JoAnn’s tour business was thriving; she couldn’t be more pleased! She loved interacting with the people. She loved sharing her knowledge with others. She loved making money pursuing her passion. What she didn’t love was keeping up with the bookkeeping of the business side of things. She typically would hand over a box full of receipts (the ones she remembered to keep, anyway) and the few bank statements she could find to her tax preparer each year and let him deal with it.
Unfortunately for JoAnn, this method of “bookkeeping” ended up costing her in several ways:
- Her tax preparation fees were sky high because of all the extra work her tax preparer had to perform.
- She paid more in taxes than she needed to because she was missing key information that would have enabled her tax bill to be lower.
- She had no idea how her business was doing financially. She would simply look at her bank account balance from time to time before deciding to do something. Sometimes this would work, and sometimes it would not and she would spend more than she had, resulting in extra fees.
- She would have loved to have expanded – possibly hired on some employees – but she had no idea if she could afford it or not due to the sad state of her bookkeeping information.
- While it hadn’t happened yet, the potential was there for her business to start costing her money rather than making it, simply because she didn’t know what was going on financially. She would have had to have stopped offering tours completely.
You can avoid these sorts of problems in your tour business by having neat, accurate, and current financial information. Here are some ways you can achieve that:
- Have some sort of system. Whether it is accounting software like Xero or a paper ledger, come up with a system. And more importantly, use that system consistently. I recommend having both a system for the actual accounting and a system for your receipt management.
- Have separate business accounts. Credit cards, Paypal, bank accounts…all need to be separate from your personal accounts. Bookkeeping is a lot messier when both business and personal transactions are coming out of the same accounts. And sometimes taxing agencies will frown upon this if you are audited, potentially costing you more in taxes.
- Keep up with your receipts. There are a few different cloud-based digital receipt management systems available: Hubdoc, Receipt Bank, and Shoeboxed are examples. They all can help you sort things and keep track. Oftentimes receipt images can also be attached to transactions in cloud-based accounting software like Xero or QuickBooks Online. However, if you’re still a paper person, a well-organized filing system can work well. Be aware that thermal paper receipts fade with time, so it is a wise idea to scan those receipts as soon as possible to capture the information.
- Categorize your transactions properly. This seems like it would be relatively simple, but it actually can be a bit tricky at times. Discuss with your tax preparer what sort of transactions are tax deductible and which aren’t. For example, is the meal you provide for your guests while on a tour deductible? How about the meal you quickly eat just before the next tour begins? What about the mileage from your home to where the tour begins? Knowing the laws regarding these sorts of transactions will help you categorize them in your bookkeeping system.
- Keep up with your bookkeeping on a regular basis. Most cloud-based applications have the ability to connect with your bank and credit card, enabling them to download the transactions automatically. This is called a “bank feed.” It’s fast and reduces the possibility of mistakes due to manual entries. You would simply go through and enter the payees and categorize the transactions. I don’t recommend waiting till the end of the year to do this though – that’s a lot of work!
- Reconcile your bank and credit card statements monthly. Bank feeds aren’t perfect – sometimes mistakes happen. When you reconcile monthly you are able to catch those mistakes faster, before things snowball and the problem gets bigger and bigger.
By having clean bookkeeping, you will be able to print reports and make business decisions for your tour business based off facts, not just a gut feeling. And best of all, at tax time, your tax preparer will love you!
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