Bookkeeping and Recordkeeping Overview
Although bookkeeping may seem daunting at first, it’s really quite easy. At it’s most basic, bookkeeping involves keeping track of how much money you take in, and how much money you spend for your business activities. A simple spreadsheet, listing, in chronological order, the money you took in, and the money that went out for your business expenses is all you need. Keep all of your receipts in one place, and post all expenses to your spreadsheet either every day, or every few days.
meet your friend and master ; )
Some people prefer to enter their transactions at the end of each workday, and this is really the best way because the events of the day will be fresh in your mind. Others prefer to sit down once a week and tally up the figures at one go.
Naturally, as your business grows, your bookkeeping and accounting needs will grow also. A busy entrepreneur, especially one with independent contractors working for him will likely need an accounting program to track the finances of his/her business. A simple, yet full-featured program which we recommend is Quicken. However, there are several other good and simple programs, some of them extremely inexpensive that will keep you organized and will make it easy to run reports and financial statements, giving you a complete picture of how you’re doing.
important documents you need to know!
The most important documents that are needed in any business are:
The Profit-and-Loss Statement: Also known as an income statement the P&L shows you how much money you’ve made within a specific period of time. This period could be broken out in any number of ways, including a week, a month, a quarter, or a year, or any other specific time period. The profit-and-loss tells a business whether or not it’s making money. The advantage that a driver has, or a driver/business owner has, is that the expenses involved in running the business are extremely limited, and that the income generated is yours to keep.
The P&L can also show which products or services are selling best, and where you might be spending too much money, from client gifts, to fuel, or advertising.
The Balance Sheet: The balance sheet provides you with a “snapshot” of the financial health of your business, and provides a summary of your assets, liabilities, and net worth. The balance sheet should clearly show what you own and what you owe. Your assets are those items that your business controls, such as cash, equipment, building, money that is owed to you, furniture, ets. Your liabilities are debts or obligations that you owe to others, such as accounts payable, taxes, payroll, payments to independent contractors, payments for advertising materials, etc. Your net worth will be what is left over, (also known as equity). In other words, assets minus liabilities.
The Cash Flow Statement: The cash flow statement shows how much money has flowed in and out of your business over a specific period of time. Similar to a checkbook register, it clearly illustrates money coming in and money going out, together with the remaining balance. This statement is a very important one, because even though your profit and loss statement may be showing that you are making a profit, the business may not be generating much cash. Of course the reverse may be true. Unlike most other business where you must wait for your customers to pay you, it’s good when you’re bootstrapping a business if it will generate instant cash for you. Cash that you can use anyway you wish.
It is important to recognize that financial statements are HISTORICAL and useless for determining a projection into the future. “The past is no valid indication of the future”. A properly formulated BUSINESS MODEL, which includes budgets and forecasts, will allow monthly results to be measured against the budgets and initiate the critical cashflow projection updates required to give early warning of impending liquidity risk going forward.
Many profitable companies fail because of cash shortages resulting from growth and successful trading in general. They literally exceed their credit limits before management are even aware of a problem. The result is a continual a fire-fighting exercise, wasting resources, and driving the company into a spiral downward to ultimate distress.
The lesson: Cash is ALWAYS king! As the greater recession and credit crunch have shown, it’s critically important to hold under review all expense items by operating prudent accounting standards ensuring that precious resources are not being wasted or lost.
We recommend the following accounting software packages as they are the most user friendly and easy to learn. These bookkeeping applications will assist you in your business.
The IRS is very clear on how businesses should handle the income that they generate from their operations. This is another reason why bookkeeping is so important. The principal rule is to not co-mingle or mix business income with personal income. With that said, we recommend that you consult with a qualified professional who can advise you on how best to comply with the rules.
Do you need a segregated bank account? Yes, and whether you decide to run your business as a sole proprietorship, general partnership, LLC, or Corporation, you will always need to have a separate bank account.
Do you need to get a Fictitious Business Name Statement? In most cases, yes. FBN’s are a pre-requisite to opening bank accounts that operate under any business name. Check with your local City and County Authorities for the rules in your area.
Do you need a business license? In most cases the answer is yes. Check with your local business license issuing authority for how best to proceed. Discover the down and dirty details in our Starting a Small Business Lesson.
Understand and accurately prepare your financial statement
No sports team would compete without a precise way of keeping score. But, incredibly, many companies operate without having accurate financial statements that owners fully understand.
In one case, the company controller (huh? what’s a ‘controller’) didn’t understand the difference between cash and accrual accounting (if you don’t, look below!). A more common mistake is carrying old inventory on the books at inflated values, masking the company’s true financial health.
What is the cash method?
This method is more commonly used for accounting in small business. Under this method, income is not counted until cash or check is received, and expenses are not counted until they are paid.
What is the accrual method?
Here, transactions are counted when the order is actually made, delivered, or services occur. This occurs regardless of when the money (called ‘receivables’) is actually received. Income is counted at the sale. Expenses are counted when you receive the goods or services.