More than 500,000 small businesses are born every year, according to the Small Business Administration (SBA). Every year, a few of those small businesses find their way to me and ask questions like: How do I keep my business finances straight? When should I start keeping financial records? What tools should I use to manage it all?
Every business is different but they all have one thing in common – they can’t make good decisions without getting control over and understanding their finances. Establishing financial systems and processes is essential. Hiring a qualified bookkeeper or accountant is one way to get started, but many new businesses don’t have the budget.
I only have the capacity to help a few new businesses every year. For those I can’t get to, here are three steps that business owners and entrepreneurs can take to get control over and understand their finances, and to make good financial decisions:
- Separate Business and Personal Finances
Open a separate business account to avoid commingling personal and business funds. Don’t wait – open the account as soon as possible. If you can, do it before incurring any business expenses. Apply for a business credit card to avoid putting business expenses on your personal credit card. Separating personal and business finances allows for a transparent view of your business progress. It also helps to establish that you are operating real business, not a hobby.
- Track All Financial Activity
Maintain a record of all business income and expenses. Expenses should be tracked by category, such as rent and advertising, so you know where your funds are going. The IRS does not specify a particular system or format for business records. The only requirement is that your records are accurate, complete, and provide enough detail to identify the underlying source documents. Source documents may be kept electronically. Computer software packages purchased online or in retail stores can be very helpful, easy to use, and require very little knowledge of bookkeeping and accounting.
- Plan and Monitor
Even without a formal budget, you need to plan for monthly and annual income and expenses. Having a plan for your finances helps to prioritize your business activities and provides a baseline to monitor your progress. Didn’t meet your plan? Don’t see it as a failure; it’s an opportunity to assess your plan and adjust your activities.
Paying a qualified and experienced professional to help set-up sufficient record keeping is a great option. But if that’s not in your budget, taking these three steps will help you feel confident that your records can help you to make good decisions for your business and to satisfy the IRS.