In the last blog post, I was able to talk about credit, one part of preparing your small business to apply for a successful loan in the future. Today, I’m going to talk about another important element: Keeping good financial records. If you never apply for a loan, you will find that keeping good financial records will make running your businesses more efficient, which will save you money in the long run. To demonstrate to a potential lender that you are a good investment, a clear understanding of what is happening with the money in your business is an important tell.
An example of some ways you can prepare to keep good records include:
- Immediately separate your business and personal accounts.
- Set up an accounting system and understand it. (Even if you hire a bookkeeper)
- Unless you’re a sophisticated corporation, use cash accounting, not accrual.
- Have a separate savings account for taxes.
- Demonstrate a good financial history and tax flow.
Separate your business and personal accounts
Some businesses start slow. Maybe you’re providing a service for a few people and you decide to make that a permanent business. Eventually, you’re running a business, but all of your money is mixed in a single bank account. At the time you decide you have your own business, make it official by getting a bank account for it. Do the same thing with a credit card. Keep your business expenses ONLY on your business credit card.
One reason for this is that you will have a much easier time at tax season when everything is in one account. With the credit card, you will be doing yourself a service if you keep your business charges separate. If you ever look for a debt consolidation loan for your business, you will need to verify each business expense. It’s much easier if your business expenses are on their own card, and not absorbed into a personal credit card. You will also want to track all of the expenses that are attached to that credit card. If you have personal charges, you will not be able to accurately attribute your charges to the business.
Set up a bookkeeping system
Accounting software programs can get quite sophisticated, but small business owners can often start with Quick Books or Quicken. You will want to keep track of everything that comes in and goes out of your business. You can often learn the basics of setting up your books through programs at the North Coast SBDC or adult education classes through various programs including College of the Redwoods. It is important, as a business owner, that you understand your bookkeeping program, even if you hire a bookkeeper. There have been far too many cases where a bookkeeper has made a mistake, or worse when working under a trusting business owner who doesn’t really keep their own close eye on the books.
Use cash accounting
Businesses often ask whether they should use cash or accrual accounting. Unless you’re a sophisticated corporation, you will want to use cash accounting so that you know, at any given time, how much money you have available to work with.
Have a separate savings account for taxes
I once heard a counselor at the SBDC call this account the, “Not My Money” account. If you’re in a business where you have sales tax, put that money that you collected aside in another account as soon as you get it. There is no flexibility with paying the Board of Equalization. It doesn’t just affect your credit. They could close doors by nullifying permits until you pay them. They could put attachments on all of your personal bank accounts to take when they’re owed. Best to keep the money aside so it doesn’t accidentally get spent for other business expenses.
Demonstrate a good financial history and cash flow
If you have a good financial history, you will not only be more likely to get a loan, but you will be eligible for loans with better terms. To show a strong financial history, you will want to show all revenue, even if you’re in a cash business. When tax time comes, you will need to pay taxes if you made a profit. It is not only illegal and unethical to not account for all of your income, but it is the figure lenders will use to determine whether or not you qualify for a loan. A lender will not be swayed if you tell them that you actually make more, but you didn’t report it all. In fact, if they are swayed in any direction, it likely be a point against you.