October 6, 2020
Good record keeping is just good business. How you manage data, account for financial transactions and store and retrieve your records is part of running and maintaining your company. Use the following six tips for a more successful balancing act.
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The following excerpt is from Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers
1. Separate business and personal data
The line between personal and business finances can get blurry for solopreneurs. It’s important to separate the two, so you can easily monitor the progress of your business, plan for the future and create financial statements for specific periods, such as monthly or annually.
Clear business records allow you to identify sources of income, tag tax-deductible expenses and easily prepare your taxes. Without a proper record-keeping system, tracking the details of your business and complying with the law may be close to impossible. For instance, if you don’t have a system to determine which restaurant meals or vehicle miles were personal and which were for business, you might be unable to claim valid business expenses as tax deductions.
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2. Use a business bank account
To keep your business and personal finances completely separate, open a dedicated business bank account. If your business is incorporated (such as an S corp or LLC), you must have separate accounts to legally distinguish your business and personal finances. Remember that the purpose of incorporating is to create an entirely separate entity from yourself. You’ll need a separate business bank account where you can deposit checks made payable to your business.
If your business name is the same as your personal name, you could likely cash business checks or deposit them into your personal account. And regardless of your business-entity type or name, you can pay business bills and expenses from a personal checking account and still claim them as a business-tax deduction. But these actions certainly muddy up your financial waters. So even if you could avoid having a business bank account, it’s still a good idea to establish one.
3. Apply for a business credit card
Most business checking accounts offer a variety of ways to make payments, including debit cards, online bill pay and electronic transfers. However, depending on the amount and type of purchases you need to make, you may want to apply for a business credit card. Just like with a business bank account, a business credit card makes it easy to keep your business and personal finances separate.
You don’t have to own a huge business or even incorporate to qualify for a business card — even part-time sole proprietors may be eligible. You can apply for a card even if your business is new and hasn’t started earning revenue. However, if you do have income, that’s a plus. You’ll likely need to estimate your anticipated spending on the card, which helps issuers determine the size of your credit line. If you’re not sure how much available credit you’ll need, it’s better to estimate higher rather than lower.
4. Find an accounting system suited to your needs
No matter the type, size or complexity of your business, you must find an accounting system that suits your company’s requirements. The IRS allows you to choose any record-keeping system you like, as long as it clearly shows your income and expenses. Your system could be entirely manual and written on paper. But I don’t think there’s a real substitute for an online financial tool or desktop accounting software (paid link).
Just think about the advantages of being able to use a smartphone app to send an invoice, track billable time or take a photo of a receipt that gets automatically uploaded and stored in the cloud. Most small-business accounting programs are easy to use, even if you’re not an accountant. They typically allow you to upload images of receipts and documents and to automatically import data from financial institutions.
5. Always get receipts for business expenses
While being self-employed means that you’re responsible for paying more taxes than a W-2 employee, the upside is that you get to claim business-tax deductions. Tax deductions are great because they reduce the amount of taxable income for your business, which in turn cuts the tax you must pay.
But the proof that your tax deduction is valid is on you. That means you must keep supporting documents, such as receipts, invoices and payments to employees. The good news is that you can store these crucial documents digitally, instead of as paper records, if you wish. You can still claim a tax deduction even if you don’t have the receipt. However, if the IRS audits any of your tax returns, you may be asked to explain exactly how you calculated the taxes you paid.
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6. Go as paperless as possible
Going paperless, or as paperless as possible, saves space in your office and keeps your data and documents safe from theft, fire or water damage. Not only does a paperless system save environmental resources, but it also saves time. Try to eliminate all incoming papers, such as bills, account statements and receipts.
Note that there are some vital paper documents you will still need to keep, such as deeds, licenses or business records with original seals. You may have other records or contracts that should be retained for legal purposes. When in doubt, check with an attorney for legal requirements and statutes of limitations in your state. Continually pare down what you receive each month. Every time you open your physical mailbox and see paper inside, make a note to log on to your online account or contact the merchant and request to go paperless.
No one likes hitting the books, but it’s essential if you want to stay in business.
The following excerpt is from Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers, out now via Entrepreneur Press. Purchase from Amazon | Barnes & Noble | Bookshop | IndieBound (paid link).