Regardless of how big your office may be, or whether you employ anyone, for tax purposes, you’re still considered a business owner. As such, you’ll need to keep careful records of both your income and your expenses.
In addition to saving money when tax season rolls around, keeping clear and concise records of all your business transactions will give you a clear overview of which business activities are paying off and where you might be able to cut costs in order to improve your earnings.
Of course, you could hire an accountant to manage this for you, but even so, it’s important to have at least a basic understanding of accounting and bookkeeping best practices. So if you’re a brand new small business owner, here are a few quick tips for getting off to a strong start.
1. Keep your personal finances separate
If you run a relatively small operation and aren’t turning a huge profit or even paying yourself a salary yet, it can be tempting to merge your business and personal finances. In fact, research shows that one in five business owners make the mistake of using the same bank account for both their personal and business transactions.
However, a separate business account will make it a lot easier to keep accurate records, take advantage of tax reductions, and apply for credit cards or secure a loan using your business name. Keeping things separate can also help you protect your personal credit score and assets should your business face any difficulties down the line.
2. Plan for all major and recurring expenses
Although it’s likely that you’ll run into some unforeseen expenses from time to time, you should have a clear idea of what your major and recurring business expenses are. This allows you to create an annual budget and also set aside enough money to cover your recurring business expenses at least a month or two in advance.
Major expenses to plan for when you’re first starting out include one-off business purchases such as a new computer or essential office furniture. Recurring expenses are the ones that will keep coming back such as utilities, rent, insurance, travel expenses, and marketing costs.
3. Schedule time for bookkeeping on a monthly basis
Another common mistake new business owners make is not organizing their bookkeeping on a weekly or monthly basis. They then face the mammoth task of making sense of all the receipts and business transactions that built up over six months or more.
So rather than letting it all pile up and promising yourself that you’ll get around to it eventually, make your bookkeeping a priority by setting aside at least one day each month that is fully dedicated to getting your accounts in order.
4. Develop a reliable bookkeeping system
Even if you hire an accountant to manage the bulk of your accounting; the task of bookkeeping, which involves recording your day-to-day business transactions and reconciling bank statements, will most likely still fall to you. So you’ll need to develop a reliable bookkeeping system and stick with it.
To make things a bit easier on yourself, you may want to invest in accounting software that will help you with things like invoicing, time tracking, and expense management. Examples of programs that you might consider include QuickBooks, Xero, and FreshBooks.
5. Understand your tax obligations
Since you’ll have to set aside enough money for your taxes each month, it’s important to understand your tax obligations and what deductions you might be able to claim. As a small business owner, you’re also legally required to keep business records for five years or more, so it’s important to find a reliable system for maintaining and backing up your records.
Government websites are a good source for guidance and information on what records you’ll need to keep. But, if in doubt, it’s still a good idea to hire a knowledgeable accountant who will be able to advise you of your rights and obligations as well as the tax requirements and deductions that apply to your specific situation.
(Featured image by Zadorozhnyi Viktor via Shutterstock)
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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