It’s the start of a new year which provides a great excuse for starting fresh and getting organized for the next 12 months. For most business owners, bookkeeping is not the most engaging task since the time spent doing it does not directly result in higher sales or better profitability. However, without accurate books, business owners will lack the information needed to make well-informed decisions and may be missing out on tax deductions that could save their business dollars that could be re-invested to help the business grow.
If bookkeeping & accounting is not your strong suit, or if your business has grown past your accounting capability, no need to worry. This guide will help you get organized and, most importantly, remain organized throughout 2024.
1. Keep Personal & Business Separate (And Keep Different Businesses Separate)
When you own a business it can be easy to intermingle personal & business funds. If you own multiple businesses, it can also be easy to use one business with more cash to pay the expenses of another business. Operating this way can lead to many unintended consequences.
From the compliance side, mixing personal & business transactions can cause you to lose your liability protection and increase your audit failure risk.
From an operational standpoint, it becomes increasingly difficult and time consuming to utilize data if you are mixing transactions. We now have powerful applications available that use business data to help owner’s make the best decisions. If the underlying data is faulty due to mixing in personal expenses or mixing transactions across multiple businesses, the ability to use data to your advantage becomes nearly impossible.
For these reasons it is crucial to have a separate personal & business bank account (or multiple separate accounts if you own multiple businesses) and formally track any transactions between accounts.
2. Understand What Is Deductible
One of the biggest advantages to having clean and updated books is the tax savings. We have seen many business owners save more on their taxes than they could ever spend on bookkeeping software or bookkeeper fees simply from having their business expenses properly categorized and supported.
If you have good books & records then you don’t need to worry about your income & expenses being reclassified and owing back taxes. Instead, you’ll have peace of mind in the deductions you claim on your tax return.
Having strong bookkeeping can help you use the following common business expenses to reduce your tax liability:
Accounting Fees
Advertising
Bank Fees
Contract Labor (don’t forget to get a W-9 for anyone you pay over $600 this year)
Depreciation
Education
Home Office
Insurance
Interest
Legal & Professional Fees
Meals
Milage
Rent Expenses
Salaries & Benefits
Travel
Utilities
3. Ditch the Spreadsheets
Bookkeeping should propel a business owner into the next phase of their business’s success. It should not be something that costs the business owner valuable time & money. It is time to scrap the spreadsheets! Simply put, they are not very helpful to your CPA and my hunch is that they are not very helpful to you either. Spreadsheet books are time consuming, lack accounting fundamentals, and are a nightmare to defend under audit.
Instead, replace the spreadsheets with a cloud accounting software like Quickbooks Online or Stessa. Cloud accounting software allows you to automatically connect your bank feed and then categorize transactions quickly. You can even create “rules” that lets the software categorize recurring transactions or transactions from the same vendor. Cloud accounting software comes with accounting fundamentals right out of the box and they allow you to link receipt images to each transaction which creates strong support should you ever face an audit.
Another option would be to simply hire a professional bookkeeper. If you are struggling to make the time to setup streamlined processes for good bookkeeping, or you want to get more meaning out of your books, it might be time to outsource this function. The saying goes that “the best business owners work on their business, not in it.”
Professional bookkeepers charge a monthly fee based on the volume of transactions and complexity of your business. They may also offer advisory services that can help you make better business decisions and save money on taxes. We consider bookkeeping fees a “high return on investment” due to the increased liability protection, increased tax savings, and stronger decision making power of your audit-proof books.
4. Go Paperless
Keeping your receipts in a shoebox is officially a thing of the past. Many accountants will no longer accept this type of documentation and some don’t accept paper of any kind. The good news is the new processes for receipt and record storage make it easier to stay organized and takes less of your time.
A good thing to get into the habit of when you have business transactions is to use a cloud storage drive like Google Drive to store these records. You can simply take a scan of the receipts on your mobile phone and leave a title with the “date” and the “name” of the vendor. This will help you remember what transactions were for when you spend time each month updating your books.
If you’re using cloud accounting software from step 3, you’ll be able to attach receipts to your books by forwarding to a custom email address (for digital receipts) and through the mobile phone app (for physical receipts).
We like to take it a step further and automate receipt forwarding from the Gmail inbox with an application called Hubdoc. Here is how you can set this up:
Click the Settings gear in Gmail > then click "See All Settings"
Go to the "Forwarding and POP/IMAP" tab
Add your Hubdoc email to "Add a forwarding address" (Your Hubdoc account will receive a verification code you'll need to enter)
Under “Filters and Blocked Addresses” click "Create a new filter" and in the "From" box add the email address of your vendor.
(If needed) In the "Has the Words" input, use words from the vendor’s recurring email subject line
Click "Create Filter" and in the check box list that appears, choose "Forward" and select your Hubdoc email
Lastly, click "Create Filter" in the bottom right
5. Set Key Performance Indicators (KPIs)
Depending on your goals, the KPIs you’ll use to see if you are on track will be different for every business. However, it is important to spend some time at the beginning of the year thinking about what will be important for your business to take that next step. Maybe you’re looking to increase profitability per client, increase sales, decrease debt, etc. Whatever you decide to track, clean bookkeeping will help you use these KPIs and make good business decisions.
Some common KPIs include:
Dollar or Percentage Growth
Debt-to-Income Ratio
Earnings before Interest, Taxes, Depreciation, & Amortization (EBITDA)
Loan-to-Value Ratio
Monthly Cash Flow
Profitability (Net/Gross Profit Margin)
Maybe one of those KPIs is to reduce time spent on repetitive administrative work, like bookkeeping…
Take some time in this first week of the year to assess where your books currently stand and take them through each of these five steps. Do you have confidence that if you received an audit notice your books would hold up? Do you feel like your books are helping your business grow? Do you know if all of your potential tax deductions were taken last year?
If you answered “no” to any of the questions above, then it is time to get your books cleaned up. Here is to a new year and a fresh start to bookkeeping.
Cheers!
