Starting and running a small business is no easy feat. In addition to the countless responsibilities of being your own boss, you also have to wear many hats. One of those hats is that of a bookkeeper. Though it may not be the glamorous part of owning a business, keeping accurate financial records is vital. This is why figuring out how to do bookkeeping for small businesses acts as a crucial make-or-break point.
As a business owner, you probably don't have the time or energy to keep up with your books every day. The good news is that advanced online and offline platforms have made bookkeeping easier than ever before.
In this blog post, we'll provide a guide to bookkeeping for small businesses. We'll cover everything from setting up your books to tracking expenses and income. So whether you're a new business owner or just looking to brush up on your bookkeeping skills, you will find everything you need to know.
What Is Bookkeeping And What’s Involved In It?
Though the word "bookkeeping" might make you think of dusty old ledgers, it's a vital part of any business. Bookkeeping is the process of recording and storing financial transactions. It is an essential part of accounting, providing the basis for financial reporting.
Bookkeeping can be broadly divided into two categories: those that relate to the recording of transactions, and those that relate to the analysis and interpretation of financial data. In terms of transaction recording, bookkeeping provides a complete record of all financial transactions that have taken place within a business. This includes all income and expenditure, as well as details of any assets or liabilities that have been acquired or disposed of.
In terms of data analysis and interpretation, bookkeeping provides a range of information that can be used to assess the financial performance of a business. This includes information on profitability, liquidity, and solvency. It can also provide insights into the efficiency with which a business is managed, and how effective its marketing and pricing strategies are.
In Bookkeeping, transactions are typically recorded in a journal and then transferred to a ledger account. The ledger contains all the information needed to prepare financial statements, such as income statements and balance sheets.
However, bookkeeping involves more than just keeping track of transactions. It also involves classifying and categorizing transactions, preparing payroll statements, and analyzing data to identify trends. This is why a bookkeeper's job requires a solid understanding of accounting principles.
While bookkeeping used to be a manual process, now it is often done using various accounting software tools where you can do it on your own. This software can automate many tasks involved in bookkeeping, such as invoice processing and bank reconciliation. As a result, DIY bookkeeping for small businesses can save you a lot of time and money.
How Can Bookkeeping Help Your Business Grow?
Bookkeeping provides financial visibility and clarity into the overall health of the company. Additionally, it can help in making an informed strategic decision around growth opportunities.
Bookkeeping has numerous benefits, but here are six key ways it can help your business grow.
1. Bookkeeping Gives You Financial Visibility
One of the critical perks of bookkeeping is that it gives you financial visibility. This means seeing how much money is coming in, going out, and what’s left over at the end of each month.
This information is critical for making sound decisions about where to allocate resources and where to cut costs. Additionally, it can help you identify trends over time to make more informed decisions about long-term growth.
2. Ensures Accurate Budgeting
Another important benefit of bookkeeping is that it ensures accurate budgeting. This is because bookkeeping provides a clear and concise picture of your current financial situation. This information is essential for creating a budget that accurately reflects your company’s income and expenses. Plus, aspects like DIY bookkeeping for small business will tremendously help you in tailoring demand-specific budgeting.
3. Gets You Ready for Tax Season
Bookkeeping can also help you get ready for tax season. It helps you track all of your business-related income and expenses. This information is then used to prepare your tax return. Also, if you ever have an audit, having accurate and up-to-date bookkeeping records can help you prove your case to the IRS.
4. Keeps Records in an Organized Manner
Another benefit of bookkeeping is that it helps you keep your records in an organized manner. This is because bookkeeping requires you to categorize and track all financial transactions. This can help you stay organized and efficient when preparing your taxes or responding to an audit.
5. Establishes Clear Business Objectives
Bookkeeping can also help you establish clear business objectives. The reason is that bookkeeping gives you a clear picture of your company’s current financial situation. This information can then set objectives around revenue growth, expense reduction, and profitability.
6. Aids in Government Regulations & Policies
Lastly, bookkeeping can also help you comply with government regulations and policies. Bookkeeping provides a clear and concise record of all financial transactions. This information can then be used to ensure compliance with tax laws, labor laws, and other regulations. Plus, if you ever have to go through an audit, having accurate bookkeeping records can help you prove your case to the government.
The Different Methods Of Bookkeeping
There are various methods for easy bookkeeping for small businesses but the most common are single-entry and double-entry bookkeeping. Let's look at what they are in detail.
Single-entry bookkeeping is the simplest method of bookkeeping. In this system, transactions are only recorded once in a ledger. This means that there is only one entry for each transaction. The single-entry system is suitable for small businesses with simple financial transactions. Additionally, it can be used as a supplement to the double-entry system for businesses with more complex needs.
Double-entry bookkeeping is a more sophisticated method of bookkeeping than single-entry bookkeeping. In this system, transactions are recorded twice in ledgers. This means that there are two entries for each transaction – a debit and a credit. The double-entry system is best suited for larger businesses with more complex financial transactions. Additionally, it provides a more accurate record of financial transactions than the single-entry system.
How To Get Your Small Business Bookkeeping Started?
While the answer to how do I set up bookkeeping for my small business may seem daunting at first. But incorporating a bookkeeping system does not have to be difficult or time-consuming. Here are a few tips to get you started!
1. Choose Your Bookkeeping Method
The first and foremost step is to decide on your bookkeeping method. There are two types of bookkeeping methods. Single-entry bookkeeping and Double-entry bookkeeping. The single-entry bookkeeping system is easier and less time-consuming, perfect for small businesses with simple transactions. On the other hand, the double-entry bookkeeping system is more complex but provides a more detailed record of your business finances.
However, based on your bookkeeping method, you can narrow down your account types. These are the five elements that will be crucial in that.
Assets: This account type includes anything that your business owns, such as cash, inventory, equipment, and property.
Liabilities: This account type includes anything that your business owes, such as loans, credit cards, and accounts payable.
Equity: This account type includes the ownership stake that each partner has in the business.
Income: This account type includes all of the money that your business earns, such as sales revenue and investment income.
Expenses: This account type includes all of the money that your business spends, such as on rent, salaries, and inventory.
2. Identify Different Types Of Business Accounts
The second bookkeeping tip for small businesses is to identify the different types of accounts based on your business transactions. The goal is to have a broad understanding of how each account affects your business's financial statement. Each account can be divided into two categories, which are:
Personal Accounts: Accounts that represent people or organizations with whom the company has financial relations. These include suppliers, customers, employees, government agencies, and shareholders.
Real Accounts: These accounts represent businesses' assets, liabilities, and equity. Each category will have its own unique set of accounts.
3. Set Up Your General Ledger
After you've identified the different types of accounts, the next step is to set up your general ledger. The general ledger records all the financial transactions made by your business. This bookkeeping tip for small businesses is important because it provides a clear overview of your money and where it's coming from.
This will help you make sound financial decisions for your business. To set up your general ledger, you'll need to create a chart of accounts. This will list all the accounts that you've identified in step two. Once you have your chart of accounts, you can start recording transactions in your general ledger.
4. Create Your Business Accounts
Now that you've set up your general ledger, it's time to create your business accounts. The first step is to identify which accounts you need based on the type of transactions you make. Once you've done that, you can create an account for each one.
You can do this by using accounting software or by setting up a spreadsheet. If you're using accounting software, you'll need to create an account for each type of transaction. For example, if you have an account for sales, you'll need to create a separate account for purchases. If you're using a spreadsheet, you can set up your accounts in any order.
However, it's generally recommended that you start with your asset accounts and then move on to your liabilities and equity accounts. Once you've created your accounts, you can start recording transactions.
5. Record All Financial Transactions
The next step to figuring out how to do bookkeeping for my small business is to record all financial transactions in your accounts. This includes every income, expenditure, asset, liability, and equity transaction. Be sure to keep accurate records so that you can track your progress and spot any errors.
Additionally, be sure to keep records of all supporting documentation, such as receipts, invoices, and bank statements. This will help you reconcile your accounts and make sure that your bookkeeping is accurate.
6. Balance Account Books
Once you've recorded all financial transactions, it's time to balance your account books. This means that you need to ensure that the total value of your assets equals the total value of your liabilities and equity. To do this, you'll need to add up the values of all your assets and compare them to the total value of your liabilities and equity. If the totals are not equal, you'll need to adjust your entries until they match. This process is called "reconciling."
Plus, you should also regularly review your account balances to ensure that they're accurate. This will help you catch any errors and make sure that your books are in order
7. Prepare Financial Reports
After you've reconciled your accounts, you can start preparing financial reports. Financial reports give you an overview of your business's financial health and performance. They can track progress, make decisions, and spot problems early on.
There are two main types of financial reports:-
Balance sheets: Shows your business's assets, liabilities, and equity at a specific time.
Income statements: This shows how much your business has made and spent over time. You can prepare these reports yourself or hire an accountant to do it for you.
8. Deploy A Bookkeeping Schedule
The next step is to deploy a bookkeeping schedule. This bookkeeping tip for small businesses helps you stay organized and on track. By setting aside time each week to update your books, you can avoid any last-minute rushes and ensure that your records are accurate.
Also, set up a system for tracking payments and receipts. This will help you stay on top of your finances and ensure that all transactions are accounted for.
9. Store Records Securely
Once you've completed all the steps above, the next bookkeeping tip for small businesses is to store your records securely. This includes both digital and physical records. Be sure to keep them in a safe place where they won't be lost or damaged.
You can store physical records in a filing cabinet or storage box. If you're storing them digitally, back them up in multiple locations. This will help protect your data in case of a computer crash or other disaster.
10. Automate With The Right Bookkeeping Platform
The final bookkeeping tip for small businesses is to automate with the right bookkeeping platform. This allows you to save time and reduce the risk of human error. Many different bookkeeping platforms are available, so be sure to choose one that meets your specific needs.
These platforms include automatic transaction entry, reconciliation, and financial reporting. You can also track your business's progress and performance over time.
You will have to decide how often you want to update your records and how much data you need to track. Once you've chosen a platform, set up automatic backups so your data is always safe. This will allow you to focus on running your business, not on just bookkeeping.
Is DIY Bookkeeping the Right Choice For Your small business?
Accurate bookkeeping can help you track your finances, keep on top of your spending, and make sound financial decisions for your business. But what if you don't have the time or resources to do the bookkeeping yourself? Is it worth hiring a professional bookkeeper, or is DIY bookkeeping for small business the right choice for you? There are pros and cons to both DIY bookkeeping and hiring a professional. If you're trying to decide which is right for your small business, consider the following factors.
Time: Do you have the time to dedicate to keeping accurate books? If not, then hiring a professional bookkeeper may be a better option, as they will be able to do it for you.
Cost: Hiring a professional bookkeeper can be expensive, so if you're on a tight budget, DIY bookkeeping may be a better option. However, keep in mind that if you make mistakes in your bookkeeping, it could cost you more in the long run.
Knowledge: Do you have the knowledge and expertise to do bookkeeping correctly? If not, then hiring a professional may be a better option. Professional bookkeepers have the training and experience necessary to keep accurate books. DIY bookkeeping can be a good option for small businesses with the time and resources to dedicate to it. However, hiring a professional bookkeeper may be a better option for your small business if you're on a tight budget or don't have the time or knowledge to do it correctly.
Why Financial Management Software Is a Better Bookkeeping Option for Small Businesses?
While both professional bookkeepers and DIY bookkeeping have their benefits, there is another option that may be the perfect answer for how to set up bookkeeping for a small business: financial management software.
Financial management software can automate many of the tasks required for bookkeeping, making it easier and faster to keep accurate books. They have advanced features like accounting integration, automatic bank reconciliation, and expense tracking that can save you time and help you make better financial decisions for your business.
Let’s have a look at some of the primary features that a financial management software can offer.
1. Automatic Expense And Income Tracking
Automatic Expense And Income Tracking bookkeeping software are designed to make your life easier by tracking your finances for you. You can automatically connect your bank account and credit cards, and the software will categorize and track your transactions for you. This saves you time and makes it easy to see where your money is going.
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2. Automatic Bank Feeds And Reconciliation
With automatic bank feeds, all of your transactions are imported into the software and reconciled automatically. This means that you don't have to waste time manually entering data or trying to reconcile your accounts yourself. The software does it all for you, so you can focus on running your business.
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3. Customizable Invoicing And Quotes
Bookkeeping software also allows you to create customized invoices and quotes. This is a great way to save time and ensure that your customers receive the information they need in a format that works for them. You can also use the software to track payments, so you always know who owes you money and when it's due.
4. Reports and Analytics
With bookkeeping software, you can generate reports and analytics to help you understand your business finances better. This information can be used to make informed decisions about where to allocate your resources and how to grow your business.
5. Collaboration Features for Team Bookkeeping
If you have a team of bookkeepers, bookkeeping software can help you collaborate more effectively. With features like shared folders and task lists, you can easily keep everyone on the same page and ensure that nothing falls through the cracks. This can save you a lot of time and frustration in the long run.
Overall, financial management software is a better bookkeeping option for small businesses because it automates many of the tasks involved in tracking your finances.
Additionally, financial management software is typically more affordable than hiring a professional bookkeeper, making it a better option for small businesses on a tight budget. And finally, most financial management software is easy to use and comes with support from the software provider, so you don't need extensive knowledge or experience to use it correctly. If you're looking for a better bookkeeping solution for your small business, then financial management software may be the right choice.
The Bottom Dollar!
Small businesses cannot rely on a one-size-fits-all approach to bookkeeping. The best solution for your business will depend on time, cost, and knowledge. However, financial management software is typically a better option than both professional bookkeepers and DIY bookkeeping, as it is more affordable, easy to use, and comes with support from the software provider.
Financial management software may be the right choice if you're looking for a better bookkeeping solution for your small business. However, not all of these programs are created equal. This is why most small businesses trust Fincent. It is one of the best financial management software programs available, and here’s why.
Fincent helps you keep track of your finances in one place. This program is designed specifically for small businesses, including all the features you need to manage your money effectively. With Fincent, you can track your income and expenses, create and manage invoices, and even accept payments online. This software is user-friendly and intuitive, so you won’t waste time trying to figure out how to use it. Even if you’ve never used a financial management program before, you’ll be able to understand how Fincent works in no time.
Fincent: Your Business's Personal Financial Wizard - From Bookkeeping to Tax Filing