Your financial records serve as the backbone of your accounting system. And much like a back, just a few financial vertebrae out of alignment can put your business in serious pain, sometimes enough to inhibit your ability to get work done.
Rather than continuing into a new year with bookkeeping techniques that force your business to hobble along, it’s time to play financial chiropractor. While it’s always a good time to gauge your business’s financial health, you need to establish the bookkeeping practices that allow you to accurately assess your business’s fiscal situation.
With a few key changes to the way you collect and record financial data, your business’s books can be put on the right track for the new year.
End-of-Year Bookkeeping Tips
Before diving into next year’s bookkeeping updates, make sure you are collecting important data before December 31. Without including some often-neglected items, your adjusting entries and financial statements will be inaccurate and compromise any financial analyses you conduct.
Many small business owners continually neglect their reimbursement expenses at year-end, robbing them of valuable tax deductions. Whenever you personally purchase a product or service on behalf of your business—including transactions charged to your personal debit or credit cards—that purchase is eligible as a business deduction.
Unfortunately, many entrepreneurs toss these receipts and never enter them into their bookkeeping system. Unless you review your personal banking and credit cards statements in conjunction with business banking and credit cards statements, you may forget about these purchases. Take note now of any purchases you made from personal accounts for your business so you can earn your full deduction. Start hanging onto all business purchase receipts and promptly recording the transactions into your books.
Wining and Dining Requires Documenting and Recording
Perhaps one of the greatest perks of being your own boss is meals and entertainment deductions. Uncle Sam recognizes that many business deals are conducted over a nice juicy porterhouse and a live show. Yet many small business owners never take advantage of this deduction. But, on the flip side, some attempt to game the system by deducting every meal and entertainment event imaginable. The IRS also recognizes that not every steak dinner and night on the town involves business—entrepreneurs need to unwind just like everyone else.
Don’t be afraid to take a deduction that is rightfully yours. To take advantage of meals and entertainment deductions without raising any auditors’ eyebrows, institute additional measures when you record these expenses. You should maintain a log that verifies the date, time, amount and purpose for the meals and/or entertainment. Go beyond that, though, to include a brief narrative (just a few sentences) about who was present and the topic of conversation. Hopefully you’ll never have to use these records, but they can be very valuable during an audit.
Tips for Establishing a New Business
If now is the year you plan to make the leap from employee to entrepreneur, make sure you’re familiar with basic accounting and bookkeeping concepts and technology. While you can outsource these tasks, you need to know the basics. For one, you’ll want to ensure any outside financial workers aren’t failing to maintain your books. For another, the more your business grows, the more you’ll need an intimate knowledge of your business’s financials in order to make strategic decisions.
Beyond nailing the fundamentals, take these specific actions as recommended by Brian Kim, a Chicago CPA, to ensure a smooth start:
- Open a business checking account now. You may also consider opening a business credit card or line of credit sooner rather than later. Although we discussed making business purchases from your personal account, you generally want to separate business and personal funds as much as possible. The division makes bookkeeping much easier and shows the IRS your business is your business, not your hobby.
- Vet professional agencies. There’s no point in doing everything yourself, but that doesn’t mean you’re off the hook for ensuring any agency representing your business is legitimate. For example, a reputable incorporation service knows that if you request your business be formed as an S-Corporation, you must form as a C-Corporation. And you only have a two-and-a-half-month window to make the election in the beginning of the tax year in order for it to apply in the same tax year. Before outsourcing a service, conduct a little research to see what specifics the service provider should know inside and out.
- Know all applicable deadlines for likely future actions. While you can’t predict where your business will be in a decade, you should have some idea of when you’ll make major business decisions. And many of these decisions will require compliance with some government agency. For example, when Illinois-based businesses hire employees, they have a very limited window to report new hires to the Illinois Department of Employment Security. If you plan to sell goods, find out the time frame for reporting sales tax to the appropriate agencies. You’ll soon find government agencies have one thing in common: “I didn’t know the deadline” is never an acceptable answer. Using that line will likely earn you penalties and interest, and possibly the loss of tax benefits.
Every industry is different, and you’ll want to research what specific bookkeeping techniques apply to your line of work in order to strengthen your 2014 recordkeeping.