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Small Business Bookkeeping Tips: What Is It and How It WorksThe main difficulty of accounting for small businesses is that entrepreneurs often do not have extra funds to hire narrow specialists or purchase accounting software. Even though their resources are somewhat limited, it is essential to be able to carry out accounting even in such conditions because it is a fundamental activity for any business. This article will look at basic small business bookkeeping rules and the main mistakes you should avoid.
How to Do Bookkeeping for a Small Business?Let’s first understand what your accounting activity should include. The full list varies depending on the company, but usually, the small business bookkeeping checklist consists of the following:
- tracking the receipt of payments from customers;
- paying taxes and claiming credits and deductions;
- paying salaries to employees;
- making other payments (e.g., bills);
- carrying out inventory and audits, etc.
1. Automate processes with simple softwareAlthough complex, specialized software is often used for accounting, small businesses can get by with simpler options. For example, you can get an app that manages money to control your finances and track transactions from your mobile device. It will be enough for basic tasks like monitoring assets in different currencies, checking upcoming bills, and meeting business goals. You can even invite other employees to do money management together.
2. Separate financesThe key point of the small business accounting checklist is that you must separate your personal finances from business ones. It will simplify the sorting of cash flows and minimize the possibility of audit errors. Self-employed and freelancers often flout this rule by using the same bank accounts for all transactions. Along with this division, it is worth using the budget app that links to bank account. Synchronize all your business accounts with one service to keep a record of all transactions in one place.
3. Schedule data entryAccording to generally accepted bookkeeping tips for small businesses, every invoice, check, and payment must be accounted for and recorded. Set aside time for this activity every day. You can automate the task using apps that record all transactions or do it manually by checking all payment documents. Don’t skip this step or leave checking payment papers for the end of the month, as it’s so easy to miss an unpaid bill or make a mistake.
4. Set up work with clientsThe basics of bookkeeping for a small business also include quality customer service. It means timely generation of invoices (preferably within 48 hours), tracking payments on them, and sending reminders. Also, as a business owner, you should know what legal tools to apply if customers refuse to pay. All these are rather dull routine tasks on which your business’s income largely depends.
5. Make reports, checkups, and reviews regularlyAny examples of bookkeeping for a small business show the importance of regular reporting and review. You can set your own metrics for checking accounts to detect errors and understand the direction of financial flows. Such reports are important both for internal verification and for the completion of tax documents. By comparing weekly or monthly reports for the past year, you can identify patterns, spot weaknesses, and plan to optimize and expand your business.
Common Bookkeeping Methods for Small BusinessesThere are two main ways how to do accounting for a small business: single-entry and double-entry. They differ from each other, so you should determine which one suits you best.
Single-entry bookkeepingWhen using this method, each transaction is recorded once. Whether it is an income or an expense, you specify it in your ledger only one time. It is the most straightforward approach to bookkeeping, suitable for small businesses and the self-employed with small financial flows. Due to the lack of detail and high probability of errors, it might not be ideal for larger companies.
Double-entry bookkeepingIn this method of basic bookkeeping for a small business, each transaction is recorded twice: in columns with credit and debit accounts. That is, if the amount of one account increases, the second proportionally decreases. You should receive a zero balance at the end of the reporting period. This method is more detailed, so you can track all financial directions and identify errors or fraud. It is more complex than single-entry and requires some accounting experience, but it is suitable for larger companies. If you just start your business, you can choose a single-entry approach, and as you grow, switch to double-entry. Be sure to consider local laws; some countries impose restrictions on using single-entry accounting for companies with high incomes.
Common Bookkeeping MistakesWe can offer many accounting tips for small business owners, but their use will have little effect if you keep making the same mistakes. Here is a short list of the most common bookkeeping mistakes:
- Trying to remember information about payments and expenses. Aspiring entrepreneurs often hope that they will remember essential data. Keeping information in mind is not the most reliable way, which can lead to serious problems in the future.
- Neglecting small purchases. Tax authorities often do not require receipts and other documents confirming small transactions (up to $75) from business owners. However, every transaction should be accounted for in your reports and analytics to be as complete as possible.
- Not making regular reconciliations. Reading reports and conducting audits and deductions is an important part of accounting. With their help, you can detect errors and inconsistencies that, if neglected, can significantly undermine the business’ financial health.
- Not being strict with deadlines. It applies both to your personal deadlines (for example, for paying taxes) and the time frame for payments by your customers. The so-called credit control is an important part of the overall strategy of how to do simple bookkeeping for a small business and helps maintain a healthy cash flow.
- Not outsourcing your bookkeeping when necessary. As your business grows, financial processes become more complex. If you do not have the relevant skills, there is a high chance of making mistakes. Therefore, outsourcing accounting tasks can be a good idea. Conduct a feasibility study on such investments to see if they would be beneficial in the current situation.
Get Started in BookkeepingWe hope our short guide to small business bookkeeping for dummies will help you master this vital task like a pro. Remember that your approach to bookkeeping should be based on the principles of regularity, consistency, and attention to detail. You need to understand exactly how your business works, what financial flows you operate, and what laws exist in your industry and region.
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