Bookkeeping is essential to running a small business. That is even truer during the early days of your operation. Follow these four tips to ensure your small business bookkeeping will always be on point.
Segregating accounts refers to the idea of separating any accounts that might have conflicting interests from a business perspective. The most obvious segregation is between personal and business accounts. Keeping these separate will ensure that your personal spending doesn't draw from the business and push it closer to the financial brink.
You should also segregate accounts to prevent any one party within the business from producing too much risk. If one person has control of several accounts, there is a risk that they might repeat mistakes across all of them. In an extreme scenario, this could bankrupt the business. Dividing the accounts across multiple decision-makers will reduce bookkeeping risk.
There are two kinds of accounting methods: cash and accrual. Professionals in the small business bookkeeping world rarely recommend using cash accounting methods. The cash method means every expense or profit goes on the books immediately when the money goes out or comes in. If you have a large expenditure one year but the profit doesn't book until the next year, you could end up with a huge tax obligation.
Using accrual, expenses and profits are linked. If you're running a widget factory, the expenses for making the widget book are at the same time as the profit. This reduces the risk of triggering a large tax event. It also makes booking unit costs and profits much simpler.
Chart of Accounts
A chart of accounts is just a chart that explicitly categorizes what every account is and does. Company assets go into a single category. The same applies to liabilities and expenses. You can then use subcategories to further distinguish something like payroll within the overall expenses category. A chart of accounts makes financial reporting simpler because you can just tabulate the bookkeeping for each section.
Cash Flow Monitoring
Most financial institutions and bookkeeping software packages now offer tools to monitor your company's cash flow. You want to always see funds coming in or going out to be sure that your company has enough cash on hand. If things get tight, cash flow monitoring will be the check engine light.
Cash flow sometimes briefly gets tight. For example, a big customer might be slow to pay. Based on the monitoring, you can then tighten expenditures, sell assets, seek additional capital, or request a short-term loan while you wait for things to balance. For more information, contact a company like Peggy's Tax & Accounting, LLC.