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Basic Bookkeeping Tips

For many small businesses, the most common bookkeeping errors are also the easiest to fix. Use these six tips to help keep your business on sound financial footing.

1. Use the right accounting system. Most businesses use either cash-based or accrual-based accounting. If you use the cash method, you count income when you receive it and expenses when you pay them. Under the accrual method, you count income and expenses when they happen, not when you actually receive or pay them.

In practical terms, this difference in timing is relevant if your company keeps inventory on hand or handles transactions on credit. In these cases, the accrual method might be a better choice for your business. And in fact, if your firm has more than $5 million in sales or keeps an inventory, the IRS might require that you use the accrual system. In other cases, however, the simpler cash system could be all you need.

2. Maintain daily records. This is one of the most basic rules: If you don’t keep accurate daily records, you don’t have an accurate way to track the financial condition of your business. Different people use different record-keeping systems; what matters is that you have one and use it every day. Once you have a good system set up, accurate record keeping will take just a few minutes a day.

3. Handle and review checks carefully. It’s easy to be on autopilot when you’re writing checks and tossing canceled ones into a filing cabinet without reviewing them. Remember: Those checks are as good as cash. And if something goes wrong, you — not the bank — will be on the hook.

Take the same care with checks as you would with cash. Sign checks using a clear, distinctive signature that won’t invite forgery. Review canceled checks before anyone else, including your bookkeeper or employees, sees them; that way you can catch unauthorized checks. And if your business is a partnership, it’s a good idea to have at least one of the partners co-sign the checks.

4. Get a bank statement with a month-end cutoff. This is another basic tip that can reap big rewards. Synchronizing your bank statement with other monthly records will make it much easier to reconcile your statement and track expenses.

5. Leave an audit trail. Your record keeping will be much more effective if you have a system that allows you to quickly and easily retrace your company’s financial activities. This means keeping your invoices and checks in numeric order, not skipping check or invoice numbers, and keeping separate bank accounts for your business and personal funds. If you can’t go back a year and reconstruct your company’s finances, you probably aren’t leaving an effective audit trail.

6. Use a computer. Computer bookkeeping software is absolutely essential for all but the smallest businesses. These applications make it easy to track income and expenses, prepare tax documents, summarize your company’s financial activities and back up records for safekeeping. If you’re working with an outside bookkeeper, make sure they know how to use a computer.

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Top 10 Bookkeeping Mistakes Made by Small Businesses

Statistics from the U.S. Small Business Administration reveal that about half of all new small businesses launched in the U.S. will fail within the first five years. What is the chief cause of small business failure? Poor financial management.

Sound financial management starts with an understanding of some basic rules of business bookkeeping, so here are 10 of the most common accounting and bookkeeping errors made by small businesses — and how you can avoid making them.

1. Using the Wrong Accounting Method
There are two main business accounting methods: cash and accrual. Cash accounting is the simpler method because it’s based on the actual flow of cash in and out of a business. The cash method is used primarily by sole proprietors and businesses with no inventory. On the flip side, accrual accounting records income and expenses as they occur, whether cash has actually changed hands or not. As they grow and become more complex, most small businesses should switch to accrual accounting, because this makes it easier to accurately match revenue to expenses.

2. Combining Personal and Business Finances
It’s critical that personal and business finances be kept separate at all times, regardless of a company’s size. That’s why one of the first things new business owners should do is open a business checking account and deposit all business income into this account. The next step is to work with an accountant to devise an earnings management strategy dictating how cash is removed from the business to meet personal expenses and savings goals.

3. Misclassifying Workers
In the eyes of the IRS, there are several different categories of workers: full-time, part-time, and temporary employees, as well as independent contractors, such as freelancers and consultants. Classifying your workers in the wrong categories can be extremely costly. The employee categories are often used to determine who is eligible for employee benefits. Full-time employees are generally eligible for all benefits offered by an employer, while part-time employees may be eligible for a pro rata share of benefits. Temps and independent contractors generally receive no benefits, and independent contractors are not covered by minimum wage, overtime, payroll tax, workers’ compensation, or unemployment compensation laws.

4. Not Performing Basic Account Reconciliation
Reconciling your business’s books with your business bank statement every month is one of your most fundamental accounting duties.

5. Being Too Nonchalant About Petty Cash
Many businesses keep an informal stash of “petty cash” that can be used by employees to cover small and incidental business expenses, such as postage stamps, snacks from vending machines, and office supplies. But just because the amounts are small doesn’t mean that petty cash shouldn’t be accounted for properly.

6. Not Knowing the Difference Between Profits and Cash Flow
A business can have positive cash flow in the short term but still be unprofitable; conversely, it can have negative short-term cash flow but still be profitable in the long term. The first scenario is common among small businesses because they often have to pay suppliers before they get paid by their customers. The second scenario is common among point-of-sale and cash-based businesses, such as retailers and restaurants, that pay their vendors on terms.

7. Using the DIY Method of Bookkeeping
Many small business owners pride themselves on their ability to wear a many different business hats, including the accounting and bookkeeping hat. However, this is one area where small business owners are usually much better off hiring a specialist rather than trying to do it themselves. Accounting and bookkeeping can get very technical and complex. The money spent to hire a trained bookkeeper or accountant, even on a part-time or contract basis, will usually come back to the owner many times over given the time savings and all the mistakes that will be avoided.

8. Not Saving Receipts for Small Purchases
The IRS requires that expenses for business travel, meals, and entertainment that are greater than or equal to $75 be substantiated with a receipt in order to be deductible. So many business owners don’t bother saving receipts for expenses less than $75.

9. Not Implementing Adequate Internal Controls
If proper checks and balances aren’t implemented in a business’s accounting system, bookkeepers may have opportunities to commit fraud and embezzlement. Losses from internal fraud can significantly cripple a small business, or even lead to bankruptcy. The best way to guard against embezzlement by a bookkeeper is to implement solid internal financial controls.

10. Relying Too Heavily on a Paperless Work Environment
To reduce expenses and be better stewards of the environment, many companies today are trying to go paperless. In the realm of bookkeeping and accounting, however, there’s simply no substitute for paper documentation and a paper trail, when needed. There are many instances in which paper documentation of financial records will come in handy or be required. An IRS audit is one example. Bookkeeping isn’t an area where you should skimp on the paper.

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Posted by on 13/02/2013 in Bookkeeping, Business

 

Tips for Starting Your Own Business

For some people starting a business has been a dream they have planned for since they were young. For others, they’ve become entrepreneurs through necessity. For myself, it was a mix of both, I resigned from an office position and as I was searching for a job I did some side work for a friend who needed an extra pair of hands with his business. I had some experience with web copy from my then-hobby of blogging.

From working with him and taking on some side projects, I was able to get an income stream that allowed me to work for myself. I then started building my business and I love it. If you want to start your own business, here are some tips to make it easier for you.

Have a Well Thought Out Plan

No doubt you’ve seen people mentioning having a business plan written out with an analysis of competition, target market, projected financials, and so forth. Depending on the kind of business you want to start, you may not need this. However, with any business you do need to sit down and figure out:

What do customers/clients need? What problem is your business solving? Even if you have the interest and the skills for the business, you have to have a market to make it profitable.
How is my business the best solution to their problem? You have to clearly define your unique selling proposition.
What is a reasonable goal for revenue from this business? You may have an idea or service that can be incredibly helpful to others, but can you make a profit from it? No one can predict the future, but most people can get an idea of what to reasonably expect with certain inputs and by comparing competitors.

If you’re having a hard time answering the above questions, take some time to work out answers before you invest a huge amount of time and money in the business. You don’t need a big marketing department or bank account to get started with a business, but you do need a solid plan.

Use Free Resources to Start and Build Your Business

I also highly recommend using resources such as SCORE and the Small Business Administration to help you get your business off the ground and on the right foot. There are plenty of free workshops available online and offline that can assist you in advertising strategies, incorporating your business properly, and handling your business finances.

The real benefit of using resources like SCORE is that you get professional advice from people who have been in your shoes or who have extensive experience with running a business. You don’t need to master everything to start a business; you just need a network of people who can assist you in building it. Taking advantage of these free resources can help you reduce mistakes that can cost the business money or worse.

File Your Taxes Properly

Of course, with any business you need to be on top of your tax obligations. The IRS makes it easy for you to acquire your Employer Identification Number (EIN) by applying online. You can also take care of your estimated taxes online through Electronic Federal Tax Payment System. If you want to enroll, here’s what you need to know.

Each business is different, so you have to decide for yourself what option is best for your tax needs.

Thoughts on Starting a Business

How many of you are thinking about starting a business? What is your biggest concern before jumping in? For those who have started your own business, could you please share what has helped you to succeed?

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Posted by on 11/07/2012 in Business

 
 
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