One of the biggest hurdles that gets in the way of entrepreneurs and their bookkeeping is getting started. And it makes sense. Getting started with a new system is always a daunting task! You have to figure out how you’re going to organize that system, how to use a new program, and carve out time to deal with the backlog! Phew!
I understand why people procrastinate starting their bookkeeping system. When I worked at a public accounting firm, I set up several brand new bookkeeping accounts - ALL of which needed to be caught up by several months, sometimes even years! (Dealing with all of that isn’t nearly as fun as it sounds.)
So, to continue our Bookkeeping 101 Series, we’re going to go over what you need to know to get started with your bookkeeping TODAY!
No. More. Procrastinating.
Step #1: Know where your financials are at.
What’s the first thing you do when you decide you’re going to organize your scary closet? You’re going to open the door and stare at the mess, taking stock of the situation and determining just how heavy of an investment this project is going to need.
Today, your financials are your scary closet.
There are three main categories of people here:
Group A: Just Starting
Group B: Current Year Operations
Group C: Multi-Year Business
Group A is pretty self-explanatory; you’re in this group if you’re within your first month or two of getting things moving. You’ve likely spent some money on blogging/business education, but earned little to no revenue. If this is you, start your bookkeeping system RIGHT NOW. I’d say that your future self will thank you, but making this decision now will probably make your future self’s life SO much easier they won’t even have the mental money-burden needed to remember to thank you. But don’t worry if you don’t know where to start, you’ve got your own section below in this post!
Group B is just a bit past A. You’ve probably started earning money, and you’re starting to feel a little pinch knowing that your bank statements are getting slightly more and more complex with each month. But, your business activity can only be traced back to within the current tax year. In the U.S., that’s usually just a calendar year. In other places, like Australia, that may have started in July of this year. You know when your tax season is. The important indicator is that your business was not reported on your most recent tax return.
Group C are the ones who have been at it a little while. If you’re reading this post, I’m assuming that you don’t have a bookkeeping system, which means you probably went through a mild nightmare trying to get your business numbers on your tax return last year (or even the years prior). You’re the ones who are really, really dreading this set-up process, but you also know that getting your numbers cleaned up and a system in place would be a DREAM. So keep reading!
Figure out where you are, then head on down to the section that applies to you!
Group A: “Just STarting”
You’re in luck! You don’t have much catch-up to do, but you do want to get started now!
My biggest recommendation, especially if you’re not certain about what you’re doing, is to set up a system that automatically tracks all of your bank transactions. That way, even if you have to clean it up a little later (or outsource), at least everything has been tracked in one place!
Here’s what you need to do to get this system in place, today:
Get at least one new checking account for your business. A savings account is also a good idea to save for taxes! However, I'm a huge advocate of the Profit First system, which actually involves a minimum of FIVE bank accounts! If your focus is just getting the basics, at least do the one checking account - then COMMIT to only using that account for business-related activity. Do not mix business and personal transactions!
Decide on a bookkeeping system. You can use Wave for free or invest a little into Quickbooks Online (I recommend the Simple Start plan over Self-Employed). Set up your banking integrations to automatically download your transactions from this point forward - you may even be able to import your full business history if you’ve kept it in a separate account from the start.
Manually enter any transactions that occurred prior to you setting up the separate bank account. This may involve printing old bank statements and highlighting anything business-related, but you want to find as many of them as possible to help your tax situation next year!
Typical transactions in your bookkeeping software will be assigned to the BANK account that the transaction occurred in. However, when entering expenses that you paid out of your personal account, change it from a bank account to the OWNER INVESTMENT account instead! This essentially tells your software that the transaction did NOT happen within your business bank account, but was actually your personal money going towards a business expense.
Voila! Other than learning the basics (post coming soon!) for how to manage that system, you can at least rest assured that everything business-related is being tracked minimally in a system. The next step is simply learning how to maximize the effectiveness of this system!
Bookkeeping-centered Q+A’s are extremely popular discussions in my 60-Minute Clarity Calls! Learn more and book yours today!
Group B: “Current Year Operations”
If you’ve been in business for several months (but within the current year), your process will look very similar to Group A’s, but it might take you a bit longer.
The absolute foundation of proper financial record-keeping is a separate bank account(s) and a tracking system. If you haven't had a separate bank account for your business activity, do that right now! Move all of your income and expenses into that account. You can worry about the historical data or implementing Profit First later - for now, separate your personal and business activity as of today. (Check to see if your online banking allows you to open an account online! This can take minutes!)
Decide on a system. Wave is a great free option, but I ultimately recommend Quickbooks Online’s Simple Start plan for fast-growing entrepreneurs. Either one is a good choice, though! (My clients are successfully utilizing both. I started in Wave but ultimately moved to QBO.)
If you've had everything in a separate bank account, import as far back as you can, though you may need to manually enter some transactions (just line-by-line data entry off your bank statements). This process should cover most, if not all, of your business transactions, if you’ve kept everything segregated. If your personal and business transactions have been mixed, pull out a spreadsheet and scour your bank statements for the full year. You want to find every business-related income or expense for as far back as you need to go! You’ll have to manually enter these, but it’ll be worth it come tax time!
Once you have every transaction recorded, it's all about classifying everything correctly and reconciling your accounts!
Group C: “Multi-Year Business”
Group C, ya’ll are the problem children. Totally kidding, you guys are great. But you’ve got a couple extra steps in order to make your books just as great as you are!
Typically, I find that those of you who have been in business awhile have already figured out that you need a separate bank account for your business. (If not, good Lord, get one! Have I said it enough yet?)
Assuming that’s in place, your process will look very similar to Group B’s above. The problems are going to be your prior year data and reconciling your bank account(s).
So, the general assumption is that you’ve managed to scramble around and get enough data together to file a tax return in the previous year(s).
What many business owners don’t realize is that, by submitting a return with your business’ data, you’re cementing your financials for that year.
Think about it, the whole point of the tax return is to report your exact amount of money earned (and lost) for the year - this number will be used to calculate the exact amount of tax that you must pay on that income. So, if you were to get audited three years from now, that auditor better see that your financial records for your business match your tax return exactly. Otherwise, you technically lied, and that doesn’t look good in an audit.
Barring any discussion on filing amended returns (all of this is complicated enough as is!), this is actually good news for your bookkeeping setup! That means that, rather than sift through all that old paperwork again, all you really have to do is pull your tax return! The year-end values are right there for you to enter into your bookkeeping system.
Along with the year-end totals for your income and expenses, you’ll also want to have your bank account balances for the last day of the tax year. This will be necessary to make sure you can reconcile your accounts properly!
The best way to do this is in one year-end Accountant’s Journal Entry, which we learned the very basics of in the first installment of the Bookkeeping 101 Series. However, journal entries are a bit complicated (and are beyond the scope of what I can write out in a blog post), so I wouldn’t necessarily jump into DIYing that. Lucky for you . . .
Helping you with your Historical Data journal entries is just a small part of how I can help you and your business in my 60-Minute Clarity Calls!
Learn more and book yours today!
Making it Happen!
Are you finally going to stop procrastinating this process?
Group A, you can probably tackle this in a matter of hours (maybe days, if you draw it out).
Groups B and C are looking at slightly more time, but that depends on how organized your business has been up to this point and on how you want to approach this project.
What do I mean?
I mean that you’re always welcome to DIY this project. I’m here for simple questions along the way! My email is: firstname.lastname@example.org
However, as a numbers nerd who is addicted to accurate record-keeping, I have to say that I’d feel much better knowing you had someone walking with you during this complex process!
Getting started is hard. Cleaning up the past is tedious. And learning to maintain an effective and accurate system can be overwhelming. Which is why I have a one-of-a-kind DIY Bookkeeping Coaching program designed to help you with all three!
Consider me your Bookkeeping mentor. I’ll help you get everything set up and cleaned up, plus I’ll teach you what you need to know to maintain the system like the CFO-Boss we both know you are! Learn more here!
Check out the full Bookkeeping 101 Series!
Until next time!
- Katie Scott