Why keeping meticulous records from day one can help you grow your business.
If you’re just starting a business or if you’re a sole proprietor, figuring out how to separate the expenses tied to your business from your personal finances can take some getting used to. It can also take time to open business accounts and get the systems in place to properly track your business financials. But that separation is important — it can help you determine how healthy your business is, and it makes life much easier around tax time.
Follow three steps to help you create healthy boundaries between your accounts that may pay off in the long run.
1. Track expenses
To create a successful business, it’s critical to understand your costs. But for business owners who are just starting out, it’s common to use things you have on hand or to pay for supplies with your personal accounts. This makes it harder to estimate the true cost of producing your goods or services, as well as your real operating costs.
Start tracking your expenses by keeping receipts for anything business-related.
Create a habit by putting receipts in one place. If you have a mix of paper and digital, consider taking photos of your paper receipts or printing your digital receipts so you can keep everything in one central location.
Come tax time, these files will help you determine which expenses are deductible — which may lower your tax liability.
Additionally, you’ll start to get a more accurate read on what it costs to run your business, which can help you price your products and services fairly. Underestimating your costs can lead you to price your products or services too low. Overestimating expenses, on the other hand, might make your business seem less profitable than it is, which could be an issue if you ever decide to seek financing.
Create separate accounts for your business to make it easier to keep track of spending. You can start by earmarking a personal account for this, but as your business grows, consider upgrading to accounts designed to serve small businesses.
2. Track income
It can be tempting to add income generated from a new business to any other income you might be making, especially if you’re paid in cash or working as a sole proprietor.
However, keeping this income separate is important for both tax purposes and your ability to build and grow your business. Keep a log of every sale you make and how you’re paid. These logs can be as simple as a notebook or a spreadsheet. This can help you see how much revenue you’re generating from your business, and it can help you identify patterns. Do you make more money on weekends or when the weather is bad?
They’ll also help you at tax time. Generally, business owners must file quarterly tax estimates. You can base these payments on your previous year’s earnings, but it can improve your cash flow to use real records of your income and expenses for the quarter.
3. Look for opportunities
Keeping good, separate records can help you establish a baseline for what “normal” is, so you can start to think about what growth looks like. Consider these questions as a starting point:
- Are these sales sustainable? Analyze whether you can keep sales consistent each month.
- Are you making a profit? Subtract your expenses from your income. If you’re making more than you’re spending, you might take the profits as personal income or reinvest the money back into your business.
- What does growth look like? Think about the best way to grow: scaling how much business you do, lowering costs, or something else entirely.
Once you have a sense of your income, costs, and what you’re hoping to achieve next, you can start to analyze different courses of action. For example, you could test out a sale or promotion to see if overall revenue increases with a discount in place.
Remember, one of the main reasons to keep separate, detailed records is to be strategic about growth.
If you’re running your business in addition to another job, detailed records can help you figure out if and when to take the plunge and work on your business full-time. For this decision, take a close look at your personal expenses as well to see if cutting back might mean you’re able to make the shift sooner.
Accounting and bookkeeping are rarely an entrepreneur’s favorite activity. But starting out with good habits, like separating your business expenses, can make life easier. It may also save you money and help you grow your business.