Small business owners often end up taking on all kinds of roles, from marketing manager to bookkeeper. And unless you are among the few rare people who love managing money, bookkeeping might just be a source of stress for you.
As annoying as it is, correctly managing finances is an integral part of growing any business. While there are options available to have someone else handle the bookkeeping for your business, it is still important that you understand the basics just in case you ever need to handle the role yourself.
We created a guide to bookkeeping for your business, because nobody wants to be clueless when it comes to crunching numbers.
What, exactly, is bookkeeping?
Even if you didn’t already know, you probably could have guessed based on the name alone, that bookkeeping entails keeping records (or books) of a business’s day to day finances. Though it may be stressful, it’s a skill small business owners have to master.
The three main “books” are:
- Cashbook – all of the cash moving in and out of your business.
- Purchase invoices – the what and how (cash, credit) you purchased for your business
- Sales invoices – everything you have sold, including both paid and unpaid invoices
This is a pretty simplified definition of what bookkeeping is. There are other terms that you will need to learn in order to really understand business bookkeeping.
Just to touch on a few of these terms:
- Accounts payable – A record of everyone you owe money to. This includes everyone from suppliers receiving weekly payments to banks receiving monthly loan payments.
- Accounts receivable – You guessed it, this is a record of everyone who owes money to your business; customers, anyone you lent money to, etc.
- Assets – Everything your business owns from physical property to cash.
- Balance sheet – The actual report that helps you understand exactly what your business owes and owns.
Depending on whether you plan on using a bookkeeping service, or handling the bookkeeping and accounting yourself, you may need to dive deeper into additional terms in order to really understand all of the vocabulary.
Why is bookkeeping important for your small business?
It seems pretty obvious that keeping track of your finances is important, but let’s discuss the specific reasons why bookkeeping is necessary for every small business.
For one, you want to be organized about who you have to pay and when. Not only is it awkward to miss a payment that you owe, it can be damaging to your business relationships and your business credit score.
It is also never fun to think you have your expenses covered only to find out you owe more money than you thought.
Bookkeeping also helps you understand who has paid you and who still owes you money. No one wants to end up losing money because they don’t remember to follow up with those that owe them.
Bookkeeping is also super important for tax purposes. We all wish the IRS would just tell us what we owed, but unfortunately that is not the case. A good bookkeeping system will make sure you pay the right amount of taxes, and claim taxes back on your expenses.
If your business is ever audited, you will want to make sure you have your books in order to avoid a big mess when it comes to retracing your financial steps.
Lastly, bookkeeping helps businesses manage payroll so they can make sure their employees are being paid what they are owed!
For small businesses every penny counts, which is why it is so important to have an organized bookkeeping system in place. It might take some time to learn everything that goes into small business bookkeeping, but doing so will make it easier on yourself in the long run.
What is bookkeeping vs. accounting?
There is no need to feel ashamed if you don’t know the difference between bookkeeping and accounting, honestly all these finance terms can be confusing! Plus, bookkeeping and accounting are under the same umbrella.
To put it simply, bookkeeping involves recording all of a businesses’ financial information on a daily basis. Accounting then takes this information and uses it to understand the businesses’ overall financial standing so that fitting financial strategies can be determined.
In other words, if bookkeeping is the micro, accounting is the macro.
How to do bookkeeping?
When getting started with bookkeeping, you will want to make sure to keep the following tips in mind to make the process as smooth as possible.
Get organized
The first rule of bookkeeping is to get your records in order. Put on your bookkeeper hat and figure out an organized system so that you can easily understand payments (both made and received).
A successful bookkeeping system is one that allows you to easily refer to any and every financial transaction related to your business.
Deadlines are your friend
It might be tempting to be flexible with customers about payments. While there is some wiggle-room, we highly recommend giving all of your clients payment deadlines, and sticking to them!
If a certain client consistently misses payment deadlines, they might not be worth the time it takes to chase them down. Deadlines will make it so much easier to keep track of who owes you money.
We also suggest that you follow this rule when it comes to paying your employees. Pick a date, like the first or tenth of the month and make sure paychecks go out on this day every month.
Track your expenses
One word, receipts, honey! Receipts are your best friend when it comes to tracking expenses. If you want to get tax back on business expenses, you’re going to have to show receipts to back up your claims.
This is also just a good habit to help you understand exactly what you’re spending your money on and whether or not all of your expenses are necessary.
Keep those invoices in order
This rule also connects to being organized, but we just want to reiterate. Make sure you are keeping your invoices and bank statements in order.
Separate paid and unpaid invoices and pay attention to the dates that they are issued and paid off. If you stay on top of this in real-time, you won’t end up having them pile up which leads to unnecessary work later.
If you are using a bookkeeper, keeping your invoices in order will be super helpful to them. Otherwise, it will probably end up taking them a ton of time to track down lost invoices and payments.
Report often
Getting organized is one thing, but if you aren’t reporting then you don’t really have an idea of how your business is doing. By reporting at least once a month, you can rest assured that you have a clear idea of what is going on in the finance department.
Reporting involves using the balance sheet to look at all your profits and losses for the month. If you are using a bookkeeping company, they may get more detailed with their reporting. If you are handling the bookkeeping yourself, monthly reporting should be enough for you to avoid any unforeseen financial issues.
How software can help
Just because you are a small business owner, doesn’t necessarily mean you have what it takes to be a bookkeeper, and that’s okay! We all have our strengths and weaknesses.
If this happens to be the case for you, don’t fret. There are bookkeeping services for small businesses that can take care of everything for you. Bookkeeping software can be used to automate most of the things we touched on above.
Most bookkeeping systems make things like issuing invoices, paying bills, and finding specific transactions super simple. Some bookkeeping software even allows you to automate a lot of these things.
Bookkeeping services are not only a good time saver, but significantly reduce the chance of mistakes. I mean let’s face it, we all make mistakes and sometimes it’s just not worth it to take the risk, especially when you’re a bookkeeping newbie.
Do you need a bookkeeper?
If your business is just starting out or is relatively small, you might not need a bookkeeper especially if you are using bookkeeping software. But as your business grows, you might want to consider hiring a bookkeeper.
Bookkeepers and bookkeeping companies are great for business owners who don’t have adequate time to dedicate to updating the books.
If your business is relatively small but finances are not your strong suit, and hiring a bookkeeper will help save you unnecessary stress, go for it!
Bookkeeping is not that bad
Bookkeeping might seem scary at first, but when you break it down it’s not that bad. So long as you stay organized and consistent with your reporting you should have nothing to worry about.
As a business owner, big or small, it is important to know what is going on in your company financially, which is why understanding bookkeeping basics is a must. That being said, it is nice to know that there are bookkeeping companies to help take the load off if it gets too heavy.
