in. We handle your financial statements, help you strategize by giving you real-time actionable financial tips and insights for your business, and even file your taxes.
In 2024, you must have the right tools. Whether you choose to use one of the powerhouse software, go old school and do it manually, or outsource it to a team of professionals. The choice is yours.
Step 5: Categorize Every Transaction
Categorizing transactions properly is crucial to keeping your bookkeeping organized.
Everything is categorized and entered into your books. It’s not just about keeping records straight, this will help you identify and maximize your deduction opportunities and future-proof your records against audit.
An indescript receipt can turn into a costly mistake six months later.
Categorize all your transactions from the start so you’re never caught off guard and avoid any future issues. It’s not just tracking expenses, but knowing if that lunch at the restaurant was a meeting with a client or a celebration with your team after a successful quarter. Many businesses overlook this and invite pointless confusion, and let deductions slip through the cracks.
Why would you want to stress yourself out even more during tax season, when you can have a clear system which can shrink your tax liability.
Businesses that categorize their transactions not only have more organized records but also make better financial decisions based on accurate data insights. So when you’re setting up your system, consult with a professional to ensure your accounts align with the industry standards and meet CPA expectations. It’s an upfront investment that pays you back in more money and less headaches down the line.
Step 6: Protect Your Financial Records and Streamline Document Storage
As tax season approaches, the responsibility to validate every expense rests on your shoulders, that’s why holding onto all of your supporting documents, like receipts and records, is non-negotiable.
Receipt ink can fade or get smudged, that’s why you need to back up all your expenses. A solid document storage plan isn’t just for tax season; it’s also about building trust with the IRS through transparency. Since the IRS accepts digital records, embracing cloud-based systems such as Dropbox, Evernote, or Google Drive is the smart choice.
- Apps Built for Receipt Tracking
Use apps like Shoeboxed that specialize in documenting and tracking your receipts. These types of tools will give you a secure way to keep a complete record of your finances, so you don’t have to go digging through your file cabinet when tax season arrives.
Step 7: Maximizing Your Deductions
Understand the rules for deductions
When it comes to deductions, the IRS is clear: expenses must be ordinary and necessary for your business.
An author splurging on a $900 pen; may be ordinary but not exactly necessary, but a pack of bic pens is fair game. Assuming every ordinary and necessary expense is fully deductible is a mistake which can lead you to spending money on the wrong things, so don’t expect a carte blanche deduction every time. For example, If you work from home, you can forget about trying to deduct your entire rent.
Refer to the IRS’s guide on business deductions to understand the nuances and avoid being disappointed come tax season.
**Check out this article for a deeper dive into tax deductions**
Make informed decisions because each deduction will impact your bottom line. Thinking ahead is key to optimize your deductions and ensures you don’t miss out on any potential savings. And don’t just guess; consult the guide or ask a professional to make sure your deductions align with IRS expectations.
It’s a small investment in time that might save you a ton on your taxes.
Step 8: Make Your Bookkeeping a Habit
As a small business owner you’re constantly juggling a myriad of tasks which can lead to your bookkeeping falling by the wayside.
One surefire way to prevent that from happening is by making this a regular habit. Establish a routine one day each month, dedicated to maintaining your financial clarity. This monthly routine involves handling pending transactions, reconciling bank statements, and reviewing financial statements from the previous month.
Taking this proactive approach will reduce your stress and minimize the risk for errors.
Avoid the mistake of procrastinating with your bookkeeping. Being consistent with this habit will establish a strong financial foundation for your business that enables you to make informed decisions by leveraging accurate insights. This will ensure your records are up to date without overwhelming you with the burden of cramming it all in before tax season
If you find yourself months or even years behind, consider outsourcing for catch-up bookkeeping (We can help with that).
Bookkeeping: DIY or Professional Support?
For small businesses, the decision comes down to either managing your own books internally or outsourcing it to a professional. Here’s how to determine the best method for your business.
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- DIY: When to Go Solo
If your business is a side venture with budget-constraints, then the DIY approach might be more suitable for you.
Consider consulting with a CPA or bookkeeper so that you can start off on the right foot. And many businesses use a straightforward spreadsheet or user-friendly software like QuickBooks when they’re starting off.
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- Outsourcing to Professionals: Accurate and Efficient
As your business expands, managing your bookkeeping internally can be challenging.
If time constraints prevent you from keeping up with your monthly bookkeeping routine, then you should outsource. When you hire a professional to do your bookkeeping, that’ll give you back valuable hours you can use to grow your business and not have to worry about any mistakes in your books or the financial health of your business, and you’ll get real time financial insights you to help you make more informed business decisions
At Gemini, we offer bookkeeping services tailored to your business, from producing financial statements, and tracking your daily expenses, all the way to simplifying complex tax procedures.
We use state-of-the-art software to make your financial management seamless, providing you with valuable insights and a stress-free tax season.