Choose an Accounting Software (QuickBooks vs. Xero Accounting)
If you haven’t already done so, you need to choose which accounting software to use in order to track your business finances for the new year. Two of the most popular options are QuickBooks Online and Xero Accounting. Click the links for further pricing & features on each. If you choose QuickBooks, Norton Financials recommends using the online version (as opposed to desktop) in most cases as it allows greater flexibility.
Organize Your Business Using QuickBooks Online or Xero Accounting
Once you determine which software is best for your business, you can start organizing your company file. The first step is to add general details such as business name, legal structure, industry, etc. The next step is to organize your chart of accounts. The chart of accounts is a listing of all accounts used in the general ledger of an organization. Each software will come with a default set of accounts, but you will also have the option to add custom accounts specific to your business. Here is a quick video which describes the chart of accounts.
Link your Bank, Credit Card, or Other (PayPal, Square, etc.) Accounts
Once you have your chart of accounts setup, you should link your accounts to the accounting software. This is important as it’ll allow transactions to flow through directly from your bank or other payment vendor to your accounting software, eliminating the need to manually add transactions. Once transactions are feeding through from your bank, you will need to categorize and add these transactions to your general ledger. These transactions will appear in a queue, which is how you will know what needs to be categorized.
Keep Personal and Business Expenses Separate
In order to accurately track business Profit & Loss, you will want to avoid the commingling of business and personal expenses. The best way to separate these two expense types is to designate certain banks/accounts for personal and business use. If you use a business card for personal use in error, you should assign this transaction as a “members draw” once it feeds through to your queue. This will make it so this transaction does not get included as a business expense when reviewing PnL.
Tracking Business Receipts
You should keep business receipts for at least 3 years, because this is how long the IRS goes back for audits. In extreme cases, the IRS will look back for 6 years. The best way to track receipts for business expenses is to keep a filing cabinet or online drive and store receipts by vendor or expense account type (which should be in sync with how you are categorizing in your accounting software).
Review Profit & Loss Monthly
Each accounting software has a reporting feature, which will allow you to pull reports such as PnL, Balance Sheet, etc. In order to understand the Profit & Loss of your business, you should be reviewing these reports on a monthly basis. This will help you analyze the business Income, expenses, and net profit. It’s helpful to create a projection before the year starts in order to estimate business profits. As the year progresses, you should be adding actual results and compare to projected amounts. If needed, you should update the projection to better reflect expectations so you can manage cash flow accordingly.