Many first time business owners often run into similar issues when it comes to finances. This is usually caused by a lack of understanding of accounting and bookkeeping.
Small business owners understand the need to wear multiple hats. They have to be CEOs, marketers, bloggers, salesman, VP, and bookkeeper. It’s the last one that usually gets underestimated. There is a big difference between personal finances and bookkeeping, and business finances and bookkeeping. This leads to misrepresentations of success in various aspects of your business.
Without a solid understanding of bookkeeping and accounting methods, it’s nearly impossible to accurately gauge success or failure. Whether you’re talking about a new product launch, marketing campaign, or customer service policy.
This article will discuss the 5 essential bookkeeping items a startup should track.
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The most important bookkeeping item to track is your cash. When the cash runs out your business is paralyzed, unable to pay bills, debts, or make new investments.
Tracking cash is often done with two logbooks. One to track cash receipts and one to track cash disbursements. This is to help avoid certain issues like overspending.
Once a month an accounting “close” should be done. This should track all important receipts and disbursements of cash to provide an accurate picture of how much cash you actually have at the end of every month.
While you may think you have enough money in the bank to not need to worry about overspending you may find yourself in for a rude surprise.
2- Accounts Receivable
If your company sells a product or provides a service for which payment is not collected for right away, you have accounts receivable. Next to your actual cash, your accounts receivable is the second most important item to track.
Remember, this is money you haven’t been paid yet. Tracking these means accurate and on-time invoices and receipts which allows for timely payments.
This is important for the end of the month when conducting an accounting “close.” This will help you to know where and how much of your money to go out.
3- Accounts Payable
Much like your customers owe you money for your products or services, your business owes others for either their products or services. This means having accounts payable. Or a more demonized word for it could be…
Every business, large and small alike, must pay their bills. This is why it is very important to track your accounts payable so that you know how much money your company is spending each month.
Accurate tracking of accounts payable can be compared to accurate tracking of accounts receivable, providing a clear picture of how much cash you should have left. You can find easy to use tools and software on a bookkeeping website to help you track your transactions, accounts receivable, and payable.
This will often trip up financial records seemingly out of nowhere. Usually, because things like manning hours, requirements, and documents aren’t considered.
For example, knowing you pay three employees $13 an hour and multiplying that by how many hours each worked a week, will not give you an accurate picture of your payroll. You need to know how many hours your business is open, the number of employees needed for one normal day, the shifts they would work, and then the number of employees needed to be compliant with federal and local laws.
This will help you to understand exactly how much you are paying your employees or a more accurate picture of your payroll. Understanding your payroll will help you to have a more accurate accounts payable record. For online payroll support, it wouldn’t be best to rely on a bookkeeping website, however, this should be fairly easy to track internally until you reach quite the number of employees.
Much like payroll, inventory is a touch more complicated than counting your stock. You need to think of your inventory as money sitting on the shelf.
When your account closing at the end of the month reflects $20,000 of merchandise purchased and only $2,000 sold that month, that is $18,000 sitting in your storage facility somewhere.
Understanding this will help you to know how much you are actually moving in terms of money and inventory a month. If your financial records show $10,000 left in inventory and your inventory count reflects $13,000, there is a problem.
Accurate records help to ensure you stay legal and don’t have surprise visits or bills from the IRS.
Summing up Startup Bookkeeping
All these items don’t require any special accounting tools and tricks; these can be tracked with some simple bookkeeping. However, even this simple bookkeeping can ensure you don’t end up with any nasty surprises.
Not only will bookkeeping help you to track your finances with accuracy, but it will also help you to better understand how successful or not your business is. It is impossible to determine a successful advertising campaign without having accurate financial records to validate the reflection in sales and conversion rate increases.
Don’t get overwhelmed by numbers and the thought of accounting. It’s not rocket science or heart surgery, it’s bookkeeping. Just keep the books.