5 steps to making order of your small business’s books

You’ve started your new business and gotten your first clients. Now it’s time to start organizing your accounting books. A shoebox full of invoices and statements, or even an inbox full of electronic receipts, just isn’t going to cut it. You need an organized system, and you need to understand how it works, if you want your business to succeed and thrive.

Keep in mind that the IRS (or whatever other local tax authority is relevant, if you’re based outside the US) has requirements that must be met in your financial management. And the better organized you are, the easier it will be to report your taxes accurately. If you play your cards right now, then you won’t need to pull all-nighters and/or unnecessarily overspend once reporting season rolls around, and you’ll be in the best possible position to maintain an accurate sense of your cash flow.

Although setting up your accounting sounds like a daunting task, if you break it up into smaller steps, it is completely manageable. We’ll explain all the basic steps you need to take so you can get your accounting into shape.

1. Choose between cash or accrual accounting

Cash accounting means that transactions are recorded only when money actually changes hands. So if you provided a service in October, invoiced for it in November but didn’t receive payment until December, the transaction would be recorded in December’s books. In accrual accounting, transactions are recorded as soon as the billable service is provided or the expense is incurred, whether or not payment has been made.

Small businesses (those with revenues of under $5 million annually, according to the standards of the IRS) can choose which system to use. The advantage of cash accounting is that it helps keep cash flow closely resembling the figures in the books. The disadvantage is that it doesn’t give you much of a big picture of your business finances. Accrual accounting is better for showing change in accounts payable and receivable, but if you aren’t careful, it can lead to cash flow problems.

Decide which method is likely to serve your needs best and make sure you stick with it.

2. Separate your business and personal finances

If your business is set up as a limited liability company (LLC) or a corporation (corp.), the law dictates that you maintain a separate business bank account, since in these cases, your business is its own entity.

But even if you are functioning as a sole proprietor, you should keep business and personal finances separate. Having a business-only bank account will make you look more professional to customers and make it easier to know how your business is doing. Also, when tax time comes, it will be much simpler to differentiate between business and personal expenditures.

3. Commit to an accounting app

An accounting platform is a necessary and useful tool for keeping your books in order. Customers want invoices to arrive quickly in their inboxes, and you can do this with a few clicks when you are using a digitally connected platform. No more printing, mailing and tracking down lost paperwork.

These days, there are tons of options for easy to use, inexpensive and even free accounting platforms. Invoice Ninja is pretty sweet for invoicing and billing customers, if we do say so, but yes, even we will admit that there are some things it still can’t do.

When choosing a platform for keeping your books, consider what features you need, help and support resources available, your data security needs, the app’s fees, how it syncs with your bank accounts and other tools, its acceptability to the tax authorities that matter to you and ease of mobile access. Take some time to make this decision, since it can be a pain in the neck to switch to a different system later on.

4. Hire a human accountant

Depending on how much you like to work with numbers, you may want to hire an in-house or outsourced bookkeeper to take care of day-to-day accounting. A bookkeeper will catch mistakes and mix-ups and follow up on paperwork you don’t have time for.

Even if you decide to keep this job for yourself, you are likely to want to hire an accountant to take care of your end-of-year taxes. Keep in mind that although hiring professionals costs you money, it frees you up to concentrate on what you do best and is likely to save you money in the long run, since you’ll have bought yourself a better sense of the true state of the business’ finances.

5. Stay organized

Set up a filing system, whether paper or on the computer, to keep track of all funds that go in and out of the business. If you do this on digitally, create folders for each month and subfolders for funds received and funds paid out.

At the end of every month, check your online accounting platform and your offline records and make sure they match the amount of money in your bank account. Check that money that didn’t go through your bank account is also properly recorded. Don’t wait for discrepancies to pile up – perform this reconcile regularly, on a schedule, to avoid unmanageably overwhelming backlogs. With balanced accounts, you and your accountant can easily produce reports according to your federal and state tax requirements.

And then?

For most small business owners or freelancers, these five steps should do it. But if you intend to maintain proactive control over your business’s finances via an ongoing understanding of your cash flow situation at any given moment, you might want to consider getting really ambitious and taking a course in business accounting.

This is especially important if you plan to do most of the accounting yourself, but it can be helpful even if you hire professionals. The more you understand about your business’s finances, the better equipped you are to make smart financial decisions.

Look into a course at your local community college or online. Many of the online accounting platforms offer extensive training included with their premium plans. An initial investment in understanding your finances can help you better interpret your financial data and avoid many of the common mistakes that small businesses encounter.

The U.S. Small Business Administration reports that about 50% of small businesses fail within the first five years and that the main cause of failure is poor financial management. Proper financial management and a thorough understanding of how business finances work will prevent your business from failing and help it grow and thrive.