Finance 101 - 10.13.2015

5 Bookkeeping Best Practices for Small Business

It’s no secret that entrepreneurs have to wear many hats - and most would agree that the least exciting of those hats is the bookkeeper's.

Our underwriting team has consulted with hundreds of small business owners looking to grow, and the #1 thing that slows down the funding process is messy financial documents.

We found that this breaks down into 5 common tasks.

1) Don’t mix personal expenses with business expenses.

When you’re just starting out, it can be easy to blur the lines between business and personal spending and income. Regardless of how much (or how little) money you have coming in, we can’t stress enough how important it is to set up separate accounts and budgets for your business.

This will help you have a clear understanding of your expenses and how much money is coming in to your business.

2) Technology is your friend.

It can be tempting to keep track of your finances by entering numbers manually into an Excel spreadsheet or Google Doc. But doing so makes it a whole lot easier to make mistakes. We highly recommend that small business owners adopt a basic software program early on. At the touch of a button, you’ll be able to:

  • Create invoices and send them out in less than a minute
  • Create estimates that you can convert into invoices
  • Track and manage your expenses
  • Easily see which invoices are past due
  • Generate a profit and loss statement for your accountant at tax time

The most popular programs we see our borrowers using are QuickBooks Online and Xero. Pro tip: Take advantage of free trials to see which one works best.

3) Ask for help.

So you’re not the most detail-oriented person you know. Or, you’re so busy running your business that the idea of spreadsheets and software makes you cringe at the end of the day. We’re going to share an experience we encountered with one of our borrowers to illustrate the importance of getting help early on.

One of our Underwriters, Eric Rivetna, consulted an owner of a CPG company why the categorization of Cost Of Goods Sold is so important to understand:

“We see too many business owners leaving out costs that should be incorporated. Your top line revenue minus cost of goods sold is your gross profit, which is the number one way to tell the health of a company. All the other expenses can go up or down based on need, but COGS is something you can’t really change unless you go with cheaper packaging, lower-quality ingredients... all things that will have a huge negative impact on your product. If you’re not getting those accounts correctly, you might to realize how much it’s really costing you to make your product and run your business.”

Avoid serious mistakes like this by asking for help from the very beginning. If you don’t know of a local CPA, websites like Thumbtack make it easy to hire an accountant. If you can, try to find one that truly knows your business and industry.

You can also do your own research on websites like KHAN Academy, which offers micro-courses on accounting & bookkeeping.

Our underwriting team suggests the following books: Accounting Demystified, Bookkeeping For Dummies, and Accounting Made Simple.

4) Track everything.

Track anything and everything related to your business by saving receipts, using a dedicated business credit card and bank account. Not only will you need to track activity to see how much you’re profiting but also for tax purposes at the end of the year.

5) Stay organized.

Even if you do have a dedicated accountant, you should make organizing a regular habit of your own. The only way to know where things really stand, to avoid mistakes or have things fall through the cracks, is to consistently check your books.

Another healthy record-keeping practice is to store your files electronically. We love Dropbox, and make sure to back up any files you store locally once every month.

Most importantly, figure out a system that you can scale. Whether you have your own bookkeeper or are investing in accounting software, think about where you want your business to be in five years. Will the processes you’re putting in place now be able to adapt and grow with your business?

Takeaway: Don’t let bookkeeping be last on your to-do list. Not only does it improve your understanding of how your own business is operating, but it will also build financial credibility, and speed up your growth when you’re ready for it. Remember: It will only get more complicated down the road!

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