Keeping Good Records Helps Sustain Small Businesses
The dreamers who start small businesses focus on doing what they love. Whether it's baking, brewing, welding, or making widgets, they yearn to do the work that inspired them to launch their dream.
But if they want to keep the business going, they need to make time to create and maintain the financial records that will provide perspective on their progress, satisfy tax authorities, and document their success.
Denise Cote, owner of SOHO Bookkeeping and Support Inc., Anacortes, Wash., is familiar with these dreamers. Her small-business clients' need for recordkeeping resources inspired her to write "
"There's a lot more to business than just renting shop space and starting to make and sell your products," Cote says.
While it's important to have a product or service that customers are willing to pay for, Cote says it's also essential to figure out how to track costs, profits, losses, and tax obligations.
"The most common mistake many new business owners make is they don't even bother to start a bookkeeping system from the start of their business," Cote says. "They only start thinking about it after they get the proverbial shoebox full of paper that goes back six months. At that point, it becomes so overwhelming they don't even know what they're looking at anymore."
Cote advises new business owners to look for free or low-cost classes in their community. Books, videos, and webinars also can offer information. The Small Business Administration, community colleges, cooperative extension services, libraries, and nonprofit organizations may sponsor classes or offer resources.
It's essential to track costs, profits, losses, and tax obligations.
A good bookkeeping system should track your financial status by recording:
Pick the right system
The Internal Revenue Service (IRS) allows you to keep records in the manner that works best for you. You should, however, plan to record income and expenses in a format that makes it possible to quickly create financial reports so you know where you stand at any point in time.
Failing to anticipate tax obligations creates big problems for small businesses.
This system can vary based on the nature of your income and expenses. A retail business that makes many small sales every day can benefit from buying a cash register linked to a computer that automatically records sales, for example. If you make only a few large sales a month, with minimal expenses, you might manually enter income and expenses into a paper ledger.
While the simplicity of a paper-based system can be tempting, many business owners save time with computer software such as QuickBooks®. If you're working with accountants or bookkeepers, they might recommend software compatible with their systems to make it easier to share information.
Understand tax obligations
Cote says failing to anticipate tax obligations creates big problems for small businesses. Even if you are the sole employee, you probably will be required to make quarterly tax payments. If you hire additional employees, your tax obligations become more complex.
"You have to go in to hiring employees with the knowledge that their entire gross wage prior to taxes—plus an extra cost of about 8.5% on top of that for the employer's share of costs such as Social Security—is not your money to keep," Cote says. "This is money that will eventually pass out of the business' hands into the various government entities that take a portion of an employee's paycheck."
Keeping personal records separate from business records is a much cleaner way of doing business.
In addition, your business may have to pay state or local sales and use taxes. Cote advises businesses to continually set aside funds to cover these obligations in a separate account so you can make payments in a timely manner. She notes that if businesses fail to make tax payments, the IRS and other tax authorities will act quickly to seize funds and assets.
Separate business and personal records
Many small-business owners say their business is their life, which makes it tempting to mingle their financial records. Yet keeping personal records separate from business records "is a much cleaner way of doing business," Cote says.
Some very small sole proprietors might be able to run a business from a single checking account, but Cote always encourages her clients to open a separate business account to make it easier to track business spending.
A separate account is required for tax and liability purposes if the business is organized as a corporation, limited liability partnership (LLP), or limited liability company (LLC).
"It eliminates many questions from inquiring minds and prying partners," Cote says.
Businesses can succeed or fail based on their ability to record and understand income and expenses.
Recognize the consequences
Cote has watched businesses succeed or fail based on their ability to record and understand income and expenses.
"I've worked with many different small businesses over the years and the most successful ones—the ones that are still in business today—are the ones that care about the accounting side of the business," Cote says.
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