You know that feeling that knot in your stomach when you think about tax season financial reports and reconciling accounts? It’s enough to make any entrepreneur want to bury their head in the sand.
But trust me it doesn’t have to be this way!
Getting your small business finances organized and squared away right from the start is the key to a stress-free life.
It gives you a clear picture of your business’s health and makes tax season a breeze.
Whether you’re just starting out with financial reporting doing some spring cleaning on your business or preparing to sell your business here are 8 essential tips to get those financial records in tip-top shape:
1. Get Your Financial Statements in Order
It might seem obvious but creating a balance sheet or profit and loss (P&L) statement is crucial for every business.
Many entrepreneurs delay this step but it’s vital to get started right away.
Whether you need a balance sheet or a P&L depends on the size of your business and your assets.
Most online businesses can get away with a P&L which provides a clear picture of monthly revenue business expenses liabilities and loans.
The P&L is a snapshot of your income and expenses for a specific period typically a fiscal quarter or year.
Now don’t let the idea of “fiscal quarter” make you think you have plenty of time to record everything.
The best way to handle your financials is to set aside time each month to fill out your statement.
This will keep you on top of your financial health and you’ll be able to spot any issues right away.
2. Reconcile Your Accounts Regularly
Remember that lesson about balancing your bank account from your first checking account? That same principle applies to your business finances.
Reconciling your accounts regularly is crucial for staying organized.
The great thing is the digital world makes this easier than ever.
Ideally you should be maintaining an updated balance sheet or P&L keeping track of all your transactions.
Compare your balance sheet to your credit card and bank statements to ensure everything is accurate.
Gather all your receipts and cross-check them against your statements to catch any overcharges or refunds.
3. Keep Your Accounts Receivable and Payable in Check
Especially if you’re bootstrapping your business you might not have the resources to invest in fancy accounting software.
That makes it even more important to check your accounts receivable and payable on a monthly basis.
It’s easy to forget about accounts payable when you’re caught up in the whirlwind of running a digital business but overlooking payments can lead to fines and fees.
On the flip side you might be surprised how easy it is to forget about collecting smaller payments when you’re focused on the daily grind.
Whether you’re using cash or accrual accounting neglecting your invoices can have a serious impact on your business.
Make time each month to review your accounts payable and receivable.
This can help you avoid unnecessary expenses boost your cash flow and keep you in good standing with your service providers.
4. Classify Your Workers Properly
You might think that classifying someone as an “employee” or a “contractor” is straightforward but it’s more nuanced than it seems.
Consulting with a Certified Public Accountant (CPA) or another qualified tax professional can help you determine the correct classification.
Even if you don’t owe taxes on your employees or contractors you might have reporting responsibilities based on your location and the location of your business and workers.
For example anyone hiring an independent contractor in the US is required to report all income paid to the contractor to the IRS by the end of January.
You also need to send a 1099 form with the reported amount so the contractor can file their taxes.
It’s easy to forget about payments to contractors especially for one-off projects.
That’s why it’s a good idea to include this review in your monthly overview.
This way you won’t be caught off guard during tax season.
5. Track Your Fixed Assets
Fixed assets like large investments that stay on your balance sheet for an extended period are often overlooked.
These assets can be found in almost any business even online.
For example if you have a successful Amazon FBA or FBM business you might have your own warehouse to manage overflow inventory or fulfill orders.
Here’s where it gets tricky: what happens when these assets go missing? This could be due to loss theft damage or other unforeseen circumstances.
When these situations occur you have a “ghost asset” on your hands.
In the chaos of dealing with a catastrophe it’s easy to forget to remove the asset from your balance sheet.
Keeping it listed as an expense can easily trigger an audit from the IRS.
While you’re balancing your books take a close look at your assets and expenses.
Make sure they are still functional and part of your business.
6. Separate Your Business and Personal Finances
When you’re starting out in the world of digital entrepreneurship it’s tempting to use your personal accounts for business transactions.
After all starting a business is a risk and you might not want to set up separate accounts until you’re sure it’s going to succeed.
While this might seem logical in the beginning it’s much better to keep your business and personal finances completely separate from the start.
One of the biggest reasons is that mixing the two can turn your business liabilities into personal liabilities potentially affecting your personal life.
Beyond that keeping your finances separated simplifies your accounting records.
You’ll have a clearer picture of your business’s financial health making it easier if you’re ever audited.
You don’t want to be digging through mountains of personal and business transactions when you need quick and accurate accounting information.
7. Invest in Accounting Software
Paying for accounting services can make your life much easier.
You simply hand over your invoices and statements and a qualified professional takes care of the rest.
But what if you don’t have the budget for a professional?
The best option is to invest in bookkeeping software.
QuickBooks is a well-known name but there are many other options available.
Dedicated software can integrate with your payment methods and bank accounts so you only need to verify the numbers quickly at the end of the month to confirm everything is accurate.
With basic plans starting for under $20 per month it’s a good idea to remember that “time is money.” You can spend hours recording and reconciling everything yourself or you can pay a small amount each month for freedom and peace of mind.
8. Embrace Monthly Accounting
You’ve heard this theme throughout this post: check your accounts transactions and statements every month.
It’s common for small business owners to leave everything until the end of the year and cram all their financial reporting into the short period before filing their taxes.
If you’ve been doing this try switching to monthly accounting.
Many business owners put off reconciling their accounts because they think it will be a long tedious and boring process.
However regular reconciliation means better organized accounts with fewer errors and discrepancies.
By breaking down what can be an overwhelming task into 12 smaller chunks you might find that you actually enjoy managing your accounting records and feel more confident about your business finances.
Beyond Your Finances
Keeping your business finances organized is just one step towards building a healthy asset you can sell later.
You need to create an accurate P&L to attract quality buyers.
But there are other areas you need to improve to get the highest possible valuation for your business.
If you’re curious about the potential value of your business check out our free valuation tool.
You can also schedule a call with one of our advisors to get actionable insights into how you can prepare your business for sale.