6 Bookkeeping Tips to Stay Organized

Written for Bulk Apothecary, September 30, 2023

There are two main reasons small business owners stress over their business finances: bookkeeping, and they are afraid of a tax bill. The best way to combat financial stress is by getting organized. That tax bill won’t be so scary if you know what’s coming and the only way to know what’s coming is to look at the numbers . . . and that’s why bookkeeping is so important!

TIP #1: Keep Business and Personal Transactions Separate

When you first start your business one of the first items on your to-do list should be opening a separate business account. If you plan to save money (and you should!), consider also opening a savings account. Furthermore, planning to pay for expenses with a credit card?  Open your credit card in your business name!

I know it seems easier in theory if you manage one account for both business and personal transactions and simply total your business income and expenses - especially when you are just starting out.  It is actually way easier to have your business accounts separate and here’s why:

• With separate business accounts, you know that all activities in these accounts are in fact for business!  

• It will save you time and money to have a separate account! Whether you do it yourself or hire help it will take more time (potentially billable time) if you must sort through your personal transactions than if your business transactions were separated already. It also becomes more difficult to differentiate what is a business expense which often leads to missed deductions.  

• You also want your customers and clients to know that you are an established business, and your business is here to stay. Having your business name show up on your clients’ bank statement when they have made a purchase from you gives them confidence in your business.  An account in a personal name while growing relationships may mean this is a ‘kind of’ business.

• Your personal information is also no longer at risk for identity thieves. Having a dedicated business account limits access to your personal financial data. The security of your personal information is of the upmost importance as identity thieves are evolving more rapidly.

• Finally, the IRS recommends business transactions and personal transactions remain separate.  If you become the target of an IRS audit, commingling of personal and business transactions lends for more scrutiny. Clean books and clearly separated business and personal transactions lead to a much more favorable outcome. 

Bottom line: not only does it mean easier bookkeeping, but it also saves you time and money!

TIP #2: Deposit All Income Before Using It

Okay, this one may seem obvious but for those folks still transitioning to collecting all payments directly into their business accounts, it’s easy to use the money before it makes its way into your business account. This often happens in PayPal accounts. Money is received and partially used to pay for an expense then the remainder is pulled from your bank account. You now have one receipt and two transactions. This can add extra time in bookkeeping and in an audit when you need to explain all these nuances. So, if you accept payments through PayPal, use the money that’s in there and treat it like a bank account or deposit all the income into your business account before using it. And, if accept cash, make a regular trip to the bank to deposit it. You want to have a paper trail.

TIP #3: Keep All Business Receipts for at Least Three Years

Normally, the IRS has three years to audit your taxes. Keeping your receipts for at least three years protects you since supporting documentation is what helps prove your case in an audit. The IRS does allow you to keep scanned receipts. Make sure they are legible if you are opting to store your documentation digitally. You can utilize apps to do this. If you are using software to help with your bookkeeping needs or an online portal, check to see if they have a system to save receipts. If you are doing it old school, label your folder or box by year (even better if you have it sorted by month and year!) and keep it in a safe dry place. Every year, toss out the oldest year of receipts to make room for the new year.

TIP #4: Reconcile Your Business Accounts

Okay, if you are scratching your head, please know that you are not alone. What’s that old saying . . . you can’t know what you don’t know. Reconciling your account statements (bank, credit card, or merchant accounts) is essentially checking your statements against your income and expense receipts. The process is important in making sure the balance you have in your bookkeeping reports matches the actual balances on your statements. Financial reports are essential for strategic planning and reaching your goals, loans or business applications, tax filing, and audits.

The general process takes a few steps and starts with categorizing all your transactions and having access to all your activity: all income or invoice information, purchase or bill information, loan repayments and the statements that correspond to them.

Next, compare the transactions listed in your statement to what happened that month. If all your transactions flow through your bank account and are electronic, this is simple. A few transactions normally don’t go directly in or out of your bank account even when all your business transactions are electronic. These include processing fees charged by your merchant processor like Square or Stripe, invoices sent but not yet received, rewards received on your credit card, and checks or payments sent but not yet posted.

The next step involves adjusting your balances on your books to match your statement and recording the differences. Each bookkeeping or accounting software provides instructions on how to reconcile your books using their system. Find your manual or contact support for specific instructions.

Reconciling your business accounts will help catch any mistakes by your financial institutions or fraud, ensure transactions aren’t forgotten or double recorded, provides cash flow data, catches invoicing issues and delinquencies, and builds financial confidence!

TIP #5: Review and Understand Your Financial Statements

Do this monthly! Reviewing and understanding your financial statements is vital to making key decisions for your business. Without knowing where you stand, you cannot make SMART goals for your business. You also gain so much knowledge about your business. Taxes are planned for in advance and minimized easily when you review your financial statements regularly! The most important reports to become familiar with are:

Balance Sheet

Income Statement (aka Profit and Loss Statement)

Income Statement by Month

General Ledger

Reconciliation Report

Cash Flow Statement

Key information to know includes understanding your gross income, expenses, and profit/loss highs and lows as well as understanding your financial records and changes made to your books to finalize your taxes.

TIP #6: Create Simple Functional Internal Accounting Systems

As long as your processing includes tips #1-5 then you are in good shape.

Here’s an example of an accounting system:

• Billing = All income is processed via Square prior to services being rendered or product being shipped. All invoicing and collection are reviewed on Friday’s.

• Expenses = All payments are paid via business credit card. All receipts are kept in a digital folder labeled “Current Month” and all scanning is completed on Friday’s.

• Task Completion = Reminders are set on a schedule and are reviewed on Monday’s. Reminders on the schedule include bookkeeping tasks, financial statement review, goals revisited, tax filings, and meetings with financial folks (aka accountant, tax preparer, legal team, etc.).

There is no one size fits all when it comes to bookkeeping. Pick a system that works for you and be open to changing what doesn’t work for you. Whether you hire help or do-it-yourself, bookkeeping is so important to remaining a successful business!