Do you know your numbers? Are you on top of your bookkeeping every month like you should be? Bookkeeping is the process of recording your financial transactions you know exactly how much you’re making and where your money is going. This action is foundational to running a profitable business. When it comes to money, many people become fearful and avoid it altogether. Nobody likes to see that their business is not making money. When you avoid it, you’re going to have a hard time figuring out how you can expand your profitability. So, it is very important to not only have a business strategy around your finances but to keep up with your bookkeeping. Let’s walk through some basics for bookkeeping that will allow you to understand the process and will help set you and your business up for success.
Find the Best Method for You
The first thing you want to do is figure out what your bookkeeping method is. There are many different types of software out there, so it’s important to do your research and narrow down the best choice for you and your business. Single-entry bookkeeping works well if you just have one or two financial transactions every month. But the best method is double entry, which means you record each transaction twice, once as a debit, and once as a credit.
Most accounting software does the double-entry method. When you do the double-entry method, it makes it easier and less likely for you to make a mistake because you are recording transactions on two different sides. I have used Waveapps.com. It makes bookkeeping so much easier. T
Create your Business Accounts
In order to get a deeper understanding of your business, the next part is what really matters – creating business accounts. This allows you to figure out exactly where your money is going. So in typical accounting speak, you have about five basic types of accounts:
- Asset accounts – which is any resource that you own as a business owner. Things like inventory or property are asset accounts.
- Liabilities – where you record all your obligations and debts that you owe. Things like monthly rent payments.
- Revenue and income accounts – where your business earns money. Anything from inventory, sales, client sales, one-on-ones, or anything that is the main revenue income of your business.
- Expense or expenditure account – records all the cash that flows out from your business. Everything from paying for website software, your hosting, your accounting software, etc.
- And then lastly, you have equity accounts – where you hold interest in the business if you have stock shares. For the most part, if you’re a small business, you really only have to worry about expenses and revenue, because that’s typically where you’ll see the most transactions
Balance your Books
Balancing your books means that you’re tallying up all of your debts (all of the expenses that you had) and all of your credits (all of the income that you earned), to make sure that they match. When that happens, your books are considered balanced. In most cases, accounting software automatically does this for you. Let’s say for example, over the course of a month, you had $3,000 in expenses and $5,000 in income. Clearly, there’s a difference of $2,000. That means that you need to decrease your revenue account by $2,000 in order to show that $3,000 went out on the expense side.
Profit vs. Loss
Once you balance those books, it’s time to run some reports. The one I find most helpful is your profit and loss statement, also called an income statement. This report breaks down your income and expenses over a period of time. As you start looking at profit and loss reports, you can compare them which can actually help you make forecasts for the future of your business.
For example, if you are a product-based business and you know that the holidays are a big time for you, your profit and loss statement probably shows a lot of expenses going out as you stock up on inventory. On the flip side, when the holiday time comes around, your revenue is going to increase due to selling a lot of product. Your profit and loss report can help you anticipate going forward how much you should be spending to build up that inventory prior to the holiday season. It allows you to forecast where money is coming in and coming out.
When you get your business books in order, it allows you to better manage your business and create a business strategy to help you grow.