I didn’t think about keeping records of my finances until I read how important it will be to file self-employment on my taxes. Book keeping plays a major role in putting the correct amount on your taxes. Filing the wrong thing can break you and get you in trouble with the IRS. Being that I am starting out with sole proprietorship as my legal structure, I receive all the profits and it is taxed as personal income. Keeping records of your finances helps you understand where your business stands financially.
I was just going to go into this with a bank account and let all the profits I make go into the account. After realizing that I will have to fill this income on my taxes, I thought to myself “well how am I going to keep track of everything.” That’s when I came across book keeping. They say many home-based businesses can get by without detailed financial reporting because you yourself can keep up with your bills and have a little bit of money to put away in your savings.
Choosing what works for you is another way to ensure the success of your business. An accurate account system will help you review your businesses strengths and weaknesses. Keeping a balance sheet will show the worth of your business. It will show the difference between its assets and liabilities. So, in simple terms, this shows if you were to shut down your business today and pay off all your bills, loans, and liquidated your assets, would you have money left over. Another thing that you should keep record of is profit and loss statements because is shows you the difference between how much money your business is bringing in and how much money it’s spending. Another term you may have heard is revenue vs expenses. In a nutshell, if your bringing more money then your spending, then your making a profit. If your spending more money then your making, then you have a loss. Cash flow projections will tell you where your money is going and whether if you’re going to have enough money to pay your bills and to run your business or not.
A quick tip: For many start up businesses a cash flow projection is very essential since you have recurring expenses. This mainly applies to businesses that aren’t run online. You have employees, rent, and other expenses that will come up when your starting up a business.
Running an online business is a little different when keeping record of the finances. My business is mainly online, so I must keep record of my finances a little different. I will keep tract of everything by using an account system, something simple of course. The simplest form of accounting system will be a lot easier to manage.