Transforming an idea into a business needs financial backing. Even if it’s a home-based service, the cost of the supplies, packaging, and shipping cannot be ignored. It is only when all these expenses are considered, can one accurately assess how successful a business really is. This process of recording earnings and expenses, called bookkeeping, plays a pivotal role in the financial health of the business.
While business owners often thrive on creativity, they also need to pay attention to calculations. Adopt a systematic method of bookkeeping right from the start. It’ll give you a bird’s eye view of what’s going on and make it easier to identify patterns and trends. Study the facts and figures to forecast what lies ahead. These insights can help ensure smooth sailing and steer the business away from danger if the sea gets rough.
There are a myriad of transactions taking place within a business, and it may be difficult to remember everything. Create a system that is convenient yet comprehensive. Here are five tips to develop a bookkeeping system that can streamline finances and prepare your business for the future.
Stay Organized
Some small businesses may begin as a hobby in a basement. They become a business only when the focus shifts from having fun to making a profit. It’s not easy to calculate profit unless bookkeeping is meticulous. For instance, a home-based caterer must keep ingredients for orders separate from those used at home. Mixing personal and business accounts can cause confusion and can make filing taxes a nightmare
Organize invoices in such a way that documents are easily retrieved. Keeping paperwork and supplies organized saves a lot of time — the most valuable asset for a business. Schedule time to sort out paperwork, so junk is discarded, and the important documents filed. Investing a little time in organizing financial records today can save a lot of time and money tomorrow.
Make Transactions on Time
Vendors need to be paid for supplies and employees need to be paid for services. Delaying any of these payments can lead to a disturbance in operations and weakening of team dynamics. Without regular revenue generation, the whole system may collapse, so stay on top of transactions. If certain clients are late on their payments, send them soft reminders until the money is collected.
It’s a good idea to designate individuals for financial tasks. Make them accountable for each step, from data entry to report compilation. Keep in mind, whether there’s a designated team or digital payments, business owners should also audit transactions themselves. Compare financial records with bank statements. Noting discrepancies on time can prevent a minor issue from becoming a major loss.
Be Proactive
If a business grows too rapidly, it can make mistakes along the way. Be prepared for tax season and be aware of expenses that can be labeled as business expenses. For example, an online tutoring business can include the internet bill as a deductible business expense. Consult a tax professional, if needed, but make sure you have all the receipts.
Some businesses may keep money aside in a savings account, so it may be used for a rainy day. Observe market trends to learn how other companies stay afloat in tough times. Don’t get carried away with every new idea that comes to mind, though, and keep referring to the initial business plan. If you need new expensive equipment, try to spread the cost across a few months so cash flow isn’t disrupted.
Monitor the Cash Flow
Having an automated method of bookkeeping can provide deep insights without taking too much time. Review reports periodically and study the profit and loss statement to see where the business stands. Find areas where the grip can be tightened. Consider making it a policy to get payments upfront, so you don’t have to chase vendors for past due accounts.
Every expense counts, so find ways to conserve resources. If the paper supplier is becoming too expensive or unreliable, renegotiate the contract or get a new supplier. Manage the inventory so that both overstocking and understocking is avoided. Reorganizing storage areas for optimal space utilization can also help. In some cases, it can even dramatically reduce overhead costs. By analyzing the cash flow regularly, entrepreneurs can take swift action when needed.
Set Achievable Goals
Having clear goals helps track business progress. Be realistic and set achievable goals to avoid being disappointed in the future. That doesn’t mean adopting a laid-back attitude. Set the bar higher, even if it’s by a small percentage. Maybe market share can be increased or the percentage of debt can be decreased. Accurate bookkeeping makes the progress measurable, thereby motivating the team to do better.
Include the team in specific goals to conserve resources. To create some excitement, promise employees a pizza party if the team reduces office supply costs by 20% over the next quarter. Setting goals gives employees a target to work toward. These goals can be broken down for departments and individuals as well. For example, the finance team may develop their own targets to minimize errors in bookkeeping and submit reports on time.
The Human Factor
Any business that is focused on growth should be prepared for more financial transactions. Developing a scalable bookkeeping system is essential, but alongside one must also develop their own habits to reconcile data regularly. A system only works if people use it. Even if the process feels tedious, remember the importance of accurate bookkeeping and the future benefits it entails.
Being a business owner teaches many life lessons, bookkeeping is one of them. Those who master the art of bookkeeping often acknowledge the impact it has on their personal life as well. Being financially stable isn’t only about making money. It’s a delicate balance between earning and spending that requires astute observations more than lengthy calculations.
