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Feature Article

Why You Can't Ignore Your Financial Records

Yesterday I was talking with my neighbor, who is in the process of launching her own business. She was telling me about the "fun" of setting up her bookkeeping system, and it brought back memories of the early days of my own business.

Bookkeeping was one of my most hated chores when I started my jewelry business. Although I've successfully managed my household finances for years, somehow the logic of accounting software eluded me. I viewed the business bookkeeping as an irritating chore that took me away from what I really wanted to be working on.

While I'm certainly not a bookkeeping expert, I've learned a thing or two about managing financial records and their importance to the success of your business. I hope these tips will help you side step a few common mistakes.

Good Financial Records are Crucial to Understanding the Health of Your Business

Keeping good financial records is not simply an exercise to keep the tax collectors happy (although keeping the tax collectors happy is necessary). Good financial records are absolutely necessary in order to understand the health of your business. They will let you know when you are making a profit or help you predict when your business will become profitable. They'll help you to assess whether you are pricing your crafts appropriately in order to cover expenses, and they'll help you to see the progress and growth of your business.

Good Records Help You to Make Sound Business Decisions

Good financial records help you to assess which strategies are working for your business and where you should be putting your money. For example, records of how much you sold at a show compared with all of the costs involved to attend the show will help you to assess the most profitable venues for selling your crafts. That type of data will help you to make informed decisions about whether to attend shows in subsequent years or continue to sell in other venues.

Assessing your financial data doesn't just let you know how you're doing, it also shows you how to improve your business and where to focus your energy and resources. If you wait until the end of the year and gather all of your financial data in a mad rush at tax season, you're not using your available data to make smart decisions about your business.

Understanding and Predicting Cash Flow

Craft businesses often see a real fluctuation in income. You may have a real influx of income at certain times of the year, but other times business may be slower and income may be more limited. You normally need to pay for entry fees to craft shows long before the date of the show, and without good financial record keeping those types of expenses can sneak up on you.

Good financial records will allow you to predict your business' cash needs, budget over time and not be surprised by upcoming expenses.

You'll Know Approximately What You Owe

When you're self employed, you need to save a percentage of your income in order to pay your income tax so you don't get stuck with a big tax bill and no funds to cover it. The amount you'll need to save will vary depending on your location and your income; you can talk with your accountant to get a rough idea of the percentage of income you should set aside for income tax.

It's very tempting to avoid setting aside this money in the early stages of your business; I've seen several people make this mistake. Money may be tight in the early stages of your business, and it's easy to rationalize that you won't owe a lot at tax time if your initial profits are slim. However, if you're not in the habit of saving for your income tax bill, and you're not in the habit of keeping good financial records, business success can sneak up on you, and suddenly you owe more income tax than you realized.

Without Good Records, You'll Likely Pay More Tax Than Necessary

If you don't track all of your expenses, you won't claim everything that you can legitimately claim. You'll either forget about certain expenses, or you won't have the evidence required to demonstrate that you incurred those expenses.

Don't assume it's not worth your time to minimize your tax bill simply because your business is new. You typically have some large expenditiures in the early days of your business (think raw materials, pop-up tent, etc.), and you'll want to get the full value of the tax deductions you are entitled to.

Messy Records Mean a Bigger Bill from Your Accountant

If your records are a mess, and you hire an accountant to file your tax returns, you'll likely end up paying your accountant more that you would have if you handed him or her a clear, well organized set of records. You may think you're saving money by not hiring someone to set up your books properly, but you can easily end up paying in the end with a higher fee to prepare your tax returns.

Get Help if You Need It

If setting up your business bookkeeping is baffling to you, get help. You don't need to hire a full time bookkeeper; there are plenty of cost effective options for getting your books in order.

• You may want to pay a someone on a part time basis to manage your books for you. A few hours a month may be all that's necessary to keep your records in order. Taking this option will mean committing to an ongoing expense, so you'll need to ensure your business is at a stage where this type of outsourcing and expense is appropriate.
  
• You may be able to barter your craft items for bookkeeping services. An aesthetician friend of mine who works from home barters manicures for bookkeeping. It's a win win for both people; my friend has good financial records, and her bookkeeper has beautiful nails.
  
• You may also have someone come in and set up your books properly for you, and once they're set up, you may choose to manage them yourself. This is a cost effective option because the only fee is the initial set up cost. While doing the books may not be fun, there's something to be said for entering those numbers yourself and seeing exactly where your money is going and where it's coming from.

Doing Things Right Saves Time and Worry

A bit of time invested at the front end setting up your books properly will save you a lot of time over the long term. You'll be able to enter financial information quickly and easily, you'll be able to use your financial data to make sound business decisions you'll be able to accurately track and submit any sales tax you are required to collect, and you'll have the peace of mind that you're doing things correctly and not missing anything important.

Don't Put it Off

Many people make the mistake of thinking, "My business is small, I'll deal with that stuff when the business becomes bigger." If you don't have time to deal with setting up a good bookkeeping system when your business is small, how will you find time when your business grows and you're busy fulfulling orders or preparing for large shows?

If you're going to get help with your books, don't put it off. It is generally less expensive to have someone set up your books correctly right from the start than it is to have someone come in and clean up months of messy records. It's much easier to establish good record keeping habits from the early stages of your business than to go back and clean up unclear records and break bad habits.

Thanks for reading the Inspiri Craft Business Magazine.
I welcome your comments and questions.