Bookkeeping can be a complicated process, but it is also an extremely important one. Every business in the world ultimately boils down to financial management, and whether or not you are taking in more money than you are spending. But achieving a profit is about a lot more than just selling good stock at the right margins. Your bottom line is affected by a myriad of factors, such as stock, price, overhead costs, interest on loans, wages, taxes, and much, much more. Bookkeeping is often seen as a relatively straightforward task that is simply time-consuming, but the truth is people are frequently surprised by its complexity, and the curveballs it can throw. Since it is fundamental to the success of your business, here are 5 tips that will help you improve your bookkeeping.
1: Categorise Appropriately
A good bookkeeper should record every single financial transaction within a business, regardless of their size. This means tracking all income, and all expenses, but it does not mean you should just track them together. Ideally, you should be keeping three separate books: one for revenue, one for expenses, and one for both. Recording all transactions in a purely chronological order can be a useful tool if there are any discrepancies in your numbers, but most of the time it just makes it more difficult to calculate your total revenue and expenses, and makes it more likely that you will make a mistake. Having three separate books make it easier to calculate your totals, and gives you a reference to make sure everything has been calculated correctly.
At the same time, you need to ensure that you are using the correct subcategories in your books. Wages and utilities are both forms of expenses, for example. But many businesses will find that their wage bills will fluctuate dramatically depending on the day of the week or time of year. Your utility bills, on the other hand, will remain relatively static by comparison; the lights will still be switched on whether you have one member of staff on shift, or ten. Lumping these expenses together will reduce the statistical significance of these fluctuations, and will make it harder to identify any negative trends, such as being overstaffed.
2: Reconcile Your Records
Keeping three separate books is a great way to double check that your numbers are correct when all the additions and subtractions have been taken into account. But no matter how careful or mathematically minded you may be, it is inevitable that you will make some mistakes. Your books are an extremely important resource in terms of both the law and business planning, but at the end of the day, what matters most is the money sitting in your account. Regularly reconciling your books with your bank statements is crucial to ensuring that the records you are working with reflect the reality of your financial situation. Whether you have mistakenly recorded an invoice as paid, or failed to take into account a recurring direct debit charge, there will be inconsistencies between your books and your statements. The longer you go without reconciling the two, the harder these mistakes will be to identify, so you should be doing this once a month at the very least.
3: Back Up Everything (Including Your Backups!)
As we may have already mentioned, proper bookkeeping is essential to ensuring the success of your business. But even if you have the most beautiful, well-kept records in the world, they don’t mean a thing if you can’t find them. Misplacing a single invoice can be pretty inconvenient, as you may forget to collect money you are owed, or suddenly get hit with a forgotten bill. Losing your general ledger can be absolutely detrimental to your business, and could land you in a lot of legal trouble.
In this day and age, there is absolutely no excuse for not having these records backed up. Services like DropBox or Google Drive will allow you to store files online for free, while apps like Expensify allow you to photograph receipts and invoices so you can create digital copies of physical invoices. These can then be easily accessed in one place, and can also be inserted directly into most forms of bookkeeping software. Getting into the habit of doing this every time you send or receive a new invoice is an easy but extremely effective way to reduce the risk of mistakes.
4: Don’t Confuse Transfers, Payments, and Loans
Despite the fact that transfers, payments, and loans all amount to cash in the bank, these three things will affect your business in very different ways. Payments are the most straightforward, as this is money you are owed, have received, and can spend as you like. All you need to do is remember that it will be taxed.
The main risk with transfers is that they can lead to situations where a payment is added twice, especially if you are using bookkeeping software. If a client pays through an online service such as PayPal, you may record the invoice as paid. But when you transfer it to your account, most software will automatically classify it as income, rather than a transfer, and this needs to be changed manually. Failure to do so can create serious discrepancies in your accounts, especially if you allow the funds to build up before being transferred, or make the transfer in a different month.
The problem with loans is that they can make your financial situation appear healthier than it is at a glance. Although a loan is cash that you are free to spend however you like, it is simultaneously an expense that is growing all the time as a result of the interest attached. Failing to recognise this distinction not only misrepresents the financial health of your business, it leaves you exposed to additional expenses.
5: Seek Professional Advice
Many entrepreneurs who are just starting out in business, or are running a small operation, will choose to do their own bookkeeping in the beginning. This is usually seen as a way to cut costs while the business finds its feet, although it can also be an educational experience. When you have a reasonable grasp of bookkeeping, you can communicate more effectively with financial professionals. But the fact is that the subject matter is extremely complex, which is why people train for years to do these jobs.
Not only should you seek professional advice early on to make sure you are going in the right direction, a bookkeeper should be one of your first investments when you can afford it. Hiring a bookkeeper will save you a lot of time, and probably a good bit of money too. They will help reign in any unnecessary costs, ensure you are paying the correct tax rates on everything, steer clear of any legal issues of which you may be unaware, and reduce your risk of being hit with unexpected costs. While paying them may appear to be an expense on paper, the time, money, and uncertainty saved is well worth the investment.
Bookkeeping is far from the most enthralling aspect of running a business, but it is one of the most important. Improper bookkeeping places the viability of your business at serious risk, you should recognise that hiring a bookkeeper is hopefully inevitable, as the workload becomes too large and complex for you to handle with a reasonable amount of reliability. The fact is that bookkeeping is, and always will be, a complicated process, and if there is one area of business where you definitely want to minimise the risk of mistakes, it’s your finances.
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