Recording Income and Expenses is a Must for Small Business Owners

Every small business owner must plan and enter their income and expenses. Before starting a business, even if it's a second-income business, a prospective business owner needs to develop a plan to record income and the expenses-how the money comes in and where it goes.

Bookkeeping is Essential

"This is why I think for both individuals and businesses the dynamics are the same in the most generic terms. We all need to understand where the money is coming in from, and where the money is going - and many really do not," said Seth David, CEO of Nerd Enterprises in Burbank, California. "In the financial industry I think we like to over-complicate things so that we can all sound and look sophisticated. In reality it is not that complicated for small businesses and I like to think that we make it really easy to understand and even enjoyable."

Seth says a business must write down all the expenses that must get paid in addition to pay for owners and employees.

Business Owners Must Know Their Bottom Line
A temptation may exist for a service business that is starting up and building a portfolio to take on a client who can't pay the current market rate. Seth warns against the practice unless the business owner is willing to adjust income expectations.

He said his own experience when he first moved to California and sought work is similar to the experience of a small business owner. "Before I took a job I had to add up what my expenses were going to be each month so that I could see what I needed to earn at a minimum to live. It wasn't much, but if I just went and took a job without knowing, I could have found myself in a situation where I wasn't making enough money to pay my bills."

If the reality was he had to take a job that didn't pay enough to meet all his expenses, then he would have to adjust the way he lived.

"Many businesses fail to [plan and adjust], and they HAVE TO! They know they can go out and make money - you get a visionary with a great idea. Maybe he has the start-up capital and the marketing skills. So he goes at it with all of the passion needed to start it off. Then as time goes on he starts to wonder why there isn't more money in the bank. Then he finds himself (or she finds herself) struggling to make payroll."

Buying an Accounting System is Smart Money
Seth says the visionary discovers they haven't planned for where the money is going and he finds a broken down accounting system.

"They failed to sit down and add up their expenses ahead of time to see at a minimum what they needed to bring in to pay for everything and still make a profit."

Accounting software programs are prevalent. But office supply stores also have paper based income-expense books that provide a good starting point to understand basic bookkeeping.

Seth urges business owners to lay out a monthly plan then sit down and review it at the end of each month. He also urges business owners in any industry to speak with both an accountant and lawyer to get advice for planning in major areas of the business operation.