The key to managing business finances effectively is thorough documentation. Whether it's keeping receipts, processing employee payroll, or recording transactions, everything must be properly documented or stored in software to meet IRS requirements for tax calculations. Establishing good bookkeeping and record-keeping habits early on will make it easier to monitor your business's income and expenses.

The IRS website has more information about requirements for tax calculations.

 

Move beyond recordkeeping

Financial tracking systems need to do far more than just log expenses and revenue. They should integrate with your business’s operational platforms (ERP, payroll, CRM, inventory, etc.) to give you live visibility into your financial performance. Accounting software (for example, QuickBooks, Xero, FreshBooks) will do a lot of the thinking for you, as it’ll have features to generate professional invoices, keep track of who owes you money, help you enter everything accurately for your accountant at tax season and remind you when things are due.

Software also offers:

• Consolidated dashboards that present your financial data across products and expenses.
• Automated bank feeds and reconciliations that reduce manual entry and increase data integrity, lowering the stress of tracking.
• Reporting to understand variances by department, product line, or project.
• Comparing actual expenses against your budget regularly to monitor spending and adjust as needed. This helps in staying within budget and identifying areas where costs can be controlled.

Popular accounting software includes QuickBooks, Xero, Wave, and Zoho Books.

Most offer tiered pricing based on the features and number of users. Be aware of the user interface and ease of use, especially if you do not have extensive accounting experience. You should also choose a solution that can grow with your business, offering additional features and integrations as your needs evolve.

 

A spreadsheet, pen and paper

If you’re just starting out, or the business is part-time and you’re trying to keep expenses low, a simple system to track money in and money out can work.

Using a spreadsheet means you can:

• Set up your own basic accounting system to track invoicing and calculations.
• Create a budget or cash flow.
• Give the records to your accountant so they can export to their software to process your accounts.

Regardless of the method, you’ll need to keep a record of what comes into your business, and what goes out:

• All receipts for all expenses, categorized into various cost centers, for example products, power, internet, rent, wages.
• An invoice or sales book to record sales, past, present and future.
• Details of any drawings of cash from the business, or money spent on personal items.

Ideally, you’re using a more accurate system and there are several free accounting software platforms you can use.

 

Keeping track of your cash

Whichever accounting system you decide to go with, having one on board allows you to make better decisions based on what is happening in your business now and in the future.

It’s essential to identify key trends in your business that will not only inform your decisions but also help you make strategic moves to scale your operations. For example, knowing which:

• Products and services generate the most revenue allows you to focus on high-performing areas and prioritize resources.
• Customers account for the majority of your sales to identify loyal clients and those worth nurturing with targeted marketing or service offerings.
• Products deliver the best profit margins enables you to adjust pricing or marketing strategies to maximize profitability.
• Customers consistently pay late helps you take proactive measures to improve collections or adjust your credit policies.
• Accounts are consistently slow, and how that affects your working capital.

By understanding these cash trends, you can better position your business to optimize profits, identify areas for improvement, and gain clear visibility into where your money is being spent. This ongoing analysis will provide you with the insights needed to make smarter decisions and guide your business toward sustained growth.

 

Next steps

• Evaluate your business needs and figure out which is the best accounting system that allows you to see your cash position at a glance, keep accurate records for the IRS and one that helps keep track of, and spot, cash trends.
• Talking to your accountant is an important first step as they’ll have good advice about what system to use, and they’ll want to know it’s one that’s compatible with their own.
• Most accounting software gives you access to free trials.

Keeping track of finances is crucial for small businesses as it provides a clear picture of the company's financial health and ensures informed decision-making. By monitoring cash flow, expenses, and profits, you can identify trends, plan for future growth, and address any financial issues before they become serious problems. Good financial management also helps with budgeting, tax compliance, and securing financing, ultimately giving your business a solid foundation for long-term success.