Bookkeeping is a critical part of any business. It helps organizing information and quickly understanding the business’s finances; making decisions about the future of the company, including proper budgeting and the correct allocation of resources; and tracking the profitability of the company while successfully managing cash flow. Furthermore, properly managing your books will prepare you for tax season with accurate information regarding revenue, expenses, purchases, payroll, and more.
As a small business owner, it’s up to you to decide how to get this all done – you can outsource bookkeeping tasks, hire a freelancer to do the work for you, or use an online bookkeeping service.
However, many small business owners choose to save money by doing the bookkeeping themselves. While this may sound daunting at first, especially if you have no previous financial experience, with a bit of research and the help of modern accounting software, it’s easier than it sounds. Much of bookkeeping can be broken down into a series of relatively simple tasks.
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Key bookkeeping tasks
- Tracking transactions: Businesses need to record every incoming and outgoing transaction in a general ledger. Make a note of each transaction, the date it occurred, the bank account it is associated with, and a short description.
- Accounts receivable and payable: Correctly invoice clients and customers to get paid on time for the goods and services you provide. Ensure you meet all your bills in full and on time to avoid additional fees and maintain a strong reputation. Many digital payment platforms come with functionality to simplify online accounts payable and receivable processes.
- Preparing statements: Financial statements (balance sheet, profit and loss account, cash flow statement, etc.) are critical documents describing the financial health of your business. They are commonly used by business owners in order to access credit, with lenders wanting information on your finances before agreeing to provide funds. Thankfully, many accounting software packages automate the generation of common financial statements.
- Organizing payroll: Bookkeeping means tracking the payroll information needed to pay employees. This includes hours worked, employee rates, and determining the applicable taxes and other benefits. Again, accounting software or dedicated payroll software can help small business owners manage their payroll.
- Taxes: The main reason business owners don’t want to manage their books in-house is taxes. While It’s true that filing your taxes can be a complicated and stressful process, it only happens once a year, and a range of tools are available to help ensure you accurately and honestly file your taxes. Businesses that follow basic bookkeeping practices throughout the year have all the data they need to complete their taxes. Even if you do end up seeking expert help during tax season, doing your own books for the rest of the year can save you significant funds.
Bookkeeping decisions you need to make
When choosing to do the books on your own, there are a series of decisions you need to make. These include:
With many options available, look for a platform that’s suitable for small businesses with the functionality needed for in-house bookkeeping. This includes tracking expenses, accounts payable, and accounts receivable, as well as creating financial statements, generating invoices, and providing features for double-entry accounting.
There are two types of accounting entry systems: single-entry accounting and double-entry accounting. Single entry is a simpler method that records transactions once, marking them as either an expense or income. It is suitable for small operations that don’t have significant assets or liabilities to track the value of.
Double-entry tracks more than just cash on hand, taking into account the value of the company’s assets. This method records every transaction twice as both a debit and a credit, impacting two general ledger accounts. In a nutshell, double-entry accounting is a more thorough process that can be more time-consuming. But it’s also less error-prone while recording all the information needed to simplify accounting processes and quickly generate financial statements.
Another choice you need to make is between cash-based and accrual-based accounting. Using a cash basis records financial transactions when money is exchanged, while an accrual basis records transactions when the work is performed or the goods are provided.
For example, you provide goods on credit in October and get paid in November. Accrual accounting would record the transaction in October on the date the goods were provided. Cash accounting would record the transaction in November when the invoice is paid.
There are small pros and cons to each method, but the most important thing is that you choose one method and stick to it moving forward.
Bookkeeping in practice – basic steps to follow
When keeping books, remember your goal is to track all your expenses and revenue and collect all the information needed to complete your taxes. Some basic steps to follow to make bookkeeping easier in practice include:
- Keep all your receipts for both sales and purchases: Include as much information as possible for each transaction, including the amount, date, and anything else that might be useful in the future. You may think you will remember, but when it’s months later, and you can’t remember whether an expense is tax-deductible, you’ll wish you had a receipt lying around.
- Keep your ledger up to date: It’s the end of a long workday, and you just want to go home. But staying just a little longer to update your ledger minimizes the chances of mistakes creeping into your books.
- Create financial reports from your ledger: Financial statements such as a profit and loss account, balance sheet, and cash flow statement are critical to understanding how your company is performing. When you’re in the daily grind of running a business, it can be hard to see the bigger picture. Taking a step back and presenting your data in succinct financial statements makes it easier to understand the financial health of your business.
Understanding bookkeeping to understand your business
Bookkeeping is the key to understanding your business. By learning how to maintain up-to-date and accurate books, you can gain deeper insights into your finances, identify trends, and find areas for improvement. Even if you end up hiring a bookkeeper and not doing it yourself, there is real value in understanding the basics of managing your business’s finances.