The new year has come, and hiding just behind the celebrations and the new year’s resolutions lists is the tax man waiting to strike. Taxes started for me in early January when I first put together a list of everything I needed to do to bring my corporation’s books up to date for 2006. It won’t end until everything is filed, but the worst is behind me.

In spending countless hours putting together my financial statements I’ve learned quite a bit this year. I’ve taken what I’ve done well with the mistakes I’ve made along the way to provide some tips to owners of small businesses panicking about the dreaded notion of bookkeeping.

Reasons to Keep Your Books Up to Date

Most of the small business owners I’ve spoken to are a few months behind on their books on any given day. It’s natural to want to toss it all in a pile (or more likely 1000 different places) and catch up a few times a year. I’ve done this plenty of times, but as of February 2007 I vow to never let it happen again. Here are a few motivators for keeping the books up to date:

• Tax filing becomes much easier. Come tax time you will have to do an exponentially smaller amount of work when the books are all up-to-date.
• No playing detective. Putting off bookkeeping inevitably results in coming across purchases and payments with missing information that were made months ago. Inputting everything right away ensures you aren’t hunting through old statements and receipts trying to figure out what you bought for $14.95 4 months ago.
• Take advantage of valuable financial analysis. Any decent accounting software package can provide a wealth of information about your financial situation at any given moment. Want to compare your Profit & Loss statements for the last 3 months to see if you’re on track? It’ll take about 3 minutes to generate these reports if your records are up to date. You can also keep on top of your cash flow situation, view financial ratios, track your sources of income, make sure money is being collected, and generate more graphs than you could ever imagine.
• You’ll know if you’re making money. If you haven’t tracked all your expenses and all your income, how do you know if you’re turning a profit? How can you judge if you’re expenses are running amok? A positive bank balance means you have cash, but it won’t tell you much else.

You get the point - bookkeeping is a good thing. However it’s not a particularly exciting task and only starts feeling urgent when someone else needs your information, be it the tax agency or a potential investor. At that point it becomes a race to put everything together in time. It’s a stressful and time-consuming approach, and denies you the use of your own financial information when you yourself need it.

If you are a small business owner that isn’t standing smirking right now, knowing all the accounting is done, join me in making 2007 the year the books stop being a thorn in our sides.

Tip #1: Get a Decent Software Package

Far too many people that I have met use Excel spreadsheets as their accounting solution, and they all insist that their spreadsheets are coded correctly and work fine. Unless you have a very good reason not based around saving $200, buy a decent accounting software package rather than trying to come up with your own solution. You’ll thank me when:

1. Your books always balance.
2. You can generate a wealth of financial reports on the fly (and be confident they are being generated correctly)
3. You realize the amount of time you’ve saved over trying to maintain your accounting own system.
4. Take advantage of all the extra features put in to make your life easier, like invoice generation, customer management, online banking integration, etc.

I’m personally a QuickBooks user and love it, but choose whatever fits your requirements and has an interface you will be comfortable with. Initially working with an accounting package can be intimidating and you can find yourself looking through help far longer than actually doing bookkeeping. I’ve come to the conclusion that this is one of those things you can only ever learn by diving in and doing it, so don’t let not knowing how to enter everything keep you from starting.

Tip #2: Learn the Basics of Accounting

It’s not as boring as it sounds! I’ve actually enjoyed taking accounting courses and will happily take more. If you aren’t interested in taking a course a book will do just fine. Regardless of how you choose to learn, by taking the time to understand basic accounting principles such as Assets = Liabilities + Owner’s Equity and how these components are calculated and linked you will understand what your accounting package is doing behind the scenes and have a much easier time understanding how transactions should be entered (not to mention what your financial statements are telling you!).

Tip #3: Automate Your Books

Not all transactions can be entered immediately, nor is it particularly efficient to enter every $4.95 customer payment the moment you receive it. In keeping updated books I’ve found it’s much more important to put a process in place that ensures the data gets captured in a regular and consistent manner instead. If you are lucky enough to have a sufficiently digital business, automation for you may literally mean importing data from an e-commerce system or a cash register automatically. For most of us there is a significant amount of record keeping that involves a human, and being a small business that human is often the owner. This is where the system breaks down, as regular tasks are put off for days, then weeks, then months. Luckily humans can be automated too by putting the right processes in place.

To make sure these regular tasks do indeed get done regularly a trigger is needed. At the moment I have my Outlook calendar setup to remind me of important monthly accounting tasks. These are recurring appointments setup with actual times booked off, which ensures that I will do the tasks when the appointment actually pops up. I experimented with flagging all-day events with no specific time, but I found that I simply keep snoozing the Outlook reminder until I accidentally dismiss it and the task ultimately doesn’t get done.

I have a number of situations where setting up recurring automatic tasks makes a lot of sense. For example there are a number of PayPal customer payments that I receive on a monthly basis through the PayPal subscription system. I could enter these each time the transaction occurs and have my sanity slowly wither away, or I could export an Excel file once a month and put the transactions in then. Before I booked off time to actually do this every month it simply piled up, but now it’s a regular appointment that I can adhere to.

Tip #4: Reconcile your Bank Accounts

Ideally you should reconcile your banking statements against your books each time you receive them. This is an invaluable check to ensure that all your records relating to this month are in fact entered and helps greatly in avoiding things falling between the cracks. QuickBooks has a feature built-in specifically to do this, and I’m sure other packages do too. For example by reconciling my main checking account I know that I have entered all the payments that I received this month along with all the expenses, and I know everything required to have been able to enter those transactions is done as well (for example if I have recorded a customer payment, I also know that the invoice was done).

The process itself is quite simple. You take your bank statement and ensure that each of the transactions on it match with what you have entered, and once this is done that the beginning and ending balances are. If you have mistakes, duplicate entries, or omissions this will highlight them very efficiently. I’ve found it particularly helpful in catching small discrepancies as a result of minor typos or incorrect rounding. In QuickBooks there is a separate function available to do reconcile, which tracks which transactions have been reconciled and generates a reconciliation report for each statement you do this for.

To make sure reconciliation gets done you need to setup a trigger as explained in tip #3. The natural temptation is to use receiving the statement itself as the trigger, but I’ve found it’s far too easy to toss it on your desk and leave it for “later”. In this case I again cast my vote for a calendar appointment, made several days after you expect to have received the statement. A subtle bonus is that if your statement gets lost in the mail you will notice its absence.

Tip #5: If You Get Stuck, Enter it Anyway and Seek Help Later

I still run into transactions that I’m not sure how to enter correctly, and when first starting out with QuickBooks it felt like half entries fell into this category. I used to let this stop me dead in my bookkeeping tracks since I refused to enter the transaction until I could find some help on how to get it entered correctly. I had quite a few of these unentered transactions, and once I knew that even if I entered what I could my books would still be missing lots of data there was no longer any motivation to keep them updated regularly.

I’ve realized now it’s much better to do my best at entering anything I’m stuck on, write down the questionable transaction, and double-check the list with a bookkeeper later on. In going through this improved process I found that I had in fact entered most things correctly after all (if not necessarily in the most efficient way), or had only minor errors to fix.

Tip #2 really helps here since by understanding the underlying accounting principles it’s much easier to make an educated guess with an entry and to know when something doesn’t seem to be entered right (ie. the wrong accounts have changed). Accounting packages also do a lot of work to ensure your books are balanced, which makes it harder to really mess things up.

Get those books up to date now!

That ends my five tips, although I can come up with more (future article perhaps?). Note that these tips have all focused on setting up a system for keeping your books up to date. This is key since trying to do bookkeeping adhoc and promising yourself you’ll keep at it just won’t work. We’ve looked at remedying this through tips on getting the right tools and knowledge, setting up regular processes to ensure your transactions get entered, and verifying this data.

Disclaimer: I’m neither accountant nor attorney nor likely live in the same country as you. This article is not intended as tax or legal advice and does not replace such advice. Consult a professional before acting on anything you have read on this blog. I’ve found the tips above helpful personally, but cannot guarantee the accuracy of the article.

I love mind-mapping and find it to be an incredibly useful format for everything from planning an event to working out complex software architectures. It’s great because of the lack of constraints that it imposes on the thought process. It is similiar in many ways to the familiar brainstorming setup (and you can indeed use it for this), but it provides a more formalized approach that makes it possible to do much more.

When I first wrote about the business usefulness of mind mapping I came up short when it came to recommending mind mapping applications. Mindjet’s MindManager is great if you are willing to foot a $349 bill ($229 for basic version), but unfortunately that places this invaluable tool out of the hands of the entrepreneurs and small business owners that could benefit greatly from it.

FreeMind 0.80 is the first free replacement I have been able to find that is intuitive and slick enough to provide a worthwhile replacement. Mind mapping is a rapid process requiring an intimite link between the mind and the resulting mind map. The clunky basic interfaces that I previously experienced with other free (and commercial) applications just weren’t suitable for the process. Creating a map in FreeMind is a freely flowing process with minimal interface gripes (I strongly recommend setting the “Selection” setting to “Click” to avoid your selected node changing when you hover the mouse over a different one). It supports the nifty and arguably essential concepts of clouds and icons as well, and with some playing around with formatting the maps don’t need to be the dull grey color.

I have successfully used FreeMind the past week in all my software design work. I’ve decided the application is stable and useful enough to actually entrust my work files to it. If you haven’t had the chance to experience mind mapping due to the relatively high entry barrier for software, I highly recommend this.