1. Keep Business and
Personal Finances Separate
This
is a restatement of the Golden Rule given above. Unfortunately, it’s
one of the most violated rules. Even if you are self-employed or a
freelancer, I highly recommend you have separate bank and credit card
accounts that are used exclusively for business.
By
eliminating all personal transactions from your business accounts,
you will reduce greatly the number of transactions your bookkeeper
must categorize and reconcile. I’ve personally done the bookkeeping
for small businesses where more than half of the transactions
in their “business” accounts were personal. Sorting through your
personal transactions is time-consuming, expensive, and can lead to
mistakes.
2.
Pay Yourself a Salary
Owners
of C-corporations and S-corporations must pay themselves a reasonable
salary and run it through the payroll system like any other employee.
However, I suggest that self-employed owners, freelancers, and
partners also pay themselves a “salary” although, technically, it
will be an owner’s draw and not included in payroll.
Paying
yourself a salary reinforces the notion that your business is a
separate entity and reduces the need for you to violate the Golden
Rule by having your business pay your personal expenses directly.
Instead of numerous transactions during the month where the business
pays an expense on your behalf, have the business write you one check
per month that you deposit into a separate account used to pay your
personal expenses.
3.
Reimburse Yourself for Business Expenses
Despite
your best efforts, there will be times when you pay for a business
expense with personal funds. Remember, the Golden Rule says these
business expenses should appear in your business bank account. To do
so, have the company write you a check to reimburse the expense you
paid with personal funds. This should be a separate check from your
monthly salary.
The
process for reimbursing yourself should be the same as for employees.
List the expenses along with the date, vendor, and purpose on a
spreadsheet and attach the receipts. Your business then writes you a
check for the exact amount. While this is a bit of a hassle, it will
guarantee your bookkeeper deducts the expenses since they were paid
with a check from the business account.
4.
Track and Reimburse Business Mileage
Your
business can deduct a standard rate per mile (57.5 cents for 2020)
for any business mileage you drive using your personal vehicle. Track
the date, miles, and purpose of each business trip and submit it for
reimbursement with your monthly expenses as explained in tip three
above.
The
business should not directly pay any expenses of your personal
vehicle, even for fuel that will be used entirely for business. You
should use the 57.5 cents per mile received from the company to pay
for your fuel and maintenance.
5.
Keep Your Receipts
While
bookkeeping systems don’t rely on receipts to identify
transactions, the IRS does require receipts for all tax deductions.
An old-fashioned method of keeping receipts is to have a file folder
for each vendor where you place paper receipts. A newer method is to
scan receipts and attach an electronic copy of the receipt to the
transaction within your bookkeeping software. This is a pretty nice
function that many accounting programs include for free.
6.
Outsource Payroll
According
to a study by Wasp Barcode Technologies, 50% of small businesses
outsource their payroll accounting. I highly recommend you do the
same. Issuing paychecks, withholding employee taxes, and filing
payroll tax returns is a cumbersome process that can be outsourced
easily for a reasonable price. Many payroll providers even integrate
with your accounting software so that the necessary accounting
entries are loaded automatically.
If
you do outsource payroll, I recommend opening a separate business
checking account dedicated solely to payroll so that your payroll
provider doesn’t have access to your primary account. In addition,
when times are tough, you can ensure there is money in the payroll
account, even if your primary account is overdrawn. There are few
things worse for employee morale than bouncing payroll checks.
7.
Hire a Pro to Set Up Your Accounting Software
There
are many great choices for small
business accounting software but
setting up accounting software properly is complicated. The better
the software is tailored to your business, the easier and more
beneficial it will be to use. Approximately 82% of experts surveyed
believe that the initial setup of a computer accounting system for
small businesses should be done by a professional.
Hire
a pro to customize your chart of accounts, products and services,
customers, vendors, and invoices. Be sure to have them show you how
to make changes to these lists as necessary. Once these lists are
complete, everyday transactions like issuing invoices and paying
bills are very easy.
