For people just getting started as a sole proprietor with an online business, I generally recommend that they start simple when tracking their finances.

But the concept for doing this is far more important than the tool used. By tracking your inflow and outflow of funds it’s easier to make economical decisions, such as which sites deserve extra attention to get their earnings level more inline with where you want them to be.

The simplest tool is: a traditional spiral notepad and pen, along with two large manila envelopes. Label one envelope and notebook “Income” and the other envelope and notebook as “Expenses.” When not in use, store the notepads in their respective envelopes.

Expenses

When you have an expense, the idea is to keep a paper trail for tax purposes and to track where your money is going. After making a purchase for your business, save the receipt or print one out if you purchased something online. Then in your expense notebook assign a number to that specific purchase and write that number on the back of your receipt big and bold. Finally, record in your notebook the date, store, item(s), and amount. This way it’s easy to locate a specific expense by just using the number. Then place the notebook and receipt in the Expense envelope.

Income

For income, save any check stubs/statements or make a copy of the check. Then in your income notebook assign a number to that specific item and write it on the back of your check stub or other documentation of the income. And don’t forget to record the date, source, and amount of the payment in your notebook. Place the notebook and check stub/statement in the Income envelope when finished.

This system isn’t too complicated and I’m sure you can find ways to organize it even better. In your notebooks, with a little arithmetic you can track monthly totals, categories, etc.

It’s important to keep this documentation so you can reference it when filing your taxes. The notebook facilitates this task, while the receipts are there in case of an audit.

For Part 2 of How to Manage Your Business Finances, I’ll discuss a free piece of software that can make your life much easier than the notebook method.