Where to Start When Starting… Tracking!
It truly is a struggle for most beginning entrepreneurs to grasp how to start their business. The learning curve can be daunting. The majority of new business owners start by using their personal money to slowly build their foundation. This is very common! However, a lot of times this leads to entrepreneurs struggling to know when to "start" their accounting.
Here is a little secret for you... the minute you purchase something for your business, whether established in the eyes of the state/feds or not, you have started your accounting.
What does this mean?
Well, what this means is that the second you buy something, for what you hope to be a business, you need to track it. Like I said, when you make your first purchase your accounting already started whether you take the time now to do it, or have the headache of figuring it out later.
This can look several different ways:
An Excel spreadsheet
A running list on your phone
Folder in your file manager on your computer
File folder in your filing cabinet
If possible, make it only available in one or two locations and be consistent!
Being consistent will not only help you make it a habit but it will also help you or your future bookkeeper convert all these expenses into viable books that can be presented to your tax preparer.
What does this need to look like or what do I need to track?
The great thing is that when you are beginning, you do not need to start your books from the moment you spend your first dollar. But that doesn't mean you shouldn't still track the money you have spent.
The information that is necessary to track is
The date this transaction took place
The vendor name
The amount spent
The form of payment, meaning the account it came from
Example: 07.10.22 Office Depot $149.99 Personal Checking -1234
The reason I find it very important to also track how it was paid is that when you are building your books, it is inevitable that you will comb through your old bank records and ensure all legally allowed business-related expenses have been applied. This little bit of added information will help you save so much time and energy in the long run.
Pro tip - you can also level up your tracking if you include what you bought. This will help immensely with categorizing once you start putting your books together.
But Audrey, it might not turn into a business...
I hear this a lot as to why people elected to not track their expenses from the beginning.
First, let's be honest - reality is really just a mindset. So if you are trying to shift your future towards success with this wonderful new idea of yours, shift your mindset.
But also, ask yourself - what do you have to lose vs what do you have to gain by taking the step to track?
Let's analyze!
What do you have to lose?
I will be the absolute first one to recognize how much time, attention and detail it takes to create and maintain proper records. So I do not wish to diminish this factor because it is a valid factor.
However, after years and years of experience with receiving literal tubs and shoeboxes of receipts, it takes a fraction of the time to handle maintained records than it does to organize and back build.
Tracking and organizing from the beginning will set you up for future success, mitigate unnecessary stress and save you so much money.
Does this mean you have fun stories?
Of course!
There was an owner who owned four entities, all with mingling funds between the businesses and his personal. He paid over $70,000 to get his books up to date and balanced. I left before they were complete so I don't know the exact total, but ouch.
Another business owner paid over $30,000 to get his books up to date and the state and federal agencies off his butt.
I personally have been paid thousands of dollars to do back builds of books since starting my own bookkeeping firm.
So while the task is daunting.. the bill to fix it might be worse.
The wonderful thing about it, though, is that you are in full control of how this will impact you.
What do you have to gain?
The most important thing that I believe you gain is that you are taking the right steps to ensure you are setting yourself up for success. That point can't be underscored.
Tracking your initial expenses also gains you insights into your finances before you even put them into bookkeeping form. As a whole, with the convenience of modern technology, we have slowly separated from being intentional with our spending.
Because let's be honest - when was the last time you balanced your checking account?
When we just swipe our cards without tallying up the expenses, it can be easy to not know or understand where your money is going. Taking the time to write it down and track each transaction will allow you to start really seeing how much money you are spending.
This will help you to be very intentional with your initial spending before revenue starts coming in - another bonus!
And, who can forget the priceless gain of peace of mind?! Choosing to make your finances a priority from day one will help you a thousandfold - ask anyone who chose the alternative.
My business is official - is my expense tracker enough?
Congratulations!
You have taken the steps to legally form your entity in the eyes of the state and federal government! Woo!! So official!! Love it.
While I would love to tell you that tracking the expenses you pay out of pocket is sufficient I would now like to challenge you to take the next step forward to set your business up for success and moving forward - get a business bank account!
Why is a separate bank account necessary right now?
Getting a bank account is necessary as soon as you take the steps to legitimize your entity.
Does this mean you are juggling one more thing? Yes, but it also means you no longer have to track expenses you pay out of pocket because everything will now go through this account.
I have no money coming in, how can I open a bank account?
Excellent question and one that confuses a lot of folks, so you are not alone.
Think of it this way - you are already personally funding your business, right? So instead of using your personal card to fund expenses, transfer the personal money you want allocated to your business and then pay your expenses.
Doing this will dramatically reduce the need for separate tracking because everything will be listed and available on the business's account.
What if I have my bank account but still used my personal?
Hey, we've all been there and it happens! While it is always encouraged to keep business and personal separate, we are still humans and life does life things.
If you are not in a position to have your books together then this is where you still need your personal funds tracking spreadsheet that lists all the expenses you paid for out of pocket.
Just because you have new tools, this does not mean you should neglect your old ones! That is still your foundation until other standard practices get implemented.
Why do I have to do all this?
It's not a spectacular answer, but it's the hard truth - because the IRS makes us.
But! There is an incredible amount of validity in requiring separate accounts.
When business and personal start mingling, it is to your absolute disadvantage by not only knowing what your finances are doing but also the ability to utilize deductions at the optimum level.
At one point or another, you will need to separate your finances and there is no better time to start than now.
The choice is yours - will you set yourself up for success now, or pay someone to do it for you later?