When it comes to running a small business, keeping accurate accounting records that are up-to-date is one of the most important tasks you need to get done. You probably didn’t start your business with a passion for bookkeeping, though, so it can also be one of the most tedious and difficult tasks on your shoulders. But it doesn’t have to be. We talked to a bunch of bookkeeping experts and seasoned SMB owners to get their best bookkeeping tips and tricks.
Check them out!
1. Understand why your books are important
First, it’s critical to understand just how important accurate bookkeeping is to your business. As Michelle Devani, Founder of Love Devani, says, “Bookkeeping may not be an enjoyable task to do, but it is vital to your business’ success. Proper bookkeeping can help you measure the financial performance and well-being of your business. It will allow you to manage your accounts better and help you make smart and strategic financial decisions.”
A bookkeeping system is particularly “integral to managing your cash flow. It makes sure that expenses are recorded properly and income values are maintained,” reminds Aqsa Tabassam, Growth Marketer & PR Manager at Kolfox.
Bookkeeping doesn’t just help you get the measure of your business’ current health, though. “A business owner can also gain a better understanding of how far they’ve come by using bookkeeping. You can see patterns and make comparisons with previous business years by looking back,” says Nicole Graham Lifestyle/Relationship Coach at Womenio.
And finally, good bookkeeping makes a variety of third party interactions a lot easier. With good bookkeeping, “when you eventually want to get in touch with lenders, it will be easier for them to make informed decisions,” says Sarah Walker, Founder of dogfooddesire.com.
Tax expert Abby Eisenkraft, CEO Choice Tax Solutions, Inc adds, “The IRS requires that ALL businesses have books and records. Many SMBs think they are not a business if not incorporated, etc., and this is a mistake. Regardless of size, it’s imperative that the SMB review income and expenses, even if it’s outsourced to a bookkeeper. The taxpayer is ultimately responsible for what is on the tax return.”
2. Learn the basics
For brand new SMB owners, learning the basics of bookkeeping is fundamental to success. Kylie McQuarrie, accounting staff writer at Business.org, lays out the two steps every owner should master:
- “First, small-business bookkeepers need to set up a general ledger, which is where they’ll record all their business’s financial transactions. The general ledger is comprised of several business accounts, or subdivisions of the general ledger where you record business transactions by type. (Some of the most common business accounts include asset accounts, liability accounts, and expense accounts.)
- Second, get to know the difference between single-entry bookkeeping and double-entry bookkeeping.”
Katherine Brown, Founder & Marketing Director Spyic, elaborates on the differences between single and double entry:
- “Single entry means all transactions are recorded in one place. This is the most basic and most uncomplicated system. You can use it if your income comes from only one source, like when you sell all products on Amazon, for example.
- Double-entry is the most common accounting system. In this system, your income comes from multiple sources like your own website, and at the same time, you sell products on Amazon or eBay. In double-entry accounting, transactions are recorded in two places: debit and credit. The advantage of this system is that it gives a quick and clear view of all your finances which is essential when you have multiple sources of income.”
3. Leave an audit trail
One of the smartest things you can do for your business is to leave an audit trail.
“An audit trail is the physical evidence of all your financial transactions, and can be a huge help in simplifying the bookkeeping process,” says Perry Zheng, CEO & Founder of CashFlowPortal.com.
“Keeping a record of all your business’ transactions will help you improve accuracy and avoid errors. These documents can include invoices, bills, purchase orders, credit card receipts etc. Closing books at the end of the month will become so much easier when you have the physical receipts right by your side.”
More than just keeping a single audit trail, Dmytro Serhiiev, leading tax consultant at PDFLiner, implores business owners to “Backup everything.” A highly detailed and backed-up audit trail “may help you prevent fraud, find critical budgeting mistakes, find missing transactions, or provide the IRS with your full transaction history if any problems occur.”
4. Prepare with taxes in mind
Paying your taxes is a huge part of running your own business successfully and you should be thinking about them all year round, not just during tax season. First, CPA Ann Hooper suggests, “Small business owners should set aside at least 15% of their revenue each month for taxes but should contact their tax preparer to make sure they are saving enough.”
Next, keep track of tax deadlines. “You don’t want to get caught up paying penalties because you missed a few deadlines. A good practice is to set reminders for all the important deadlines, so you can stay up to date,” says Perry Zheng.
In addition, Abby Eisenkraft, CEO Choice Tax Solutions, Inc., reminds SMB owners to keep their accounts in formats the IRS accepts. “Scan your receipts so you can get rid of the paper. The IRS does not accept credit card or bank statements as the sole support of a category they are auditing. You need receipts!”
5. Use accounting software to automate your work
Experts everywhere recommend automating as much of your accounting and bookkeeping as possible.
Danetha Doe, financial wellness educator and creator of Money & Mimosas, says, “Use a cloud-based bookkeeping software system. This will allow you to access your financials from anywhere in the world and when you hire a bookkeeper/accountant, they will be able to see your information in real-time.”
Hugo Samengo-Turner, Co-Founder of needyfish.com, points out that the “rule of thumb is that SMB owners can get by with software that can do: cashbook, ledger, bank reconciliation, accounts receivable, and accounts payable activities.”
Using cloud-based accounting software doesn’t just mean you can access your data from anywhere in the world. It also keeps your financial data highly secure. “Many bookkeeping solutions, if not all, use data encryption to help keep your information safe, and due to their online nature, your data will always be backed up and up to date. Also, any changes to federal and/or international variables will automatically be updated,” points out Sonya Schwartz Founder of Her Norm.
6. Outsource your bookkeeping if possible
Many SMB owners recommend outsourcing your bookkeeping to a pro if possible.
Kristin Stump, Marketing Manager of MyEnamelPins.com, shares what you can expect of professional bookkeeping services, “Modern bookkeepers may be tasked with a variety of activities, such as:
- Managing accounts receivable. Bookkeepers are responsible for preparing invoices and sending them to clients so that you can receive payment on time. A bookkeeper is also likely to handle the accounts receivable sheet, as well as following down late payments to ensure that your records are regularly updated.
- Processing payrolls. For small enterprises, some can handle payroll and other HR tasks. Assisting businesses with the processing of salaries and tax payments to employees is one example of this.
- Tracking cash flows. They can achieve this by keeping an eye on the revenue-to-expense ratio and providing further advice if the company requires extra cash to function.”
If you don’t (yet) have the means to hire a full-time accountant, Kylie McQuarrie recommends at least consulting with one before beginning your own records. “You should be able to hire a local (or even a virtual) bookkeeper at an hourly rate or on retainer. They can offer valuable insight into setting up your books, creating the right type of business accounts, and helping you understand the basic bookkeeping principles that will keep your business afloat.”
7. Separate personal and business expenses
“There’s nothing that can screw up your bookkeeping processes more than mixing your personal finances and business expenses,” says Sam Shepler, Founder of Testimonial Hero. “You may think that combining your personal and business finances can simplify expense tracking or something, but it’s not how it actually works,” adds Dmytro Serhiiev.
On your very first day, set up both a checking and savings business bank account. CPA Ann Hooper says that “using the business checking for bill paying will keep business expenses straight. Then use the savings account to pay taxes.”
8. Schedule bookkeeping activities into your regular day
Keeping organized, up-to-date books ultimately requires that you work bookkeeping activities into your everyday tasks. “Any small business owner, even those with no accounting background, can manage their business’s books with reasonable success. That success is achieved through consistency — scheduling “bookkeeping” on your calendar,” says RaLea Harbrige owner of Balanced FI.
Mike Jesowshek, CPA, recommends “doing your bookkeeping every month, at a minimum, but weekly is ideal.”
Danetha Doe founder of Money & Mimosas, expands on that by suggesting,
- “Reconcile your books on a weekly basis. To reconcile is a fancy term for categorizing the transactions into their appropriate account.
- Review your financial statements on a monthly basis. The two most important statements (for most businesses) are the P&L and the cash flow statement.”
As your business grows, Kylie McQuarrie says that your weekly reconcile should become daily to keep up with transaction volume. She says, “The start or end of each business day is the best time to check that your books are in order: it’s usually a quieter time of day where you won’t be distracted by other business tasks and can really focus on finances.”
Finally, Curtis Lawson, Managing Editor of Project Gunner suggests, “Conduct a quarterly assessment. Examine your bookkeeping and accounting records in detail at the conclusion of each quarter. Look for patterns, such as rising or falling sales, revenue growth year over year, or a rise in late-paying clients.”
9. Never forget to triple check your work
With all of those tips, there’s still one more important thing every SMB owner should remember when it comes to small business bookkeeping:
“No matter how good you think you are at bookkeeping, you’ll make a few mistakes. Make sure you double-check your entries.” – Michael Eckstein, owner of Eckstein Advisory and Eckstein Tax Services.
Bringing it all together
Bookkeeping success requires both knowledge and consistency. You need to educate yourself on the fundamentals of keeping good books, and you need to apply those principles on a regular basis. It also helps to have a robust system for handling your financials. Integrating your payment processing solution with your accounting software ensures that payment data flows smoothly from one platform to the next, so you don’t have to worry about added manual and human error.
Stax streamlines your bookkeeping by seamlessly connecting with leading accounting software. Get in touch today to discover how Stax can help you be more efficient and even save more money.
Quick FAQs about Bookkeeping
Q: Why is bookkeeping important for small businesses?
Bookkeeping is vital to a business’s success as it helps measure the financial performance and well-being of the business. It allows better account management and supports smart, strategic financial decisions. Furthermore, it assists in managing cash flow, ensuring proper recording of expenses, and maintaining income values.
Q: What are the basics of bookkeeping for small businesses?
The basics of bookkeeping for small businesses involve setting up a general ledger to record all financial transactions. This ledger comprises several business accounts, including asset accounts, liability accounts, and expense accounts. Business owners should also understand the difference between single-entry and double-entry bookkeeping systems.
Q: What is an audit trail in bookkeeping?
An audit trail refers to the physical evidence of all the financial transactions of a business. It simplifies the bookkeeping process and helps improve accuracy, avoid errors, and prevent fraud. An audit trail can include invoices, bills, purchase orders, and credit card receipts.
Q: How can small businesses prepare for taxes with bookkeeping?
Small businesses should set aside a percentage of their revenue each month for taxes, keep track of tax deadlines, and keep their accounts in formats that the IRS accepts. They should also maintain receipts for all transactions as the IRS does not accept credit card or bank statements as the sole support of a category they are auditing.
Q: How can accounting software automate bookkeeping work for small businesses?
Accounting software can automate bookkeeping tasks like cashbook management, ledger management, bank reconciliation, accounts receivable, and accounts payable activities. Cloud-based bookkeeping software systems can be accessed from anywhere in the world and can provide real-time information.
Q: Should small businesses outsource their bookkeeping tasks?
Yes, if possible, outsourcing bookkeeping tasks to a professional can be beneficial. Professional bookkeeping services can manage accounts receivable, process payrolls, and track cash flows among other tasks.
Q: Why should personal and business expenses be separated in bookkeeping?
Separating personal and business expenses can prevent confusion and complexities in expense tracking. It ensures that business expenses are recorded accurately, which is essential for tax and audit purposes.
Q: How often should bookkeeping activities be scheduled?
Bookkeeping activities should ideally be done weekly, but at a minimum, they should be conducted every month. As the business grows, daily reconciliation may become necessary to keep up with increasing transaction volume.
Q: What is the importance of double-checking in bookkeeping?
Double-checking entries in bookkeeping is crucial to catch and correct any errors. Even the most efficient bookkeepers can make mistakes, so it’s essential to review all entries for accuracy.
