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Congratulations! Not everyone has the heart or perseverance to take their big idea to the next level. As a new small business owner, prepare yourself a never-ending list of tasks and problem-solving. When so many obligations start to come at you, it’s tempting to just fly by the seat of your pants. However, seasoned entrepreneurs will tell you to establish practices, policies, and good habits early on in your journey.
One of the foundations of any successful small business is solid bookkeeping and accounting practices. Although talking about accounting isn’t as sexy as hitting big sales goals or business development, good accounting habits will help you feel confident that you have your financial ducks in a row. Putting in some hard and sometimes tedious accounting work up front leads to hitting milestones, making goals, and growing your small business to where you know it can go.
Here are five small business accounting habits that seasoned entrepreneurs practice on the regular.
Keep Personal and Business Expenses Separate
The cardinal rule of small business accounting is to always keep your personal and business expenses separate. Even before your small business starts bringing in its first dollars, it’s important to have a separate system of business accounts in place. Maybe you’ve already legally registered your new business- now open a business checking and savings account in that same legal name. The same goes for credit cards, lines of credit, and loans. If you choose to use credit for your small business, you should use separate business accounts for all these products as well.
Keeping your business finances separate from your personal life isn’t just good practice or a convenient habit for tax time either. If you’ve legally registered as an LLC, partnership, or corporation, you’re legally required to keep your business finances separate from your personal finances. The only free card goes to sole proprietors who don’t legally have to, however, it’s still a smart decision to keep everything separated.
Develop Your Bookkeeping System
In the very beginning, it might be tempting to do your bookkeeping on a spreadsheet and keep your financial records in a shoebox. Long before you actually need a robust bookkeeping system is when you should invest time and possibly money into one.
For new small businesses that are comfortable going the DIY approach, there are dozens of free or low-cost bookkeeping and accounting products available to help manage your small business’ finances. For owners who don’t want a DIY solution, other options include contracting a part-time bookkeeper or a CPA. If your business is growing rapidly and you’re looking for something more sophisticated, outsourcing to an accounting firm that can handle your books, payroll, and invoicing might be just the solution you need.
Keep Impeccable Records
We just learned about how important it is to develop a detailed bookkeeping system, but we also know that garbage in is garbage out. You can have the best bookkeeping system money can buy, but if you’re not keeping good records, it’s all for naught. For many seasoned entrepreneurs, the thought of the IRS knocking at their door is good motivation to maintain impeccable financial records.
However, keeping detailed records isn’t just for tax time and to keep the IRS away. An accurate record-keeping system will keep you up to date on the progress of your business. Your records can show you the current state of your business or even who’s paid you and who hasn’t. Keeping good records can also help you identify the more profitable areas of your business, so you know where to focus your time and talents.
Dedicate Time to Review Your Books
Just like you do with your personal finances (hopefully), it’s critical to set aside time weekly and monthly to review your books. Even if your bookkeeping or accounting is outsourced or on autopilot, it’s still critical to crack the books open each week. Seasoned entrepreneurs know that regularly reviewing your books helps you to really get to know how your business is positioned financially. Even just seeing a basic snapshot of your revenues, expenses, and cash flow will help you to better understand your business and make more informed decisions as an owner.
Whether it’s sales tax or income tax, the federal, state and even city governments are eagerly standing by to collect the taxes owed to them. Depending on how you’ve structured and registered your business will determine your tax obligations. Before you even earn your first buck, investigate whether you think you might pay taxes through a separate return or on your own personal tax return. If you’re self-employed, plan for paying your estimated quarterly taxes too.
Remember when we talked about keeping personal and business finances separate and the importance of impeccable record-keeping? Tax time is where you reap the benefits of all that upfront hard work. If the thought of managing your small business’ taxes sounds, well, taxing to you, think about hiring a tax professional like a CPA, enrolled agent, or attorney to do it for you. A professional can do more than just fill out your tax forms, they can help you perform tax planning to squeeze the most out of your business.
Also by Christine Maxwell: How Do I Find a Good Financial Advisor?
Reevaluate your Systems Periodically
We’ve got high hopes for your new small business and we know you do too! As you’re just starting out, the accounting tools you have in place today might not be sufficient in a year or even six months from now. However, you’ll never outgrow the good accounting habits you’ve been practicing all along.
As you grow, your systems might need to grow with you. That could mean upgrading your accounting software from the free to the professional version or maybe even contracting out some services. Reviewing your systems periodically will help you to identify areas where you might be spending too much time and not reaping enough benefit.
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This communication is provided for informational purposes only. It is not intended to be an advertisement, a solicitation, or constitute professional advice, including legal, financial, or tax advice, nor is StreetShares providing advice on any particular situation.