Small Business Bookkeeping: 8 Tips For Every Business Owner

September 28, 2022

By: Gareth Mankoo

Small Business Bookkeeping: 8 Tips For Every Business Owner

For growing businesses, learning small business bookkeeping could be a key asset. It’s a necessary skill set for businesses of all sizes that want to monitor, manage, and legitimize their business dealings.

As you grow, good bookkeeping will help present the records of your growth to your future investors and partners, giving them more confidence as you build your brand.

Key takeaways:

  • Understanding basic accounting terminology helps you get acquainted with the process of small business bookkeeping.
  • It makes sense to prioritize automation tools, but learning about manual tips helps you detect flaws in the system.
  • It’s important to track your expenses and keep your records organized to avoid mishaps with your spending.
  • Basic bookkeeping knowledge allows you to monitor your taxes and set budgets that let you save money in the long run.
  • Managing a small business is rough, so take care of your limited resources by carefully observing your expenses.

Bookkeeping 101: Basic bookkeeping jargon and what they mean

Unless you have prior experience in the field, most bookkeeping terms will sound foreign and complex. We wouldn’t want you to approach these tips with a minimal understanding of what these words mean.

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Let's define basic bookkeeping terminology in plain English and explore what they represent so you can confidently handle your accounts.

Accounts Receivable (AR)

The amount of money that you expect from customers after you have delivered the goods or after they have used your service.

Accounts Payable (AP)

The amount of money that your company owes third parties like suppliers, creditors, vendors, and more.

Balance Sheet (BS)

A comprehensive report that showcases records of the company’s assets, its liabilities, and the equity of the company as held by every shareholder.

Capital (CAP)

The value of financial assets, which could include cash or goods. It also refers to working capital, which is the total sum of assets held by your company minus the liabilities.

Cash Flow (CF)

The sum of money that your company expects to receive over a period. It is one of the main aspects of small business bookkeeping.

Cost of Goods Sold (COGS)

The cost of producing goods or running a service that your company provides, which can be raw materials, employee remuneration, resources like power and water consumed, and so on.

Expenses

These include the day-to-day costs of the company. Regular, expected expenses like rent and fixed utility costs are referred to as “fixed expenses,” whereas unpredictable ones are called “variable expenses.” Unpaid dues are called “accrued expenses.” Expenses spent for insurance, advertising, and other factors not directly involved with the production of the good or creation of the service are called “operational expenses.”

Net Income (NI)

Also known as net profit, net income is the total revenue earned by your company minus total expenses.

Return on Investment (ROI)

It is the financial performance of your business in any venture it undertakes, which is calculated by dividing the net profit by the total cost of your investment.

8 basic small business bookkeeping tips for business owners

Bookkeeping today isn’t what it used to be decades ago. Most financial tasks are carried out over digital channels and involve some accounting tools.

For example, tools like Intuit’s Quickbooks automate your bookkeeping and represent data through engaging graphs.

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It is easier to retrieve records of financial transactions and reports, but this doesn’t discount the importance of adopting a small business bookkeeping strategy. Let’s take a look at eight essential small business bookkeeping tips to keep your company in check.

1. Create a new bank account for business

Just as you keep your personal assets separate from your business assets, you must create an exclusive bank account for your business. A single account simplifies the monitoring of cash flow and debit transactions. Your statement works like an expense statement.

It’s wiser to segregate your business and personal accounts. Select a nominee for your business account. If it is a joint business, then consider co-account holders. It makes it easier for authorized team members to carry out legitimate transactions even in your absence.

2. Track your expenses

Business expenses can spiral out of control. Here’s where your small business bookkeeping can come in handy. By creating a single bank account or using just one business credit card, you can track your business expenses on a single dashboard.

If you have an overwhelming number of expenses that are difficult to manage, then use categorizations for the entries within your balance sheets and expense records. Tools that help you visualize data better through graphs and charts make it easier to understand your expenses and take action to cut costs.

3. Keep your records organized

It’s okay to fuss over organizing your financial records. Allocate dedicated time to sorting your expenses, earnings, balances, vendor lists, and other elements. Maintain separate files and folders for each of these so that they are well within reach when you need to tally numbers at the end of the month.

Organizing the financial records for your small business isn’t as hard as it seems:

Another advantage of keeping your records organized is the ease of handing them over to a staff member who you may appoint in the future to manage finances. In the beginning, everything is under your purview, but as you grow, the data will be accessible to your finance staff, chartered accountants, and auditors. Being organized from the beginning saves everyone a world of trouble.

4. Set a budget for taxes

Taxes are inevitable for any business that is raking in profits. Your small business bookkeeping strategy should include a separate allocation of funds for paying taxes.

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Taxes could spring up on you when you least expect them if you do not take them into account. Work with a tax expert to know what local taxes apply to your business. Depending on the kind of business you run, you could also enjoy tax benefits from your government.

5. Leave an audit trail

If you use software to manage your small business bookkeeping right from the start, you can easily trace your old expenses. It helps at the time of audits.

If you are maintaining expense records manually (on paper) or using spreadsheets on a computer, then be thorough in the way you name your sheets and workbooks so that they are easy to trace in case of an audit. It's important to leave an audit trail when conducting financial transactions to ensure transparency and accountability.

For example, keeping track of compliance topics, such as how long to keep pay stubs, can ensure you have the documents you need if an audit does occur.

Dealing with the disconnect between paper documents and digital finance files can be challenging unless you’re using the right tools to create an audit trail. For instance, there are services to convert bank statements to make them easier to integrate with whatever expense tracking and accounting software setup you use.

6. Keep track of your accounts receivable

Many small business owners focus on company expenses but place expected funds on the back burner. It could affect a business severely because late-paying parties can take advantage of this and not pay you on time. It impacts your ROI and CF and misrepresents your business on the balance sheets.

What do you do if you have clients that do not pay? Here’s a good strategy:

As you stay on top of all your small business bookkeeping needs, ensure that you are aware of incoming funds. If a party hasn’t paid you on time, follow up by email or leave a paper trail of your follow-ups. Doing so can help in extreme cases where you may need to seek legal recourse.

7. Keep tax deadlines in mind

Missing tax deadlines can mar the reputation of your organization and attract fines. Work on your taxes in advance to avoid anxiety and chaos as the tax deadlines draw near. Get professional help from an accountant or financial consultant if you aren’t an expert in numbers and taxation.

8. Maintain your daily records

Small business bookkeeping isn’t an end-of-the-month activity. It is a process that a business should follow every day or after every transaction it makes. Do not put off things for later because you may forget to update your balance sheet, leading to numbers not tallying at the end of the month.

If you have a team that manages your company finances, ask them for visibility into your bookkeeping activities. Go through the numbers as if you were being audited and do this periodically with a fine-toothed comb.

Frequently asked questions: 5 popular FAQs about small business bookkeeping

What are some commonly asked questions about small business bookkeeping? Get your questions answered with these five FAQs.

1. What kind of bookkeeping is used by small businesses?

Single-entry accounting.

All of your transactions only need to be recorded once with single-entry accounting, and they may be categorized as either a cost or an income. This is a simple approach that works well for businesses that don't have a lot of expensive inventory or tools.

2. Can I do my own bookkeeping?

If you want to be successful as a business owner, bookkeeping is a skill you either acquire or outsource. The good news is that it is possible to teach yourself bookkeeping, and doing so has a number of clear advantages, so we hope you paid attention to the tips in this article!

3. What accounting is needed for a small business?

There are three primary accounting reports used by most small businesses: the balance sheet, the income statement, and the cash flow statement. Accounting can be done manually, with computerized accounting software, or by hiring an outside accounting firm.

4. What's the difference between bookkeeping and accounting?

The main goals of bookkeeping are to keep track of transactions and to ensure financial records are kept in order. Accounting is the process of making sense of this information and presenting it to stakeholders.

5. What is the most important duty of a bookkeeper?

Keeping tabs on and organizing financial transactions is a bookkeeper's top priority. Bookkeepers aren't responsible for making sense of financial services; that's the job of accountants. Instead, their major duties revolve around recording transactions and monitoring the records.

Bottom line

Small business bookkeeping may not be the most exciting activity for a small business owner, but it isn’t one to be ignored. You are in business to earn money, so keeping track of the money coming in and going out helps you gain a perspective on how successful your business is.

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You will also be answerable to external parties like auditors, prospective partners, investors, and tax officers. Having a meticulous financial record helps avoid any unwanted crises. After all, you do not want anything to come in the way of business.

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