Every week as SmallBizLady, I conduct interviews with experts on my Twitter talk show #SmallBizChat. The show takes place every Wednesday on Twitter from 8-9pm ET. This is excerpted from my recent interview withOctavia Conner @SmartChoicellc1. Octavia is the founder of Smart Choice Business Solutions also known as The Bookkeeping Expert. The goal of Smart Choice Business Solutions is to empower, educate and guide small business owners to continue to grow and achieve longevity by implementing sound financial practices. For more information about her accounting services check out www.smartchoicellc.com
SmallBizLady: How can a small business owner benefit from bookkeeping?
Octavia Conner: Bookkeeping is the process of recording all financial transactions within your business. This includes all cash flowing in and out of your business. With proper bookkeeping in place you are able to keep track of your expenses as wells as your revenue. You are able to identify what steps are needed within your business to promote further growth and longevity.
SmallBizLady: How often should bookkeeping activities take place in a small business?
Octavia Conner: You should produce and review monthly financial information. There are three very important statements that you should pay close attention to. They are the Income Statement aka (P&L), Balance Sheet and Statement of Cash Flow. I recommend that a small business owner spend at least 2 hours a day completing their recordkeeping. If this is too much, then at the least, they should set aside time once per week to update their recordkeeping system from the previous week.
SmallBizLady: What are some of the key challenges busy small business owners must overcome when implementing a bookkeeping system?
Octavia Conner: As busy small business owners, we wear many hats. We have to do everything and be everyone in our business. With more duties than time, BUSY small business owners often find themselves postponing their recordkeeping duties until the next day. This, in most cases, leads to neglect. Why? Because, the next day turns into the next week then the next month, and so on. This adds to the challenge because now they are facing penalties from the IRS for late and sometimes never filing their business taxes.
SmallBizLady: Why is it so important to remain current on your small business bookkeeping?
Octavia Conner: By remaining accurate and up to date on the financial aspect of your company, this will place you in a position to make sound decisions regarding the growth of your business. This will also allow you to know the health of your business at any given time. In addition to that, when tax season is here, you will have all of your information in order – which could lead to a reduced tax payment, maybe even get money back.
SmallBizLady: If it is very important, then why is it not required by the IRS to keep receipts of your business transactions?
Octavia Conner: This could mean the difference between proving why you reported a smaller profit on your taxes than the IRS believes you earned. Keeping your receipts helps you provide a paper trail if you ever were to get line audited. A lot of business owners are unaware that the IRS can go back 3 years if they find errors. In addition to that, they can also go back another 3 years from the date of the error searching for supportive information. By keeping all of your documentation, you at least appear organized and professional with nothing to hide.
SmallBizLady: What documents and receipts should a business owner keep?
Octavia Conner: A business owner should keep all receipts that represent monetary transactions to and from their business. All documents that show proof of funds flowing in and out of their business. This could be in the form of a receipt, deposit slip, cancelled check, withdrawal slip, etc.
SmallBizLady: If a small business owner has been keeping receipts in a shoe box or Ziploc bag, what should they do to get organized?
Octavia Conner: One strategy I recommend is organizing a monthly binder for your business. Inside of this monthly binder you will have your financial statements, printed bank statements, documentation of proof of all cash flow in and out of your business for that month and any other additional reports. I call this your SMART Financial Binder. A new SMART Financial Binder should be completed each month. In addition, you will have a yearly binder, which will include all year-to-date information. You will also place your tax filing documents in the yearly binder once completed.
SmallBizLady: Should all small business owners purchase accounting software?
Octavia Conner: This depends on the number of sales and the size of their business. There are a few strategies that a small business owner can implement if their funds do not provide them with the option of purchasing accounting software. If they are fairly good with Excel, then the use of spreadsheets can help them implement a proper bookkeeping system. The small business owner could create a workbook per month. In this workbook they will have individual sheets for all of their monetary transactions. For example they can have the following spreadsheets in one workbook: Accounts Payable, Accounts Receivable, Mileage Tracker, Petty Cash Report, Income Statement, Balance Sheet and Statement of Cash Flow. If the business owner is really good with Excel, he or she can have these spreadsheets linked to three financial statements. At the end of the day, they can take 1 to 2 hours and enter their information on the correct spreadsheet. At the end of the month they can total each spreadsheet and print them out. They will then attach their receipts to the correct spreadsheet and file in a folder or binder for that month. If you need assistance with creating these spreadsheets you can visit my website and download my free eBook which includes all of the spreadsheets you would need. If you are not good with Excel, download the book and just make copies of the spreadsheet each month, summarize and attach your receipts.
SmallBizLady: What is a very simple way to implement a bookkeeping system?
Octavia Conner: A really quick and simple way to organize your receipts and cash flow documents is to use folders. Purchase different colored folders. Each folder would represent some type of cash flow transaction. For example a green folder would represent money received, a red folder would represent money paid out of the business, a yellow folder could be all current items not yet categorized, a blue folder could be all bank statements, and a purple folder could be all cash purchases. At the end of the month you summarize all of your income and all of your expenses.
SmallBizLady: What if a SMB doesn’t have the funds to purchase accounting software? Is there something else they could do until revenue picks up?
Octavia Conner: Yes an even easier way to keep track of your expenses, income and documentation is by using envelopes. Basically you would purchase a box of envelopes from the dollar store. Usually they’re no more than 50 cents with about 40 envelopes in the pack. Each month you will use maybe 5. Label each envelope according to the cash flow of your business. For example you could have a deposit envelope, payments received, purchases made, petty cash envelope etc. At the end of each month you would summarize all of the receipts in each individual envelope.
SmallBizLady: What is the most important financial information to know at the end of each month?
Octavia Conner: You must summarize your financial information at the end of the month. This summary will then produce financial statements. For example if you summarize all of the payments received and all of the purchases made within your business, then subtract these two numbers, you will then have your Net Profit or Net Loss. You have just formed your Income Statement or (P&L).
SmallBizLady: What are the long-term benefits of outsourcing the accounting function in your small business?
Octavia Conner: You would not call a carpenter to do a plumber’s job. Business owners who are frustrated with having to learn an accounting system or stressed because they have a mountain of receipts on their desk, need to call in a professional bookkeeper or accountant to assist them. For a business owner who is totally clueless about this record keeping stuff, they can rest assured knowing that their financial record keeping is under control. Not to mention they don’t want any trouble with the IRS.
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The simple book-keeping strategies, are of use, to both the business pro, already getting cash, and a startup fresher, still finding the way, as it gives an intuition, into the basics, of Business Financial Accounting. Thanks, for the relevant ideas, and contribution. It’s a remarkable work.
Great interview. I’m curious if these strategies work the same for every type of corporate structure — LLC, LLP, S-Corp, etc.? I would assume so, but I’d guess there are probably some subtleties about implementing and using bookkeeping strategies. Thanks! By the way…Melinda, I love your work and would be interested in interviewing you for my site podcast or having you write some guest posts. Interested?
Thanks to both of you. Benjy yes these simple strategies can be use regardless of what type of business structure you may have. My goal was to provide busy business owners with an easy and quick way to organize their receipts and avoid the recordkeeping worries. If you need further assistance with implementing these are you’re interested in more tailored made accounting services feel free to contact us, we are here to help.
Highly recommended professional strategy especially designed for busy small business owners towards the bookmarking concept.For a successful business area,Every businessman have to manage their financial condition by maintaining their finance status after proper adoption of bookkeeping management.Good stuffs i must say.
Many business owners are caught between outsourcing their bookkeeping versus preparing their accounts in-house. The conflict arises if the business owner does not have either the necessary skills to do the work himself or does not have the resources to hire a third party to review business finances.
The error many people make is to focus on their businesses profit and loss statement to the exclusion of all else. It’s a potentially fatal mistake because healthy profits can mask an incipient cash flow crisis