Good Businesses Keep Good Books
So here’s the deal…not one of us who opens a small business does it to do bookkeeping, unless of course, you’re actually opening a bookkeeping business. We’ll cut those people some slack. But the rest of us don’t want to think about it and well… even go to great lengths to avoid it. But you can’t pretend to be running a real business without being involved and engaged with that part of your business. Here’s a coupla good reasons why you should be putting some of your energy into your books:
1. The IRS Requires It
The IRS is like a pit bull when it comes to reporting and paying taxes. They never give up, especially if you have withheld money from employee paychecks and gotten behind in your payments (or not paid). I have legit seen companies who have owed the IRS $21,000 in taxes and had $22,000 in penalties and interest. That’s pretty damn hard to recover from, so best idea? Know what you owe and pay on time.
2. It Will Boost Your Chances of Success
Your chances of success at your business are significantly reduced if you don’t do bookkeeping. Take a look at the chart below. The person doing poor bookkeeping has less than a 5% chance of success. If you’re wondering what ‘poor’ bookkeeping is, I like to use the example of the gentleman who hired me to clean up his company and get him right with God and the IRS. He handed me 5 wrinkly bags filled to the brim with bills, receipts, invoices, bank statements and a stack of unopened letters from the IRS….oh…and a baggie of weed. So that’s poor…what then, is good? That’s a company who tracks income and expenses, reconciles their accounts, files and pays liabilities on time, and runs and analyzes financial reports. All of that allows them to change direction in a timely fashion if the numbers show a problem, or expand if growth justifies it, or any number of decisions that can be guided by good books. Please note that even if your bookkeeping is good, the success rate is at 70%, meaning there are things outside your control. I don’t know about you, but if there’s 30% of my business life I can’t control, I’m going to work extra hard with the things I can control!
Five Things to Do if You Want Good Books
#1. Keep Your Business and Personal Accounts Separate
When starting a small business, most of us use our own funds from our personal accounts, because, well, it’s not really going yet so it doesn’t feel like we’re ‘big’ enough for a real account. During that time, put your receipts in a folder marked “Start-up Costs’ and throw them in there. You should also keep a running total or a spreadsheet so you can track what you have in the game. (The total will be set-up as a loan to your company.)
But as soon as you know you have a viable business, open a business account and get either a credit/debit combination card or a credit card. From that time on, use your business cards and accounts for business and your personal cards for personal purchases. And here’s why:
It’s Mental!
That’s right. You tend not to treat your business seriously if you aren’t set up to track expenses, income, and profit. And you won’t watch things carefully, and that’s important!
Once Again: The IRS.
If you keep your business and personal accounts together the IRS may classify your business as a hobby and disallow deductions. If you’re audited, it’s on you to convince them you operate a real business and that’s much harder with co-mingled accounts.
Tax Time.
You have to report the income and expenses for your business in the tax year. If you’ve mixed personal and business expenses together you have to un-mix them, and it’s horrible. Done it, hate it. You have to go through every receipt you have and then add them up. Seriously not fun. Oh, and if you think you can just use your statement to track the expense…that’s a big no. Your statement may say you spent $560 at Best Buy. You say it was for a computer but you don’t have a receipt. The IRS says “Hey, that might be a TV set for your home –disallowed!”
You Might Miss Deductions. Face it, when there’s a looooong list of transactions to go through, your eyes start to cross, and BAM! That’s when you miss the $642.23 business purchase on your personal account. You just signed up to pay Uncle Sam money you don’t owe. Don’t be that person.
#2. Set Up An Accounting System
You will need to enter your income and expenses somewhere. Way back in the olden days, this was done with pencil and ledgers. I actually know an old guy who uses a spiral notebook and pen to track his little restaurant. Every day he carefully records what he purchases for the business, what he sold, and what he paid out in labor. It works for him because he carefully tracks it. He couldn’t turn a computer on to save his life, let alone work software and honestly, I’d never want to change him. The rest of us? We need accounting software (and no, Excel is not accounting software). There are quite a few to choose from: QuickBooks, Xero, Freshbooks, Zoho, Sage, to name a few. QuickBooks, of course, is the big one, with 85% of small businesses using it in cloud-based and desktop versions. What that means for you is that accountants are used to QuickBooks, and that makes it easier for you to get your year-end books and tax prep taken care of.
Do your research carefully as to which software you select. It’s the difference between smiling with satisfaction at a job well done or trying to decide which window to hurl your computer through. Yeah…I’m so not kidding. If you aren’t familiar with what your company needs to track your business, find an expert to help guide you. It’s worth the money. It’s also worth the money to hire an expert to set up your books and train you in understanding them.
#3 Check Your Accounts Daily
Make this part of your daily rolling-out-of-bed routine. (after caffeine!) Turn on the computer, log into your bank and credit card accounts, then review all purchases and credits. Here’s why:
· If there is fraud on your account, you’ll catch it quickly.
· You’ll see where your money is going. If you are in your accounts, you’ll start watching how you spend your money. It can be shocking when you first see how much you spend on latte’s, lunch, and fancy stuff your business doesn’t really need. Be wise with your hard-won earnings.
#4 Have a Bookkeeping Routine & Calendar
This is critical. The successful businesses that I work with all have bookkeeping routines. You need to make a firm date each week to do your books, including recording deposits and posting expenses, sorting receipts and filing papers. Make notes on your calendar for when forms need to be filed and taxes paid. Do the same for license and insurance renewals. If you’d like a sample of a bookkeeping routine, please e-mail or DM me and I will send you one.
#5 File Government Forms & Pay Your Taxes on Time
As a small business owner, you will most likely deal with government agencies at the federal, state, and local level. It’s not up to them to come and find you to get your reports and tax payments. You are expected to set up the accounts and take care of it. Most agencies send you information as soon as you get a business license or register, but you should research yourself to make sure you’ve got them all covered
Here are a few tips to stay out of trouble with the US government:
· Create folders for each taxing and reporting agency.
· Most agencies have online access, so create online accounts with them before forms or taxes are due. That way you won’t be scrambling with tech issues the day it’s supposed to be submitted.
· Find out how the agency accepts payment…some don’t take checks.
· Keep your accounting up-to-date so it’s no big deal to file the reports.
· If you pay taxes quarterly to an agency, set aside money every month for the taxes so it’s not such a big hit. (If the money is in a savings account, you won’t be thinking that you have money that should be tagged for something else.)
· Get that payment in on time. Late penalties can be from 2% (IRS) to 9% (WA state DOR) And from there they tack on more fees and interest. • Don’t trust that your bookkeeper will handle all this for you. It’s your responsibility as an owner to know what taxes you have to pay, when they are due and oversee that it gets done. If it’s forgotten, they won’t come after the bookkeeper, they come after you.
· Put filing and payment dates on your calendar so you know when they are coming up.
E-mail me at julie@julie-porter.com if you have any questions. I love hearing from you!