Bookkeeping Basics For New Business Owners
Most people tend to be masters in one or two fields rather than everything they put their hand to. You may be an expert when it comes to thinking up creative ideas or an artist when it comes to making those ideas a reality. You might have great people skills or be a genius with all things technical. So if you’re a natural entrepreneur and yet can’t name three important financial documents, you’re not alone. According to SCORE, counselors to America’s small businesses, many small business owners would flunk basic bookkeeping.
As a new business owner, you’re not expected to be a bookkeeping wizard—you hire professionals to do that for you so that you can concentrate on running and growing your business. But keep in mind two reasons you should have a basic understanding of bookkeeping: to keep the IRS happy, and to help you manage your business. So here’s what you need to know:
Certain words and terms will become familiar to you in time, but the following is the most common terminology you will need to understand:
- Balance sheet is a financial statement that shows an overview of the company’s finances. In order to balance your books, follow this formula:
Assets = Liabilities + Equity
- Assets are resources, or what the company owns, like cash, inventory, equipment, and vehicles.
- Liabilities are what the company owes others, including bills to vendors, credit card balances, and any loans you have taken out.
- Equity is all the money invested in the company by its owners.
- Accounting method:
- Cash-basis accounting is when you record transactions only upon payment.
- Accrual accounting is when you record transactions when they happen, regardless of whether you’ve been paid yet.
- Income statement is a financial statement that shows an overview of the company’s financial activity over a specific period of time. In order to assess where you’re at, follow this formula:
Net Profit or Loss = Revenue – Cost of Goods Sold – Expenses
- Net Profit or Loss – A positive number means your business made money, and a negative number means you’ve lost money.
- Revenue – The money earned from selling goods and services.
- Cost of Goods Sold – The money spent on producing goods and services.
- Expenses – The money spent to operate the business, not including the cost of goods sold.
- Accounts payable is the account from which you pay your bills.
- Accounts receivable is the account in which you deposit money from sales or other invoices.
Basic Skill – Keep it Professional
The Small Business Association (SBA) says that small businesses should make it a practice to send out clean, professional invoices.
How to Do It:
Make sure your company invoice includes your logo and other pertinent business information such as address, telephone number, fax number and, if you have one, a license number. Also make sure to include an invoice number so that both you and your customer can better track the bill. The idea is to make it as easy as possible for your customer to pay you. Make it your payment terms crystal clear with statements like “Payment due in 30 days.”
Basic Skill – Track Your Invoices
There is no way to get around the fact that too many late and unpaid bills can crush your business. Once an invoice has been sent, make sure you know when it is due to be paid. If it is past due, you are responsible for making sure that the customer is reminded of his obligation to pay.
How to Do It:
If you don’t have the time, designate an in-house employee to issue and collect on your invoices. Each invoice should state when the invoice becomes overdue and what the penalties are. Don’t rely on the customer to automatically pay each invoice on time; it is your responsibility to follow up and get the money that you’re due.
If you don’t have a designated accountant, consider using an online billing and invoicing service like Hiveage. We will play “bad cop” to your “good cop” and send out invoices, reminders, thank yous, and any other invoice-related correspondence so that you can keep doing what you do best: run and grow your business.
Basic Skill – Carefully Protect Deposits
As a business owner you have about 1,000 things that need to be done at any given time. There is no denying that you are busy. Still, this should not prevent you from making sure that deposits are properly accounted for.
How to Do It:
Create a system for keeping everything straight. You can use a simple notebook, Excel spreadsheet or online software. Whichever system you choose, be consistent. Do not wait to make deposits. No matter where the money comes from—be it revenue from sales, cash from a relative, rent on properties, or a bank loan—it must be deposited and recorded right away.
The trouble with not doing so is twofold. First, you are playing a dangerous game with the health of your business if you do not know where the money is or its original source. Second, unless you properly record where each amount of money came from you could end up paying more taxes than you have to. For example, say you transferred $5,000 from your personal savings to your business account. If your records do not clearly state the fact, you or your accountant could end up tallying it as income, causing you to pay taxes on money you have already been taxed on.
Basic Skill – Set Money Aside For Taxes One of the most difficult aspects of trying to build a business with traction is the fact that money can be tight. As tempting as it is, avoid the pitfall of spending every penny you make. Uncle Sam wants some of that money, too.
How to Do It:
Make it habit, like brushing your teeth. Systematically put money away throughout the year for the taxes that will be due on your income. If you are making quarterly payments to the Internal Revenue Service, mark them on your calendar and build in time to prepare those tax forms.
No matter what you do, do not dip into employee withholdings to get through a down time. Not only does the IRS look down on it, but you will find yourself with one more financial hole to dig yourself out of. You know at the beginning of the year that there will be taxes due, so make sure the funds are there, even if it means cutting back in another area.
Basic Skill – Plan for Major Expenses
This is important because by planning you are less likely to make a mad scramble for a loan when unexpected expenses hit. In addition, if you have the cash in place you can easily take advantage of business opportunities as they occur.
How to Do It:
Look down the road to expenses you are sure to incur, like upgrading a computer system, replacing an old roof on your office building (if you own it), buying new company vehicles or making repairs, and paying taxes. You don’t have a crystal ball and cannot predict the future, but you can make fair guesses.
Even if you just learn the basics, that will be enough to provide you with a gauge of your business’ financial situation. So take a little time to set up a simple bookkeeping system or hire a professional accountant so that you can keep growing your business with confidence and clarity.
Do you have more suggestions for new business owners on how to manage their finances? Please share them in the comments!