Unless you have a background in accounting or business finance, chances are you’re a little sketchy on the finer points of financial management for your enterprise. And yet, when you’re just starting out you might not have any choice but to be your own bookkeeper and accountant. As the owner of a small business enterprise you should expect to wear many hats, at least at the outset, and hiring a staff accountant or even a part-time bookkeeper may fall beyond the scope of your budget. Unfortunately, failing to manage your finances appropriately can get you into some very serious financial difficulties in both the short- and long-term. For one thing, you might miss out on payments that could help to bolster your bottom line. Or you may forget to pay vendors in your supply chain, resulting in a stoppage of goods and a lawsuit. Even worse, you could miss out on deduction come tax time, increasing the amount you owe the IRS. And let’s not even get started on what could occur if the IRS audits you. The point is that it’s extremely important to start off on the right foot when it comes to your business accounting practices. Here are just a few tips to help you on that score.
- Hope for the best, plan for the worst. When you run all the numbers, create your business plan, and secure funding, you probably have projections in place for anticipated earnings over the course of the first few months and perhaps even the first few years. And when you balance these numbers against probable expenses you have your basic budget in place. However, you don’t know what your income is going to look like and you probably won’t know what to expect for at least a year. So it is crucial that you have a plan in place should the worst happen and you not only fail to make money, but you lose it as you learn your way around running your startup. In short, you need to plan for both operating costs for the first several months, as well as major unexpected expenses like a power outage that fries all your computers or a client that goes belly up without paying your invoices, just for example.
- Cash versus accrual method. When it comes to business accounting there are two main methods you might follow. The cash method means that you track tangible income and expenses. If you get money for a sale, it falls under income. If you pay a vendor for materials, it gets listed under expenses. It’s pretty straightforward and it can serve you well at tax time since you’re only claiming the cash you’ve actually got in hand. The accrual method is a little different because it also accounts for income and expenses that are pending, as in invoices are out and you’re waiting for payment. This can get confusing for some business owners, especially if they’re doing their own books. But there are advantages to each system, which you should probably discuss with a financial advisor before you decide.
- Track like your life depends on it. Businesses may get away with fudging their numbers for a while, but eventually you should expect an audit, and when this happens your company could be in serious trouble if you haven’t been tracking your finances accordingly. Not only could you end up owing the IRS a ton of money in fines and back taxes, but the worst-case scenario is that you’ve broken financial rules and regulations, subjecting you to criminal charges. And if you are the accountant for your business, the buck stops with you.
- Use tools. There’s no reason to reinvent the wheel or go old-school with a paper ledger when it comes to your business accounting. With programs like QuickBooks, mobile apps like Expensify, and online banking, everything can be done quickly, easily, and most importantly, digitally. Not only is it extremely easy to copy data between programs, but there are so many features for common accounting practices, not to mention reports, that you hardly even need to compile taxes anymore – the programs give you exactly what you need so you can fill in the blanks on TurboTax or hand everything off to your CPA.
- Hire professional help. When it comes right down to it, you can’t hold a candle to a professional bookkeeper, accountant, or tax prep specialist. These people have the knowledge and experience to manage your business finances in a manner that is efficient, legal, and the most beneficial to you. So using a service like Ecount Inc. or hiring a specialist, even if only on a temporary or intermittent basis, could be worth the expense for what you stand to gain in the process.