Once you have obtained your business license and permits, it’s time to create a simple and effective accounting system.
Your first step is to open a business bank account so that you can separate your personal money from your business money. It’s easier if you open a new account where you currently bank, however, be sure to take your personal and business ids with you. Different banks have different rules and some won’t create business accounts for brand new businesses. You may need to open an additional “personal” account which is then used only for the business.
Once you have a separate account, you can transfer personal funds to the business to cover your expenses until your business earns income. As you incur business expenses make sure that they are paid from the business account, not your personal account. Likewise, pay only business expenses from the business account.
Accounting is using numbers instead of words to tell a story. An accounting system starts tracking and organizing your monies coming in and your monies going out. We group the movement of your money into expenses and incomes based on similar categories. Then we combine them together in a certain way to create reports.
There are several reasons for creating different kind of reports. First, you’ll want to know if you’re making any profit. Second, you’ll see how to increase that profit by increasing your sales and/or reducing your expenses. Another necessary reason is for governmental agencies that need reports for licenses, forms and taxes.
As your monies move in and out of your bank account, keep the documentation of the transactions and use a few file folders to group similar receipts and invoices together. Think of which groupings you could use to lump similar costs together. You can use paper folders, or you can scan your receipts to keep the same information in digital format.
Paperwork that you’ll want to keep will include receipts for (but not limited) to:
• Rent
• Advertising
• Telephone
• Supplies
• Insurance
• Automobile
• Travel
• Licenses
• Business loans, and IOUs from your friends and family
• Credit card and bank account statement
• A list of cash and/or equipment you loaned to the company to start
Invoices for the services you provide and for the items you have sold to your clients and customers
If you are a retail store or a restaurant, you will keep your daily cash register tapes and your daily batch receipts from processing your sales.
As you organize your expenses and incomes into categories, you’ll be able to summarize them by month. The first summary report that owners learn to love is the Profit and Loss Report, sometimes known as an Income statement.
It simply groups your incomes together, at the top of the report; and it summarizes the expense together, underneath income. You should know how much “profit” you earned in each month--how much money is left from your income after you paid your costs. Ultimately you would add all months so that you’d have total income and total expenses for the year.
You can use spreadsheet software for this—which automatically add the numbers for you. You can also use accounting software to make this recording faster and easier. There are several accounting software packages created for small businesses: QuickBooks, Xero, FreshBooks, Zoho Books and others.
You could also use a yellow pad or plain white paper – regardless of which you decide to use, keep it simple.
The idea of a simple accounting system is so that the reports help you understand what is happening in your business. You’ll want to have feedback of what changes you can make in your business to increase the money that you earn.
Marie Gibson, speaker, author, online educator, and accounting solutions expert works with busy business owners who need to KNOW their numbers and make SMART business decisions. If you’d like Marie’s full online program “Accounting Made Simple for Busy Business Owners” for free, with no obligation, please visit https://smartprofitpro.thinkific.com/courses/AccountingMadeSimpleforBusyBusinessOwners and use this coupon code: SimpleSolutions.
NCET is a member-supported nonprofit organization that helps people explore business and technology. (www.NCET.org)
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