Module 1: Financial Management
Bookkeeping is the organized process of tracking all income and expense transactions. Your budget works in concert with the bookkeeping function so you can make informed decisions based on actual numbers and projections. It will also help you set aside the necessary dollars to pay state and federal taxes, pay yourself, and sock away some money for retirement.
Here are the 11 basic bookkeeping steps:
- Invest in a bookkeeping/accounting tool. There are many solutions out there, including QuickBooks and Freshbooks. These services will not only track your income and expenses, but they also connect to your business bank accounts, credit cards and payment gateways such as PayPal and inventory. If you run a service business, these bookkeeping services can also generate invoices for you.
- Open a business checking account. You should never mix your personal and business accounts. Open a separate business account that can be linked to your bookkeeping platform.
- Reconcile your accounts monthly. Login and review your accounts, including reconciling any missing payments that customers should have made.
- Track sales. Create a system for tracking your sales, including cash, checks and credit card payments. Whatever method you use, be sure that you stick with it. If you are receiving cash payments, create a process for tracking the cash, including depositing it into your bank account daily or at least once a week.
Note: Total sales (cash, checks, credit cards, online payments) should equal your bank deposits. Resist the temptation to take money out of the till. It is nearly impossible to track.
- Pay your business expenses out of your business account. Use a debit card or checks to pay your expenses. Do not use petty cash. If possible, get a credit card in your business name. This will help you track your costs and build business credit.
- Pay your expenses first. As the business owner, you typically get paid last through what is known as an owner’s draw. This isn’t a salary, but rather, a draw against the business’ profits. Always pay your expenses before you pay yourself. This can be a difficult discipline to master, but it will keep you from going into debt, even if you’re tired of eating Top Ramen because every dime is being plowed into the business – at least at the start.
- Remember to set aside taxes. Nothing is worse than thinking you have a nice profit going, only to find that you didn’t set aside the necessary taxes. This can include state taxes, such as sales tax on items sold or business, occupation taxes, and federal taxes.
- Run a profit and loss (P&L) statement. The balance in your checking account isn’t an accurate way to gauge how much money you actually have. You will want to run a profit and loss statement to determine how much money you actually have. Your bookkeeping software or online platform can do this automatically.
- Pay yourself last. Once you have a solid understanding of your cash flow, it’s time to pay yourself. You can do this by writing yourself a check or making an electronic transfer between your bank account to your personal one. Be sure that you assign these draws to an “equity” account called “draws” so you can see how much you are paying yourself.
- Hire an accountant. At the end of the year, you’ll need to file taxes and close out your finances so you can start a new fiscal year, usually on the 1st of January. An accountant can be a lot of help at this stage, especially when it comes time to file your federal taxes. You don’t need to hire a full-time accountant or bookkeeper. Sites like upwork.com allow you to engage the services of an accountant or bookkeeper on a per-project basis.
- Keep good records. Whether physical or digital, keep records of all your financial paperwork. These need to be retained for specific periods of time. A complete list of records and how long you need to retain them can be found here.