Accounting and Bookkeeping for Your Own Home Based Business
Many new home business ventures are unsuccessful because they lack the financial systems necessary to keep track of their finances and cash flows. It’s all too common for home-based business owners who don’t like the idea of keeping their own accounting records, to think that as long as money keeps coming in, their business will be fine.
However, it is not really that simple when you are engaged in business.
If your goal is to stay in business for a long time, you’ll need to understand your cash flow and financial situation for a number of reasons. (I’m not pointing this out to scare you, but to make you aware that you don’t make these common mistakes!)
Cash flow
This is critical to running a business. Without cash, your business can fail, no matter how much profit you’re making on paper. Cash is king. If you run out of cash, your creditors can take you to court to get payment or even try to liquidate your business.
Taxes.
As one of the few things in life that are certain, taxes are very important to any business, as non-compliance can lead to serious penalties and even the loss of your business.
So you need to keep track of all your income and expenses while making sure the relevant tax entries are done correctly.
Reports
You will need to produce reports for several reasons. Depending on the status of your business, you will need to make different types of reports and submissions to the relevant authorities. Some examples are an annual statement of profit and loss, a balance sheet, and a cash flow statement. If you are operating for your own account, you will still need to file annual returns, although not as burdensome as for a corporation.
controlling your business
One of the best techniques used to monitor a business is through the use of financial data. Your monthly reports tell you how well (or poorly!) your business has been performing and can highlight areas where improvement is needed. It can point to certain indicators that all is not well. Things to look for are:
• Turnover: was it high enough?
• Profit margins: are they in range?
• Overhead – Are your costs under control?
• Net benefit: are you really making any profit?
This is best done against a budget or forecast. Most of the larger organizations prepare budgets for the next fiscal year and these act as a goal or business plan. It then compares the actual results with the forecast to see how your business is performing and make any necessary adjustments if it isn’t.
Hopefully now you understand the importance of having a good accounting system.
Setting this up doesn’t have to be complicated. We are in the digital age and computers make bookkeeping so much easier than it was in the days of big written record books!
Before choosing accounting software, you should read my previous article on “Small Business Accounting Software” as this will help you decide what features to look for in relation to your own business.
If you’re a very small business with few clients and little paperwork, you can simply use a spreadsheet to keep track of things. (I personally do this at a self-employed home based business and it works great).
However, one of the advantages of using accounting software programs is that they will balance your books for you, eliminating a potential headache!
All you have to do is enter the data on one page and the program will take care of everything else. Most accounting software programs will automatically perform the required accounting process and immediately update your statements. Retrieving your data from an accounting program is also easy. The financial reports that your business is likely to require can usually be generated by the software (Check this out before you buy!)
This saves you so much time that the software will pay for itself many times over.