Managing your finances is crucial for the success of your start-up business. Whether you're new to bookkeeping or have dabbled in it before, mastering the basics will save you time and prevent costly mistakes. Here's a step-by-step guide to help you get started:
1. Separate Business and Personal Accounts
One of the first things we always recommend to clients is separating their personal and business expenses. Many new business owners will start by using their personal bank account or credit card to operate their business. While this may seem easy in the beginning, it may make it difficult to accurately track just business expenses. It's kind of like mixing a red sock into your whites and ending up with pink clothes!
Additionally, this is important for tax purposes so you can ensure you're claiming all business-related deductions without any issues.
How to do it: Open a dedicated business bank account. This account should be used solely for business transactions, including paying bills, receiving payments, and covering business-related expenses. You should also consider getting a separate business credit card to further streamline your financial management.
2. Integrate your business account with QuickBooks Online (QBO)
We recommend taking advantage of QBO's automation and integrations and syncing your bank transactions to your QBO account automatically. This will help ensure the information you see in QBO is real-time and reduces the amount of time you have to spend in your books and accounts each week.
Why QBO? QBO allows you to easily track income and expenses, manage payroll, generate financial reports, and even automate tasks like invoicing. Plus, it’s cloud-based, meaning you can access your financial data from anywhere.
3. Decide Between Cash and Accrual Accounting
Choosing the right accounting method is crucial for accurate financial reporting.
Cash Accounting: This method records income and expenses when cash actually changes hands. It’s simpler and provides a clear picture of your cash flow. For most small businesses and solopreneurs, cash accounting is recommended because it’s easier to manage and more straightforward for tax purposes.
Accrual Accounting: Alternatively, accrual accounting records income and expenses when they are earned or incurred, regardless of when the cash is received or paid. While this method provides a more accurate picture of your business’s financial position, it can be more complex and may require more time and effort to maintain. Typically this method is utilized when a business is sending out invoices to customers or clients and awaiting payment.
4. Record Transactions Consistently
Recording every financial transaction is the backbone of good bookkeeping. Whether it’s income, expenses, or any other financial activity, keeping detailed records ensures you have a clear understanding of your business’s financial health.
Tip: Make it a habit to record transactions regularly, ideally daily or weekly. This will prevent errors and omissions and make it easier to reconcile your accounts later.
5. Categorize Transactions Correctly
Once transactions are recorded, they need to be categorized into the correct accounts. This is essential for generating accurate financial statements which are necessary for making informed business decisions.
How to do it: Create categories or accounts for different types of income and expenses, such as “Sales,” “Office Supplies,” “Marketing Expenses,” etc. QBO can automate much of this process by learning how to categorize your transactions over time.
6. Store Transactions with Supporting Evidence
Every transaction you record should be backed up with supporting documentation. This includes receipts, invoices, bank statements, and any other evidence that verifies the transaction.
Why it matters: Keeping these records organized not only ensures that you’re prepared for tax season but also protects your business in case of an audit. It’s a good practice to store both physical copies and digital backups of all your financial documents.
7. Reconcile Accounts Regularly
Reconciling your accounts means comparing your recorded transactions with your bank statements to ensure that everything matches. This step is crucial for catching and correcting errors, such as duplicate entries or missing transactions.
When to do it: Ideally, you should reconcile your accounts monthly. This helps you maintain accurate records and provides a clear picture of your business’s financial position at any given time.
