As a business owner you need a recordkeeping system that captures all of your business activity. The key word is “system.” Whatever you choose must be sustainable, occur regularly, and produce verifiable information that you can use to manage business operations as well as meet secondary information needs for tax and regulatory compliance.
Every bookkeeping system contains three key elements: documents, record processing, and storage. The system need not be complex or expensive when you’re starting up. You’ll need a more extensive system when your business grows or you have increased requirements for accountability to third parties such as business partners, lenders, and shareholders.
Step 1: Documents
All of your business activity should be captured in a recordkeeping system. The records most likely to get lost are the ones generated in retail transactions, such as office supplies and postage purchases, auto usage and maintenance, and meals and entertainment. The best way to record them is with a simple Microsoft Excel spreadsheet, a notebook, or a calendar. Note every expenditure as it happens, then put the receipts in a file, an envelope, or a bag that separates them from personal activities. Make notes on the receipts for meals of who else was present and the topics of conversation.
In the office, collect all bills, invoices, and so on in a single place; a file drawer is the most efficient. Adding a program to create PDFs from e-mail can save time, paper, and ink.
Step 2: Data Recording
Record all documents at least monthly. Spreadsheets have largely replaced multicolumn notebooks, although a handwritten system is acceptable early on. Accounting systems such as QuickBooks, Peachtree, and MYOB make it fast and easy to record data by category and create financial statements but can be confusing for bookkeeping novices to set up and operate properly. If you want to use one of these systems from the beginning, ask for direction from your accountant or colleagues familiar with these systems.
In a cash-based system, a spreadsheet or a notebook includes columns for transaction dates, descriptions, receivables, cash paid, and credit card charges. Label additional columns with other common transactions such as sales, office supplies, rent, auto expenses, and so on. For every transaction, make two entries, one in a payment column noting received, cash paid, or charged, and one in a category column. Total each column at the end of the month. Total receipts should equal total sales and total payments, and charges should equal the total expenses.
Create separate spreadsheets to keep track of amounts owed by clients, unpaid bills, and inventory balances.
The next step is reconciling the checkbook. End-of-month cash should equal total receipts minus total cash paid. The total of all expenses should equal the total of cash paid and charges. Now is the time to compare the actual revenue and expenses to the monthly budget to track how well the business is performing.
Step 3: Storage
Set aside receipts for big-ticket and long-term items, such as real estate, equipment and vehicles, loans, and leases, and store them in separate files. Store your other documents in a filing cabinet or in folders with sides to keep the smaller receipts from falling out. Arrange the folders by month or by topic, based on your preferences or how you most often retrieve the information.
Another option is to scan documents into PDF format. Store at least one backup copy in a separate location that is dry and temperature controlled (not a car trunk). You need to be able to access and retrieve the records in a legible fashion if the Internal Revenue Service requests them.
As your business grows, your recordkeeping system will become more complex and even more important to maintain. Starting with a well-organized system is key to staying on track as you run your business.