For many small businesses, the most common bookkeeping errors are also the easiest to fix. Use the following tips to help keep your business on sound financial footing.
Use the right accounting system
Most businesses use either cash-based or accrual-based accounting. If you use the cash method, you count income when you receive it and expenses when you pay them. Under the accrual method, you count income and expenses when they happen, not when you actually receive or pay them.
In practical terms, this difference in timing is relevant if your company keeps inventory on hand or handles transactions on credit. In these cases, the accrual method might be a better choice for your business. And in fact, if your firm has more than $5 million in sales or keeps an inventory, the IRS might require that you use the accrual system. In other cases, however, the simpler cash system could be all you need.
Maintain daily records
This is one of the most basic rules. If you don't keep accurate daily records, you don't have an accurate way to track the financial condition of your business. Different people use different record-keeping systems; what matters is that you have one and use it every day. If more than a week goes by without writing down expenditures and income, you'll be playing catch up. Once you have a good system set up, accurate record keeping will take just a few minutes a day.
Handle and review checks carefully
It's easy to be on autopilot when you're writing checks and tossing canceled ones into a filing cabinet without reviewing them. Remember, those checks are as good as cash. And if something goes wrong, you—not the bank—will be responsible.
Take the same care with checks as you would with cash. Sign checks using a clear, distinctive signature that won't invite forgery. Review canceled checks before anyone else, including your bookkeeper or employees, sees them; that way you can catch unauthorized checks. And if your business is a partnership, it's a good idea to have at least one of the partners co-sign the checks.
Monitor your collection procedures and outstanding invoices
Payment terms should be written on every invoice you send out—and should be agreed upon with clients before a job is started. Ask that payment be made within 15 or 30 days of invoicing. When working on long projects, charge at regular intervals. Don't wait until your bill is so high that if payment is not made you'll be financially hurt. Cash flow depends not only on how much you make per hour but also on receiving payment in a timely way.
Get a bank statement with a month-end cutoff
This is another basic tip that can reap big rewards. Synchronizing your bank statement with other monthly records will make it much easier to reconcile your statement and track expenses. Also, reconcile your bank statements as quickly as possible after receipt.
Leave an audit trail
Your record keeping will be much more effective if you have a system that allows you to quickly and easily retrace your company's financial activities. This means keeping your invoices and checks in numeric order, not skipping check or invoice numbers, and keeping separate bank accounts for your business and personal funds. If you can't go back a year and reconstruct your company's finances, you probably aren't leaving an effective audit trail.
Use a computer
Computer bookkeeping software is absolutely essential for all but the smallest businesses. These applications make it easy to track income and expenses, prepare tax documents, summarize your company's financial activities, and back up records for safekeeping. If you're working with an outside bookkeeper, make sure they know how to use a computer.
Hire a bookkeeper or accountant if you're too busy to keep your books
Many part-time or contract bookkeepers work at an hourly rate. They will provide services such as paying salaries, coordinating and handling accounts receivable and payable, balancing ledgers and checkbooks, and organizing financial information required for business plans, loan proposals, cash-flow statements, etc.