As a new business owner, it can become overwhelming trying to keep on top of sales, marketing, networking, events, launches, the list goes on and on. However, the finances are without a doubt the most important part of the business which you can’t afford to ignore.
Unfortunately, many businesses fail because, while the owner may have a great idea the numbers just don’t add up and they don’t understand how to correct that and make it work.
Bookkeeping is your way of knowing your numbers as well as keeping track of income and expenditure for the business, but many business owners don’t have a clue how it works.
To give us clear guidance we asked our friends from Crunch, a provider of online accounting software, and they gave us some bookkeeping basics which all business owners need to understand:
This is the most basic transaction – money in and money out of a business. It’s important to get it right however and make sure all transactions are recorded in the books. It’s all too easy to forget that you popped out and bought essential office items and then not record it in the business books.
Accounts receivable refers to money due in from customers which you haven’t yet received – this relates to you if your business needs to invoice or bill customers for goods and services rather than gathering payments up front.
If you carry a large amount of stock it’s like having your business cash sitting on the shelf so you need to make sure you know how much you have in at any one time, and keep track of any orders and stored items regularly.
All businesses have to pay bills so keeping track of what’s going out of the business by recording your accounts payable in your books is just as important as recording income coming in. After all, if there is more going out than there is coming in, you need to know about as the business could be in trouble.
If you have any loans, credit cards or overdrafts associated with the business you need to record the payments which you make against these in your books as well as what you spend the money on, particularly if the credit card is one that is used regularly for business purposes.
One of the most important aspects of your business is the money that is coming in from sales – your business income. It’s vital to record this income in a timely way so you can see exactly how well your business is doing at any one time.
This refers to anything that you have bought for your business including materials or goods required to keep your business up and running.
You need of course to keep track of staff wages, tax, and other staff costs so that you know exactly where you stand. It’s important to keep on track of all staff costs otherwise your business could end up in trouble.
Money invested by the owner
It may be that you put money into the business regularly to help cover large purchases or to keep the business in a good place so it’s important to keep track of how much you are putting into the business.
Money withdrawals from the owner
Obviously, as a business owner, you will need to draw down a salary or regular payments from your business to cover your own personal costs so these need to be recorded carefully in your books as well to make sure you know how much you are taking out of the business at any one time.
Bookkeeping is a key part of any business but it needs to be done right and in a timely manner so that it doesn’t turn into a complicated mess. If doing it yourself feels like too much of a chore then it’s important not to just leave it and hope it goes away.
Using a professional bookkeeper to record all of your business income and expenditure is the most important investment which any business owner needs to make. Bookkeeping is not only a key financial tool for accounting purposes; it is the only way to keep track of your business performance.
Bookkeeping enables you to track spending, sales and to compare your income and outgoings month by month, allowing you to adjust your marketing spend to boost sales if need be or cut back on expenses which are proving too costly.
Without this information, it will become very hard to know whether your business is actually turning a profit and if it’s not, why it’s not. Bookkeeping will show up any patterns of spending, or sales which you can then take action to adjust.
Once you have been running for six months to a year your books will show you your most profitable months, when sales might fall seasonally and where you can make cost savings in the business.
Bookkeeping basics involve recording accurately all of the income and outgoings of your business but rather than consider it a financial chore, new business owners need to understand how knowing your numbers become an invaluable business tool, allowing you to flex and adjust elements to keep the business on track and profitable.
Whether you keep your books yourself, use an online tool to record everything, or pay a professional bookkeeper to help you out, the most basic thing you need to know is not to ignore your books.