Recordkeeping is probably the least interesting part of owning a business, but it is one of the most important. The Women’s Business Center of Northern Virginia recognizes the challenges of running the financial aspects of a business while also running every other part of the operations. That’s why they sponsored me to virtually share valuable financial recordkeeping tips to over 100 daycare professionals last week.
My workshop, “Organize your Recordkeeping for Easier Tax Preparation”, covered a wide range of topics that the participants could use in their businesses immediately:
- Keeping Business Finances and Records
Each business should have a bank account and credit card separate from personal accounts and cards. Personal credit will probably be needed to secure a credit card for a new business. Financial transaction records should be kept for all income and expenses starting with the first penny spent on the business, even if it’s before any income is received.
- Financial Information to Get and Review
Keep financial records up-to-date for real-time tracking of the business’ financial health. Records and reports should include an income statement (aka P&L), balance sheet (e.g., cash and credit card balances), and projected cash flow for at least three months. Review all financial reports periodically. Quarterly is advisable, but reviews should be more frequent when business is new to consider and incorporate more information.
- Business Expenses
“Ordinary and necessary” costs associated with carrying on a trade or business are deducted from business income to determine net profit and to calculate taxable business income. Ordinary expenses are common and accepted in that business. Necessary expenses are appropriate for the business type. Common examples include employee wages, employer payroll taxes, supplies, equipment, liability insurance, and training.
- Deducting Home Business Use for Daycare Providers
Licensed daycare providers get an exemption from the “exclusive use” rule that other businesses must follow to take a home use deduction. Home space used regularly for providing daycare may be claimed based on the square footage of the home used for providing daycare and the percentage of time it is used as a daycare center. Calculating the deduction is explained in IRS Publication 587, Business Use of Your Home (Including Use by Daycare Providers), https://www.irs.gov/pub/irs-pdf/p587.pdf.
The Women’s Business Center of Northern Virginia wants daycare providers to know the importance of financial recordkeeping, so they asked me to share some tips about getting organized. Up-to-date and complete business financial records are key to knowing what’s going on in the business at any point in time. Participant feedback was positive, so the 100+ daycare providers must have found the information helpful for organizing their financial recordkeeping and easier tax preparation.