Virtually every business owner would agree that having well-organized books is important, but the process of actually getting your books in order can be a challenge. Ideally, the best time for organizing small business bookkeeping is right from the very first day of business.

If you are a small business owner and already know your books are messy, or simply want to make sure they stay clean, you will find some of the tips in this post useful.

 

What are the Benefits of Keeping Organized Books?

Searching through a mess of business transactions to retrieve critical data can be tedious, but when your books are properly organized, all the information you want will be easily accessible, right when you need it. Below, we discuss exactly why it is important to keep your accounts well organized.

 

#1 Avoid Tax Penalties
Messy books inevitably limit the business owner’s ability to sort out finances and calculate tax payments. The worst thing about getting your quarterly business tax payments incorrect is that if your books are not organized, you may not even realize what is happening until you are slapped with a hefty penalty.

 

#2. Improve Organization in Your Business Activities 
Tax penalties are not the only thing you have to worry about. You also have vendors, utility companies and other services to pay for. Delaying these payments can incur late-fees or interest payments, which may cost you money, affect your credit record, and potentially ruin your business reputation.

 

#3. Makes performance analysis simpler
Well-kept books will make it easy for a business owner to perform basic financial analysis to answer key questions, including:

• Are you profitable?
• Are your expenses too high?
• Is the business on track for growth?

#4. Makes it easier to get financing

If you would like to expand your business, you may decide to seek financing, either from a bank, a financial institution, or direct investment from venture capitalist and funds, all of whom will ask to see your books. Well-organized books will make it easy for an investor to see how well your business is performing and also serves as a reflection of your capabilities as a business manager.

 

 

Factors that Lead to Disorganized Bookkeeping

#1. Getting the initial setup wrong

The initial setup of your accounting system may be the single most important factor in getting your bookkeeping done correctly. If you get this step wrong, you may end up recording multiple classes of transactions in the wrong accounts for months or even years.

 

Here is a quick checklist of important things that need to get done during the initial setup for organizing small business bookkeeping:

• Determine whether you will use a cash or accrual-based system
• Determine whether you will use a manual or automated entry system
• Set up a chart of accounts

 

#2. Falling behind on your entries

Being a small business owner, your time and attention will probably be divided among many different activities. It is not unusual for you to get so busy that you postpone or forget to log your entries and reconciliations. After some time, paperwork or receipts may get misplaced or the backlog may become too overwhelming for you to catch up with.

 

#3. Not understanding how your accounting software works

Most accounting software packages can be fairly complex, particularly if you do not have prior knowledge and experience with the software. You may either make mistakes or underutilize your software if you do not understand how it works.

 

#4. Shoebox Accounting

Instead of making regular entries into their accounts, many small business owners tend to keep all of their receipts and paperwork for a while, and then hand them over to an accountant to sort out during tax season.

 

The problem with this approach (called shoebox accounting), is that it is usually difficult to make sort out and be completely accurate when going through several months worth of receipts and paperwork – even for an experienced accountant. Additionally, you may incur an additional cost because the time required to fully sort through and properly complete your bookkeeping and accounting records.

 

#5. Bookkeeping can be tedious…and downright boring

Sometimes the sole reason business owners neglect their bookkeeping, even though they may be capable of doing it themselves, is because they find it tedious and boring. Not everyone has the patience and fortitude to painstakingly sort through transactions, enter them accurately, and compile reports. This is the primary reason small business bookkeeping services are so valuable.

 

#6. Mixing personal funds with business funds

This is a classic small business owner mistake and one you need to avoid at all costs. Mixing business and personal expenses make it hard to properly record transactions, and as a consequence, your books may not reflect the true financial state of your business.

 

Habits to Help Keep Your Books Clean

#1. Make sure your initial setup is done properly every time

As mentioned before, getting your initial setup done well is extremely important. In fact, we would say getting this step right is winning half the battle. The smartest thing you can do, if you do not understand how to do bookkeeping, is to hire a professional bookkeeping service at this stage. You could also consider taking a few bookkeeping lessons if you have the time for it.

 

#2. Utilize software and available tools

It can be tempting to save a few extra dollars by using a pen and paper accounting system, but over the long term, a small investment in a good accounting software package can save you a lot of stress, and potentially money as well.

 

With good accounting software, all of your data will be safely stored in one location (you can create backups too), and the software will be able to generate automatic reports that you may lack the technical ability to create yourself. With these available tools, organizing small business bookkeeping becomes a breeze.

 

#3. Be consistent in your entries

Not entering accounting and transaction data in a timely manner can easily lead to receipts and other paperwork getting misplaced. Not only does this mean that you will not have accurate records of past transactions, you may also have trouble explaining transactions in the event of an audit.

 

The best practice for properly organizing small business bookkeeping is to enter your accounting data and do reconciliations on a daily basis.

 

#4. Make sure personal expenses are properly accounted for

For a small business, an owner’s personal expenses should be recorded as drawings. These transactions should be debited against the drawings account and credited against the cash account.

As long as you maintain proper records, your books should stay in good order.

 

#5. Be open to hiring a professional small business bookkeeping service

The smartest thing you can do is focus on the activities that grow your business, while you let a professional bookkeeper take care of organizing small business bookkeeping on a day-to-day basis. If your books are already in a mess, most bookkeepers offer clean-up services that will help get you back on track.

 

Small businesses can have massive potential for growth, but some owners find it difficult to transition from a small, self-managed and controlled business to a business that scales and grows to meet demands. This alone can slow or completely stop business growth.

 

Bookkeeping is a critical task, but organizing small business bookkeeping is not time well spent for a business owner. Keeping your books organized is necessary, and the best way to do that is to seek professional help from day one.