Keeping your financial records well-organized is important for more than fulfilling regulations or legal requirements. It also helps you better understand your business, now and in the future. Without a proper record-keeping system, it can be easy to lose track of important business details. Give your small business a better chance to survive in the short and long term with these tips to keep your financial records in order:
Separate business and personal finances
When you start a small business and finances are still manageable, it can be tempting to keep your business and personal expenses in the same account. However, this will only make it increasingly difficult to track your expenses over time, and can impair your ability to claim business expenses on your taxes. “Make sure to have a clear way to keep track of your business expenditures, like using only a debit card tied to your business account,” says Seattle Business Magazine’s Melissa Kincaid. The same goes for credit cards. Generally, it’s a good idea to separate financial accounts for your company the moment you start the business.
Use different storage methods for different records
According to Lita Epstein, author of more than 40 business books, bookkeepers use four different methods to store accounting information: file folders, three-ring binders, expandable files and backup computer data. File folders are used to file invoice, payment and contract information about vendors as well as information about employees and individual customer accounts. Binders typically contain your chart of accounts, general ledger and journals. “Even if you do use a computerized accounting system, it’s a good idea to keep a copy of records for the month most recently closed and the current month in hard copy in case your computer system goes down and you need to quickly check information,” Epstein says. Expandable files are good for managing vendor activity and outstanding bills, though Epstein says you may be able to get away with not using these if you prefer using a digital bookkeeping method. Finally, if you are keeping your books on a computer, you should always keep a backup copy in a safe place. Physical documents should also be scanned and stored digitally.
Consider utilizing software
As a small business, you may have no trouble organizing your financial records without resorting to software, but that can change as your business grows. The more financial documents you have, the more you can benefit from a bookkeeping system’s indexing and sorting features. Going paperless can also save you money on office supplies. Managing your finances via a computerized system can do more than just help you save time and money: because the computer does the math for you, the risk for human error is reduced as well.
Stick to a schedule
You should set aside some time every week to record all of your financial transactions. Doing so will help you maintain a clear view of the state of your business, making it easier for you to decide what steps to take in the future. Additionally, organizing your business finances regularly keeps the work more manageable. Leslie Truex, writing for The Houston Chronicle, also recommends reviewing your financials on a monthly basis. “Print a transaction report to compare to your bank statement to make sure you've accounted for all transactions,” she says. “Print an accounts receivable report so you can send an invoice to clients who owe you money. Run an income and expense report to make sure you're operating in the black. Evaluate expenses to determine if they were necessary and provided a financial return.”
Keeping your small business’s financial records organized is hard work, even if you are disciplined about tackling the job on a regular basis. “Unless you’re specially trained in accounting principles, bookkeeping can be a challenging task,” says small business writer Joshua Adamson-Pickett. “So consider getting help — whether by hiring a bookkeeper, outsourcing to an accounting service, or using accounting software.” However, software is no one-stop solution. As the most capable software tools tend to also have the steepest learning curves, you may find yourself spending valuable time learning how to use the tool rather than getting back to business or even managing finances.
Ultimately, spending hours each week to manage your business’s finances may not be what motivates you to be an entrepreneur. By hiring a bookkeeper or outsourcing the work, you can free up valuable time to focus on what matters to you most.