Far too many small business owners and entrepreneurs are so busy running their businesses that they often let bookkeeping and accounting practices slide. The common argument is, "I've got it all in my head," or, "I don't have a big budget; there's no need to keep records."
The fact is, accurate record-keeping is a fundamental part of small business operations, and it can be a valuable, as well as practical, practice. Let me give you some examples of why you need to keep detailed financial records.
Operating budget/cash flow projections: Regardless of the size and scope of your operation, you have to know how much money you're working with, where it's coming from, and where you plan to spend it. Developing an operating budget should be established as part of your business plan, which we discussed in last month's column.
Profit-and-loss statement (P&L): Simply put, you need to know when, where and how money is coming in, and when where and how money is going out. A monthly-updated P&L will let you know whether you're on track. If your records are sloppy, there's a tendency to overlook things. Over time, that can throw your operating budget and cash flow projections out of whack.
Tax prep: Whether you do your own taxes, or have an accountant do them for you, the process will be much easier, more accurate, and less likely to trigger an audit when you have records and a paper trail to refer to.
Obtaining financing: If you're planning to apply for any type of loan or to attract investors, you'll need to have your financial picture in order, and this includes a detailed operating budget and profit-and-loss statement.
Now that we're all in agreement that establishing a small business recording keeping and accounting system is a necessary part of your small business operations, let's look at an easy, hassle-free way to go about doing it.
Step 1: Choose a system
You can be as simple or as elaborate as you like in setting up your accounting system. There are plenty of good books and software packages on the market that provide step-by-step instructions on developing a bookkeeping system. Or, if you'd like to save a few bucks, you can accomplish the same goal by starting with something as simple as a stack of manila folders and a Sharpie.
Step 2: Build the basics
If you're going with the low-tech folder-and-Sharpie system, go ahead and label your folders with the following headings, or choose ones appropriate to your business:
* accounts payable
* accounts receivable
* payroll
* assets
* liabilities
* capital expenditures
* bank/financial statements
* sales /marketing reports
* profit-and-loss statements
* tax-related info
* operating expenses (can be all-inclusive or divided into categories such as rent, utilities, etc.)
* sales tax
* receipts
* purchase orders
* insurance
* invoices
Step 3: Organize it
Start categorizing your paperwork into the appropriate folders and enter each addition on a log stapled to the inside of your folder. This will let you know what you have at a glance, so reference and retrieval is fast and easy. Once you have all of your folders completed, make a master list of the files you have created.
Step 4: Use it
A detailed accounting and record keeping system not only keeps your business' financial affairs organized it can also be a good tool for helping you gauge the health of your business on a regular basis. Some folders, such as your bank statements, P&L, marketing reports and cash flow projections, should be reviewed at least once a month. Reviewing your records can help you determine the following:
* Are you staying on budget with regard to expenses?
* Are all accounts current?
* Were there unanticipated expenses during the month, or lower-than-expected sales?
Regularly reviewing your records will help you identify trends, budget over-runs or slow-paying clients in a timely manner so that you can address issues before they get out of control. Having all of your financial information at your finger tips can also make it easier to make quick and well-researched financial decisions during this slow economy. For example, I know one small business owner who, on her operating budget, highlights line items that can be temporarily reduced or eliminated during months when cash flow is slower than anticipated.
Solid bookkeeping is a vital element of your business. Make it a priority to organize your business today!
(My thanks to Marie Gibson for her help and guidance with this month's column.)
Dave Archer is chief executive officer of Nevada's Center for Entrepreneurship and Technology and a founding member of Reno Angels. Contact him through www.NCET.org.
