Adopting some good habits can help stave off costly errors when it comes to record-keeping.
Entrepreneurs keep a lot of the financial details of their business
in their heads. Doing so has its advantages: No new software to learn,
no danger of a system crash that loses all your data, and you can tweak
your budget as often as you need without sitting down at a desk.
But when you don't have a system and some processes in place,
unpleasant surprises can pop up, goals can be easily missed and
important paperwork forgotten. Getting a better handle on your money can
help you to make and keep long-term goals, smooth out the seasonal ups
and downs of your cash flow and maybe improve your profits. It can also
help you to stay out of trouble with the Internal Revenue Service.Here are five bookkeeping tips for entrepreneurs.
1. Plan for major expenses.
Why it's helpful: You're less likely to miss business opportunities or have to scramble for a loan when the expenses become unavoidable.
What to do: Put events like a major computer upgrade
on the calendar a year in advance or, ideally, three to five years
ahead. Acknowledge the seasonal ups and downs, something many
entrepreneurs are reluctant to do.
"This helps you to be honest about the fact that it's coming and plan
for it," says James LeMay, a director with the accounting firm Daigle
& Associates in Boston.
You'll avoid taking money out of the company during the flush periods
only to find yourself short in the slower months, when costly projects
like upgrading computers or replacing factory components usually happen.
2. Track expenses.
Most card statements categorize expenses, so you can see which outlays relate to which business activities.
Why it's helpful: You otherwise might some miss tax write-offs and may lose out on others.
What to do: A credit card that you use solely for
business can be a basic accounting system, says Raffaele Mari, an
accountant in Newport Beach, Calif., who teaches a financial course for
entrepreneurs at Pepperdine University.
If you always use your business credit card for business expenses,
you're less likely to pay cash at, say, Staples and lose the receipts,
forfeiting tax-time write-offs. Pens and printer paper can add up.
Additionally, Mari says, routinely jot down business trips, lunches,
coffee dates and other events with cash outlays in your electronic or
paper day planner. This habit can go a long way toward substantiating
those items for your tax records in the event of an audit.(Related: How a Banker Sees Your Financial Records)
"Often on tax returns, those numbers are too round. No one drives
exactly 5,000 miles for business in a year, so the IRS knows this is an
estimate," Mari says. "In an audit, if you can't substantiate those
numbers, the whole category [of write-offs] can get thrown out."
One of his clients provides a link to a Google map for each trip
instead of trying to remember to note the mileage for every trip he
takes on his odometer. That data, along with a day planner recording the
trip, are usually enough record keeping to satisfy the IRS, Mari says.
3. Record deposits correctly.
Why it's helpful: You may be less likely to pay taxes on money that isn't income.
What to do: Adopt a system for keeping your
financial activities straight, whether it's a notebook you use
consistently, an Excel spreadsheet or software such as Quickbooks.
Business owners typically make a variety of deposits into their bank
account through the year, including loans, revenue from sales and cash
infusions from their personal savings. The trouble, Mari says, is that
at the end of the year, you or your bookkeeper might erroneously record
some deposits as income, and consequently pay taxes on more money than
you've actually made.
4. Set aside money for paying taxes.
Why it’s helpful: The IRS can levy penalties and interest for not filing quarterly tax returns on time.
What to do: Systematically put a portion of money
aside throughout the year for taxes. Then note tax deadlines on your
calendar, along with prep time if you need it, to make sure you actually
make payments when they're due.
Payroll taxes that go unpaid can be especially problematic, Mari says. He often
sees cash-crunched entrepreneurs get through a down cycle by dipping
into employee withholdings that they should have sent to the IRS.(Related: Midyear Tax Check: Organize Now, Save Later)
"If you mess with [payroll taxes], you have a two-fold problem," Mari
says. "You haven't paid taxes due and you've taken money that the IRS
sees as belonging to your employees. They can be very unforgiving about
that."5. Keep a close eye on your invoices.Why it's helpful: Late and unpaid bills hurt your cash flow.
What to do: Assign someone in your organizations to
track your billing. Then put a process in place for issuing a second
invoice, making a phone call and perhaps levying penalties such as extra
fees at certain deadlines.
"You want to have a plan for what happens if they're 30, 60 or 90 days late," Mari says.
Some entrepreneurs believe that once they've sent out an invoice,
they've taken care of billing. Not so, Mari says. "Every late payment is
an interest-free loan hurts your cash flow."
(Related: Cash-Flow Calculator Tool)