When it comes to running a small business, keeping accurate accounting records that are up-to-date is one of the most important ongoing tasks. 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. Explore the nine essential bookkeeping tips to stay on track and keep your business running smoothly.
1. Understand why your books are important
First, it’s critical to understand just how important accurate bookkeeping is to your business. While bookkeeping is tedious, it is vital to the success of your business. Without proper bookkeeping, measuring your business’s financial performance is vastly more difficult. Yet with efficient bookkeeping, determining the success of your business and managing your accounts is simpler, allowing you to make better 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.
Bookkeeping doesn’t just help you get the measure of your business’ current health, though. Accurate bookkeeping allows business owners to track the growth of their business over the years and identify positive or negative patterns.
Moreover, proper bookkeeping makes a variety of third party interactions a lot easier. With successful bookkeeping, procuring loans and implementing new financial strategies becomes a lot easier.
Most importantly, the IRS requires that all businesses maintain accurate books and records, regardless of whether they’re incorporated (etc.) or not. The taxpayer is responsible for what’s on the tax return, so SMBs should be aware of their income and expenses, even if outsourcing the bookkeeping.
2. Learn the basics
For brand new SMB owners, learning the basics of bookkeeping is fundamental to success. There are 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 composed 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.
Moreover, there are 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 a single ecommerce website.
- Double-entry is the most common system. In this system, transactions are recorded in at least two places (debit and credit) to maintain the accounting equation (Assets = Liabilities + Equity). This method is necessary for any business that tracks inventory, accounts receivable, or accounts payable, regardless of how many sales channels they use.
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 chronological, verifiable record of all your financial transactions. It is a huge help in simplifying the bookkeeping process and is primarily digital in a modern cloud-based system.
Keeping a record of all your business’s 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 becomes much simpler when you have the physical receipts.
Moreover, ensure you have a proper, easily accessible back-up of your transactions. 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. Small business owners should set aside a portion of their net income (profit) each month for taxes. This percentage can range from 25% to 40% depending on their income bracket and legal structure (sole proprietor vs. corporation). Always consult a tax professional to determine your accurate withholding rate.
Next, keep track of tax deadlines. Missed payment deadlines may result in penalties. It’s best practice to set reminders for upcoming deadlines so you stay up to date and avoid paying late penalties.
In addition, the IRS requires adequate documentation for all expense deductions. While bank and credit card statements show what you paid, they rarely show what you bought. Scan and digitally link all receipts to your transactions. Modern accounting software makes this simple, ensuring your records are audit-ready without relying on paper.
5. Use accounting software to automate your work
Experts everywhere recommend automating as much of your accounting and bookkeeping as possible.
Many small businesses will find value in a cloud-based bookkeeping software system. This type of software system allows 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.
The rule of thumb is that SMB owners need software that can manage the general ledger, handle automated bank reconciliation, and track accounts receivable (money owed to you) and accounts payable (money you owe).
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 is backed up and up to date. Also, any changes to federal and/or international variables will automatically be updated.
6. Outsource your bookkeeping if possible
Many SMB owners recommend outsourcing your bookkeeping to a pro if possible.
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. While some bookkeepers offer this, payroll requires specialized knowledge of federal and state tax compliance. Many businesses find it more efficient to use a dedicated, integrated payroll software to handle calculations and remittances, with the bookkeeper overseeing the overall reconciliation.
- 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, you may consider consulting with a bookkeeper for insight on the process. Many bookkeepers are available virtually and locally for an hourly retainer.
7. Separate personal and business expenses
For an efficient, accurate bookkeeping process, it’s essential you keep your personal and business expenses separate.
On your very first day, set up both a checking and savings business bank account. Then, use a dedicated, high-yield business checking account or a money market account to hold your tax funds. This ensures the money is segregated from operations but remains liquid for timely quarterly and annual tax payments.
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. Consistency in your bookkeeping is the key to success, even if that means scheduling time on your calendar for the task. Ideally, your bookkeeping should be completed monthly, if not weekly.
Two key insights include:
- Reconcile your books on a weekly basis.
- 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.
While reviewing your dashboard and cash flow daily is wise, weekly or bi-weekly reconciliation (categorizing transactions and checking for errors) is usually sufficient, even for high transaction volumes, thanks to accounting automation.
It’s wise to 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, and that’s to double-check your work. Mistakes are easy to make but more painful to correct and manage in the long run.
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 finances. 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, but more importantly, our flat-fee pricing model eliminates the variable costs that complicate reconciliation. Get in touch today to discover how Stax can help you be more efficient and save substantial money on transaction fees.
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.
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.
