Small Business Bookkeeping: A Beginner’s Guide

Bookkeeping is how businesses, entrepreneurs, and decision-makers monitor a company’s overall financial health and activity. Without basic bookkeeping practices, it’s easy for financial transactions and spending activities to get out of control, which can lead to confusion, disorganization, and loss of profit.

Despite the importance of accurate bookkeeping practices, most people don’t feel entirely confident with maintaining detailed business finances. Whether it’s a lack of interest or knowledge, many businesses outsource this process to a professional bookkeeper to ensure accurate and healthy finances all around.

If you’re new to doing your own bookkeeping, this guide will establish important definitions, offer tips on basic bookkeeping principles, introduce various financial options, and provide tips to get your finances on the right track.

Here’s What We’ll Cover:

What is Bookkeeping?

Why Do Small Businesses Need Bookkeeping?

Bookkeeping Options for Small Business Owners

How to Start Bookkeeping in a Small Business

How To Do Bookkeeping For a Small Business

Become Familiar with Bookkeeping Statements

6 Tips for Small Business Bookkeeping 

How to Budget for Bookkeeping Services

Small Business Bookkeeping Mistakes to Avoid 

Conclusion

Frequently Asked Questions

What is Bookkeeping?

Bookkeeping is the regular practice of updating a company’s financial records to reflect all financial transactions, credits, and debits. Professional bookkeepers prepare and track financial documents, including invoices and bills, and create financial statements to ensure the business is ready for tax season and other financial reporting requirements.

Bookkeeping is different from accounting in that it is the critical first step in tracking all business activities. While bookkeeping provides oversight into each individual transaction (in order to catch discrepancies and correct mistakes), accounting provides a thorough analysis of these numbers.

Accountants rely on bookkeeping records to analyze and advise on the financial activity, health, and growth potential of a business. In other words, a bookkeeper is the first step in ensuring your company’s financials are complete and accurate, while a certified public accountant is your second step in knowing what the financial records indicate so you can plan and make the right business decisions.

Why Do Small Businesses Need Bookkeeping?

Maintaining bookkeeping tasks is essential for the stability and success of small businesses. With so many moving pieces (including assets and liabilities, and income and expenses), small business owners must stay on top of it all. 

Bookkeeping can help small businesses:

• Create organized and detailed financial reports
• Be more prepared at tax time
• Understand business transactions at a granular level
• Make a plan for profitability that leads to improved cash flow and long-term success 

Bookkeeping Options for Small Business Owners

Fortunately, small business owners don’t need to be experts in mathematics to find success when doing their own bookkeeping. There are many ways to divide bookkeeping responsibilities and leverage powerful technology and small business accounting software for more accurate expense tracking. 

Of course, it’s always possible to handle bookkeeping internally. If your business chooses to keep this task in-house, it’s best to stick to a predictable expense tracking schedule. Developing a bookkeeping routine prevents you from accidentally forgetting important steps in the accounting process.

Bookkeeping Software Platforms

Business accounting software and modern technology make it easier than ever to balance the books. A platform like FreshBooks, specifically designed for small business owners, can be transformational.

The bookkeeping software options from FreshBooks are flexible, mobile, and secure, which makes it easy to manage several important tasks, including:

• Tracking business expenses
• Ongoing tracking of accounts payable and accounts receivable
• Managing financial reporting for a set period of time
• Producing and sending customer invoices
• Tracking incoming payments 
• Using double-entry accounting to ensure compliance and accuracy

External Consultants and Outsourcing

Professional bookkeepers and accounting professionals are available to manage, track, and report on financial activities. For a small business, this can be a great way to get the benefits of having a dedicated bookkeeper and accountant without the need to build out your own accounting and bookkeeping department. 

When hiring external team members, keep in mind that some of the responsibility still falls to you as the proprietor. For instance, if you own a service-based business, a bookkeeper may still ask you to provide access to an online accounting system, pass along receipts, provide details for customer billing, or grant approval for vendor payments.

How to Start Bookkeeping in a Small Business

Bookkeeping is something every business needs. 

Establishing a strong financial foundation for your small business begins with a few simple steps:

• Open The Right Accounts: Business accounts should always be kept separate from personal bank accounts. Additionally, it’s important to recognize that the term “accounts”  in bookkeeping refers to certain types of transactions, rather than to actual business bank accounts. These accounts include assets, liabilities, revenues (income), expenses, and equity.
• Choose A Bookkeeping Method: Just as there are different accounting methods, there are two different ways to handle bookkeeping: single-entry bookkeeping and double-entry bookkeeping. Double-entry bookkeeping is the industry standard since it more accurately records and matches activity to every affected account. Most accounting software has options to work in both methods.
• Establish Realistic Payment Terms:  It’s wise to make and record sales transactions on time, every time, and allow the accounting system to use the payment terms to calculate customer receivable due dates. The calculated due dates will appear on sales invoices, so the customers can be informed of the expected payment deadline.

How To Do Bookkeeping For a Small Business

Once you’ve got a handle on how to begin bookkeeping for your small business, it’s time to set yourself up for success with an ongoing bookkeeping system. 

It might feel daunting at first, but the sooner you get a handle on this important step, the sooner you’ll feel secure in your business’s finances. Remember that the basic goals of bookkeeping are to track your expenses and profits, and to ensure you collect all necessary information for tax filing. 

Here are the basic bookkeeping principles to keep in mind in order to establish a reliable bookkeeping process for your small business: 

1. Keep Your Receipts 

For both sales and purchases, it’s vital to have detailed, complete records of all transactions. You’ll need to note the amount, the date, and any other important details to ensure you can accurately summarize your finances when it comes time for tax season. Purchase receipts should always be kept as proof that the purchases took place. 

2. Keep a Ledger 

The information you get from your receipts should go into some kind of ledger (usually a digital option). This ledger acts as a tool to summarize your business’s overall financial performance and should include revenues, business expenses, and any other financial information your company chooses to keep track of. 

3. Create Financial Reports

Using the data you gain from keeping a ledger, your next step will be to generate and prepare financial reports for analysis. The major reports to include are the profit and loss, the balance sheet, and a cash flow analysis. Additionally, the aged accounts receivables and aged accounts payables reports are helpful in knowing which customers have not paid and which vendors are yet to be paid. These reports will help you gain greater insights into the financial health of your small business.

4. Proactively Handle Tax Liabilities

When you keep detailed, organized records of your business transactions, tax season suddenly won’t feel like such a daunting chore. By being proactive with your bookkeeping, you’ll save your small business time when it comes to taxes. Simply turn your financial statements over to your CPA or other tax filings expert, and let them handle the rest. 

Alternatively, you can use these same records to make the most of a cloud-based accounting software system like FreshBooks, which is a great way to collaborate with your accountants and bookkeepers throughout the year. Most accounting software offers a range of features that are suited for almost any type of small business. 

Become Familiar with Bookkeeping Statements

Financial statements showcase the stability of a business. This is particularly true once the business accounts for its operational costs and recurring expenses. 

Below are some of the most common statements a bookkeeper uses to monitor activities. 

Income Statement

The income statement is a holistic report that shows revenue and expenses over a set period of time. It is sometimes referred to as the Profit and Loss Statement. It can be produced for one period to gain insight into the month’s profitability, or produced for the year to period. And sometimes it can be produced to include comparisons against the prior year’s same period or the prior year’s year-to-period data.

Balance Sheet

A balance sheet is an accounting tool that shows the overall financial situation as represented by the equation: Assets – Liabilities = Equity

Chart of Accounts

Bookkeepers use a chart of accounts to see all of the accounts in a company’s general ledger. In many instances, an accountant prepares the initial chart, and the bookkeeper references it while recording transactions.

6 Tips for Small Business Bookkeeping 

Bookkeeping beginners need quick wins to get started quickly and efficiently. The tips below are industry standards that will help any small business excel at bookkeeping.

1. Bring Your Bookkeeper Up to Speed

Occasionally, you might hear financial professionals reference a “backlog.” This refers to a collection of past records, transactions, and financial statements that a bookkeeper needs in order to learn the history of a business. When you first begin the bookkeeping journey, collect everything you have that could be relevant to establishing financial history.

2. Keep Personal and Business Costs Separate

A separate bank account is the first step in distinguishing between business and personal finances. Bookkeeping becomes more difficult when business transactions are lumped together with personal activity. Keep all cash, credit card, and other financial activities separate.

3. Track Absolutely Everything

As businesses grow, it becomes easier to let small activities slip. Since good record keeping relies on accurate expense tracking, it’s important to monitor all transactions, keep receipts, and watch business credit card activity. Many bookkeeping software options automate the tracking process to eliminate errors.

4. Plan Ahead for Taxes 

Efficient bookkeeping involves foresight, meaning that a business should always plan for upcoming financial events, including tax time. Good preparation and documentation are critical for paying taxes (including payroll taxes) on time. 

5. Set Aside an Emergency Fund for Major Expenses

The specific amount of an emergency fund may depend on the size, scope, and operational costs of a given business. Regardless, work with your bookkeeper and accountant to ensure the amount of cash left in the bank is sufficient for unexpected costs. Finding the right level of cash to be kept on hand requires a proper cash flow forecast and cash monitoring. Businesses might not want to keep all cash in the bank, as having an excessive amount of cash in the bank could mean missed opportunities in investment income. 

6. Regularly Cross-Check and Audit Files 

Never leave the practice of bookkeeping (or your business assets) to chance. No matter what system you implement, incorporate a practice of reconciliations, by comparing the numbers in your system to the source records, like bank statements, receipts, and invoices. This habit improves communication, boosts transparency with your bookkeeping team, and promotes longevity and compliance.

Also Read: How to Do Bookkeeping for Small Business in Excel

How to Budget for Bookkeeping Services

Although bookkeeping is an investment, it’s generally much more affordable than attempting to correct costly mistakes down the road. 

When it comes to budgeting for bookkeeping, the difference hinges on whether you hire or manage using software tools.

• A professional bookkeeper may charge $20-$30 per hour for services. This amount can range based on the bookkeeper’s location, level of expertise, and availability.
• Bookkeeping software ranges from free services with limited functionality to full-fledged accounting suites. For instance, FreshBooks pricing ranges from $7.50 to $25 per month, based on the number of clients and accounts required. Typically, higher-priced service plans offer greater visibility, functionality, and automation.

Small Business Bookkeeping Mistakes to Avoid 

When it comes to bookkeeping tasks, there’s a great deal to learn. If you have mistakes to fix or transactions to track down, don’t stress. Most of the time, a qualified professional can correct or document these errors.

By avoiding these common mistakes, small businesses can skip unnecessary financial hassle associated with poor bookkeeping habits. 

• Hiring a bookkeeper only at tax time: The best results happen when a business implements a bookkeeping strategy over a period of time or builds a long-term working relationship with a qualified bookkeeper. Waiting until crunch time to prepare documents and fix bookkeeping errors can be too late if the records are kept with many mistakes.
• Failing to communicate about financial reports and activities: Every involved party should understand a company’s bookkeeping practices and expectations. Because of the number of accounts and moving pieces, collaboration is critical for successful implementation.
• Choosing the wrong accounting method: Whether it’s cash basis or accrual, choose the system that’s most appropriate for your specific needs and industry. The chosen method affects record keeping, expense tracking, and most importantly–interactions with the IRS. 

Conclusion

Bookkeeping is one of the most important tasks that a business owner will delegate over the life of a business. Without it, it’s nearly impossible to produce an accurate record of financial activities that affect everything, from profit to equity to payroll, and more.

Fortunately, bookkeeping doesn’t have to be daunting. There are several effective ways to manage bookkeeping responsibilities in-house or externally by using helpful tools and technologies.

It’s never too early to take ownership of your bookkeeping policies. By following the tips and best practices outlined in this guide, you’ll be more equipped to set a strong financial foundation for future growth, profitability, and ultimate success.

FAQs on Small Business Bookkeeping

Do you have more questions about the bookkeeping process for small businesses? Wondering how best to collect and track financial information, deal with expense management, and ensure healthy cash flow for your business? Here are some of the most frequently asked questions on bookkeeping for small businesses.

How much should a small business bookkeeper charge?

The specific answer to this question can vary somewhat depending on the extent of bookkeeping services your company needs, and how often you require the services of a small business bookkeeper. For full-time bookkeepers, the average annual salary sits around $77,000, according to Glassdoor.

Do bookkeepers do payroll?

Yes. Unlike an accountant, who takes a more analytical approach to your financial transactions as a whole, bookkeepers are often responsible for day-to-day tasks such as your company’s payroll, just as they would do with all other expenses that your small business incurs. 

Is it worth paying a bookkeeper?

For every new small business, it might not make sense to hire a bookkeeper straight away. But as soon as you see growth in your company, it will soon be essential to have a highly detailed, consistent bookkeeping approach. While you can manage your own accounting during the initial stages of your small business, it’s best to make the investment in a qualified, professional bookkeeper to ensure your success in the long term.

What is the simplest bookkeeping software?

There are countless options out there for bookkeeping software that blends a good price with solid features and functionality. But if you’re looking for one that’s simple to use and understand, but doesn’t compromise on the features you need, FreshBooks’ cloud-based bookkeeping solution and accounting software might be the right choice for you. 

More Small Business Accounting Resources

• How to Become a Bookkeeper
• How to Do Bookkeeping for Small Business in Excel
• How to Do Accounting for Small Businesses: Basics of Accounting
• How to Do Accounting for Your Cleaning Business
• 7 Signs Your Business Needs Bookkeeping Services
• Bookkeeping vs. Accounting: What’s the Difference, Anyway?

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