Money matters, but for small businesses, matters of money aren’t always easy to navigate: Payroll, accounting and bookkeeping can be causes of stress. That’s why it’s important to understand your financial obligations when you launch your business.
Alicia Jeffreys of Shampooches Dog Grooming in Alton, Illinois, was struggling to understand the financial aspects of running a business. As the owner of one of six businesses selected to receive a makeover from Small Business Revolution, she got the training she needed to take control of her finances.
We’ll walk through what Jeffreys learned from the Deluxe team, and the three steps to take early on, so your books and payments are in order during your first year and beyond.
1. Track income and expenses
While you’re running the day-to-day, it’s easy to push the more monotonous tasks to the side. But it’s crucial to track the money coming in and going out of your accounts.
Jeffreys was too busy grooming dogs and serving clients to organize her books. As a result, she had no idea how much cash was coming into the business or how much she was spending.
Why track income and expenses?
Tracking revenue and expenses gives you a picture of your profits, which is especially important if you’re just starting out. It also keeps you on budget. If you find that you need to control costs, you can review this financial record to see exactly what you’re spending money on and where you can make cuts.
During tax season, your records will end up saving you time and will prevent a lot of stress. You won’t have to dig around to find any invoices or receipts — instead, you’ll have everything you need right there in front of you.
As your business grows, you’ll be able to predict future financials based on past trends that you see in your records. These kinds of financial projections are particularly important if you ever consider expansion, franchising or need to find investors. Meticulously kept records showing the financial health of your business over time can help you secure the funding you need to get started.
What should you be logging?
There are four elements that you must make sure to record:
- The date
- The amount of money
- Whom you paid or who paid you
- The income or expense category
That fourth element, your income and expense categories, is simply a way to help you organize your finances. The categories will be different for every business. A pet groomer, like Jeffreys, for example, may have expense categories for clippers or shampoos and conditioners.
2. Decide on a bookkeeping system
Bookkeeping is the term used to describe the process of tracking all of your financial transactions — that is, the money that comes in and out of your business. A few examples of financial transactions are:
- Bill payments
To do business bookkeeping, you must record all of your transactions, like making a sale or purchasing a machine, in chronological order. Anything that goes in and out has to go in your books.
In addition to tracking your income and expenses, bookkeeping encompasses the following elements:
- Reconciling bank statements
- Managing accounts receivable — money that you are owed — and accounts payable — money that you owe vendors
- Providing financial statements, like balance sheets and income statements
Your bookkeeping options
Bookkeeping can be challenging when you are juggling all of your other responsibilities, so choose a method that works for your schedule and level of accounting acumen. Options available to you include:
- Manual bookkeeping: Some people record and calculate their business’s finances by hand to save money (granted, this approach takes a lot longer than on a computer). You can buy a bookkeeping journal — a book filled with ruled, columnar worksheets designed to help document finances. Like a journal about your day, all transactions go here first.
- Bookkeeping by spreadsheet: Spreadsheets allow you to keep track with the convenience of a computer and without the price of accounting software. Microsoft Excel and Google Sheets are both good options; this method essentially works the same as manual bookkeeping but is more legible and with mathematical functions designed to save you time. Additionally, it’s easier to share the information and convert it into graphs or charts for visual representations.
- Software for bookkeeping: Software is often shown to improve accuracy and manage cash flow while saving you time. Software is a great option for more established businesses that just don’t have the time to keep doing it on their own. A popular option for small businesses is QuickBooks. There is also Xero, Zoho Books and FreshBooks, to name only a few. Software can often track employee timesheets, require less manual entry of data, automatically download transactions and much more.
Once you’ve decided which system you’ll use, you should determine if you’ll use the cash method of bookkeeping or the accrual method. Here’s the difference between the two:
- Cash method: Revenue and expenses are recorded when they are received or paid.
- Accrual method: Revenue and expense are recorded when the transaction is made, even if the cash isn’t technically in or out of the bank yet.
There are pros and cons to both options. Ultimately, you will have to decide which works best for your business. Whichever you choose, be consistent. The IRS requires that companies use the same accounting method throughout the year.
3. Establish a payroll system
Everyone, even one-person businesses, must have a system for handling payroll. Despite employing two groomers, Jeffreys lacked a formal system for paying her employees. Deluxe set her up with a professional service [https://www.deluxe.com/payroll/] that handled payroll, start to finish.
Beyond the positive tax implications, there are three options for paying yourself and your employees:
- Do it yourself (DIY): You or someone who already works for you takes care of payroll. It’s the most affordable option and allows you to have a deep understanding of how you’re paying employees. But it will eat up a lot of time and put you at risk for costly penalties if you accidentally violate any local, state or federal payroll laws — which can change often.
- Hire someone else: You can hire a professional bookkeeper or accountant to do your accounting for you. The best thing about this is that they’ll know the laws around employment and taxes, and they’ll keep up to date for any changes. When it comes to payroll accounting, you’ll save a lot of time by hiring a professional to keep up on things. Keep in mind, though, that hiring an accountant can be costly.
- Outsource it: In this case, a third-party payroll solution for small businesses handles every part of your business’s payroll. This is a full-service option that can include payroll management and, sometimes, human resources help. You get peace of mind knowing that you’re complying with the latest rules and regulations. Most likely, your third-party service will have an online portal that lets you easily see your business’s payroll information, employees’ hours, earnings and other important information. Often, a third-party service costs less than an accountant.
Always get advice from an accountant or lawyer if you need more help deciding what’s right for you. Additionally, consider the convenience of eChecks QuickBooks integration to easily pay employees.
Small business accounting might not be the most romantic part of running a business, but it is an important thing to get right in order to keep your business on the right track.
Now that Shampooches has systems in place for financials, Jeffreys’ business is ready for growth. Starting out on the right foot with your own bookkeeping and payments will help keep your business on track — and can set you up to thrive.