If ever there was a year that spotlighted the need for keeping clean books and records, 2020 is it. What began as an action packed, booming economy, quickly nose-dived when all across the country, stay at home orders forced many businesses to close or pivot to significantly different ways to provide their goods or services. From online and virtual based platforms, to pop up outdoor dining, business owners everywhere scrambled to evaluate their finances utilizing varying degrees of properly kept books.  Tough decisions had to be made, highlighting the importance of accurate bookkeeping.

 

As the tumultuous year draws to a close, the reality of the unavoidable looms for all of us: Taxes.  While 2020 provided all of us with a much different outcome than our business plans could ever have imagined, the need for accurate bookkeeping only became more important. After such a rollercoaster ride, where do small business owners start and what steps should you be taking to prepare your records? Ultimately, the basics of organizing your records for tax time stay the same: Accuracy, documentation, and thoroughness will prevail. 

 

Unfortunately, for most small business owners handling their own books, many important tasks are also the most tedious. Data entry and organization of documentation often gets overlooked or set aside in favor of the more pressing day to day business operations. Eventually this creates a major backlog of bookkeeping. With tax time lurking around the corner, let’s take a look at the key areas to focus on to get you where you need to be.

 

It is important to remember that while there are many components to well-kept records, there are key best practices, that are often overlooked.  

 

  • Reconciling Bank, Credit, and Petty Cash Accounts:  With many of the available accounting platforms utilizing connections with the businesses bank accounts to bring in transactions, I have found that business owners believe this step is automatically done. Technology, while great, isn’t perfect. Transactions may be duplicated, missed in a tech glitch, or categorized incorrectly. Monthly reconciliation of your accounts ensures an accurate balance and that the reports generated, especially year end ones, are populated correctly.

 

  • Document Storage: Paper documentation can be cumbersome and if not managed properly, overwhelming. It is ultimately the business owner’s responsibility to be able to provide the appropriate documentation for expenses. For our clients, we highly recommend digital file storage and there are many apps and programs available that make this task significantly easier. In the event of an audit, you may be asked to provide statements, receipts, invoices, petty cash slips, and cancelled checks. These also may be requested by your tax preparer to confirm that your financial reports are accurate, enabling them to properly calculate your deductions on your tax return. Ease of access to these documents makes things substantially more efficient and less stressful.

 

  • Accounts Payable/Receivable Review:  Year end is a perfect time to review outstanding balances with your vendors. Doing so can help ensure that any credits that have been issued were properly applied, outstanding balances addressed, and will help highlight where businesses are allocating the majority of their budgets (to help plan for the upcoming year). Performing the same task on your Receivables can help facilitate collection of any outstanding debts owed to the business prior to yearend, while also providing a list I of any of uncollectable debts that may need to be addressed.

 

  • Owners’ Equity Contributions: How much are you really investing in your business? The overwhelming majority of business owners that I work with cannot answer this question with precision. This number is an extremely important component and often highly miscalculated. In preparing your books for taxes, it is worth the time spent to review receipts accumulated over the year and ensure that any business expenses paid from your personal accounts are documented and included in the tally. While ideally this would be part of your monthly tasks, it is not too late to review the year’s expenditures and account for out of pocket expenses that you may have incurred.

 

 

Preparing for taxes can be highly stressful, but with some good practices in place, it is a process that can be easily streamlined. Partnering with a bookkeeping firm to maintain your books in real time will not only allow you to experience tax season with ease, but will also provide you with a knowledgeable partner that can help develop the systems that work best for your situation - ensuring that your financial records are always updated. 

 

If 2020 taught us anything, it was that sometimes in life we have to make difficult business decisions without warning. Treating your bookkeeping as if each month is year-end provides you with real-time, accurate information, critical to decision making because you cannot make good decisions with bad books.