Bookkeeping for a business requires a significant amount of time and resources. Professional and accurate accounting is a crucial aspect of management for small, medium, and large organizations. Following bookkeeping best practices ensures you safeguard the interests of your employees, customers, and other stakeholders. The most beneficial practices include:
Determine Your Accounting Method
You can use one of two accounting processes: the cash or accrual method. The first one recognizes transactions the moment money changes hands for receivables and payables. It’s more suited to smaller businesses that mainly operate on a cash basis due to its straightforward nature. It also helps in managing your cash flow.
The accrual method uses the matching principle to record transactions. It recognizes expenses and revenues immediately when they occur, regardless of whether the parties make actual payments. Although it’s more complicated than the cash method, it’s appropriate for larger businesses that regularly invoice their clients. Some organizations implement a hybrid solution that incorporates aspects of both accounting methods.
Separate Business and Personal Finances
A business and its owner or manager are two separate entities. As such, it is essential to avoid using company funds for personal expenses. The legal consequences of doing so include losing the limited liability protection that some business structures offer. You might also experience cash flow problems, as well as complications with the IRS and state auditors.
It’s advisable to have separate credit cards and bank accounts for personal and business use. This discipline makes your work easier when filing tax returns. There are various accounting software solutions you can use to make such distinctions. Examples are QuickBooks®, Zoho Books®, Xero®, and FreshBooks®.
Evaluate Data Frequently
Avoid complications by ensuring your financial statements are always up to date. Balance them regularly to identify and resolve discrepancies as soon as they appear. To be safe, check your bank transactions every day, evaluate bank statements every week, and ensure all other financial documents are in order at the end of every month.
A monthly evaluation of your business data shows you the main drivers of profitability. Swift action discourages employees, suppliers, and partners from attempting shady practices such as unauthorized payments and fraud. You’ll also avoid any financial penalties that your bank might charge on discovering such actions.
Optimize Chart of Accounts
A chart of accounts is a list of every financial entry in your company’s general ledger. It categorizes all the transactions in a given accounting period in a way that’s easy to understand. Although it’s useful, most organizations maintain an alphabetical format for tax compliance purposes. However, you can optimize it to help you figure out some critical metrics such as ROI and your break-even point.
For example, you can track customer acquisition costs by putting the marketing and sales accounts in one segment. You can also separate General and Administrative (G&A) expenses from industry or product-specific expenses. This move helps you control costs by reducing or eliminating discretionary ones.
Plan for Taxes Year Round
One of the biggest mistakes some business owners make is to ignore taxes until the end of the financial year. You’re more likely to make mistakes if you rush to compile all the information during tax season. It will be also harder to find missing financial statements and settle discrepancies during this short window. To avoid IRS audits and penalties, update all tax-related documents throughout the year.
That means maintaining accurate records of your loans, expenses, revenue, and profit. Accounting software makes this work easy. As you make entries every day, it automatically calculates tax figures for the whole year. Another benefit of being disciplined and organized is that you’re more likely to benefit from tax deductions, exemptions, and credits.
Transform Your Bookkeeping with Professional CPA Services
While these tips can improve efficiency, hiring a qualified CPA to handle your bookkeeping is an even better decision. You can focus on your core duties as these professionals manage your finances. Their knowledge of legitimate tax-saving strategies helps your business save costs and remain competitive.
By studying your books and comparing them with industry data, they can identify trends with long-term growth potential. Investors, suppliers, and other stakeholders are also more likely to trust a business that conforms to accounting regulations. The overall benefits you’ll gain from a licensed accountant outweigh the costs of hiring them and saves you time and money in the long run.