When you decide to start your own small business, accounting feels like a tedious and intimidating process. Business owners are swamped with other aspects of running a business and send accounting to the backburner. But implementing best practices in bookkeeping can help you monitor your business’s financial health and identify potential gaps early in time. Make better financial decisions by following the below best practices.
Separate Business And Personal Accounts
Don't mix business with pleasure adage is more apt for small business finances. When the business is run by a single person who also manages the accounts, combining personal expenses with business transactions can lead to complications. Setting up a separate checking account for business accounts will prevent personal debt from creeping into business expenses. Having clear records separately for business accounts eases the process of tax filing. A bookkeeper can organize the transactions and avoid overlooking deductions.
Choose The Right Business Entity Type
In accounting, the business entity concepts separate businesses from owners and treat them as two different parties. This separation helps in assessing the business performance through profitability and cash flows. The three basic types of business entities are sole proprietorship, partnership, and corporation. Each business entity has unique attributes to determine the way of recording transactions and cash flows, tax filing, and business owner classification. A bookkeeper can help you record the transactions as per the norms for your entity type.
Review Your Books Regularly
Keep track of your receivables and update the status as soon as you receive payment. If you let this reconcile later, there is a chance that you miss this transaction. Make sure you allocate dedicated time every week to tally the receivables. This process will reduce overhead during tax season and eliminates the risk of overpaying. Creating a cash flow statement during your financial review can help you visualize cash movement related to your business. By identifying the places where the money is overspent, you can make better budget planning.
Sort And Track Expense Receipts
Tracking your spending is crucial for effective financial management. Small businesses need to trace expenses of various sorts from rent, infrastructure maintenance, inventory, etc. Additionally, staff expenses also need to be monitored. Travel expenses, home office setup, client meeting expenditure all come under business expenses and should be itemized under the business account. Using a separate credit card for business will make expense tracking easier. Periodically reviewing the statement and updating the expense report will make a huge difference during tax season.
Make A Chart Of Accounts
Categorize your business into separate accounts that represent each channel where the money is spent or earned. Some important accounts every small business needs are accounts receivable, accounts payable, sales, purchases, payroll, investment capital, and profits earned. A chart of accounts will list all these different accounts in one place. Maintaining separate accounts will enable business owners to organize transactions related to that category for easy access later. Though a time-consuming process, the chart of accounts will give you your business’s overall financial health.
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