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Small Businesses Bookkeeping – Why Every Business Owner Needs to Know the Basics

If there’s one thing that every business owner needs to be comfortable with, it’s bookkeeping. Bookkeeping plays a critical role in every business, in many ways reflecting the success and growth of the business itself. 

Proper bookkeeping is especially essential to small businesses, as it allows small business owners to gauge how well their business is performing, and what may need to be improved. If a small business fails to properly manage its bookkeeping, it could risk losing money and potentially fall into legal trouble.

It may seem daunting at first, but with some patience and determination, any small business owner can implement effective bookkeeping practices that will help them succeed.

The Benefits of Basic Small Business Bookkeeping

Small business owners put a lot of time and effort into conceptualizing and establishing their business, so much so that the thought of bookkeeping may fall by the wayside. Some small business owners may get by with the bare minimum in financial management, but thorough bookkeeping has numerous benefits that can help small business owners genuinely thrive.

Below are some ways to incorporate bookkeeping best practices into your business:

1. Separating Personal and Business Finances

When running a small business, it’s important to distinguish between personal and business finances. Not only will this make organizing business and personal documentation easier, but if a business experiences any financial difficulties, it won’t directly affect the financial security of the business owner. The liability of any debts will also be on the business itself and will not affect the owner’s credit in the same way as if it were a personal debt.

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2. Maintaining Business Health

If a small business has a proper record of its finances, it will be much easier to identify what is doing well, how it might be struggling, and what adjustments need to be made. 

Without proper bookkeeping, a small business owner likely won’t be able to properly gauge how much money is coming in and going out, nor will they have a sense of whether they are growing or not. Thorough bookkeeping can also help small business owners identify any financial mistakes and correct them before they become a more significant issue.

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3. Simplifying Finances

In addition to its other benefits, small business bookkeeping significantly simplifies finance management for business owners. From streamlining tax processes to basic document organization, effective bookkeeping makes the finer details of business ownership easy to manage.

Bookkeeping Options for Small Businesses

While it may seem like small business owners have to do everything themselves, that’s not entirely true for bookkeeping. Yes, there is accounting software available for those who want to manage their own bookkeeping, but it can be easy for things to fall through the cracks and become overwhelming over time. To avoid this, there are two routes that small business owners can take to ensure their finances are in proper order that also allows them to take a step back from the particulars of the bookkeeping process.

Outsourced Bookkeeping Services

The first thing small business owners can do is outsource their bookkeeping to an online bookkeeping service. These services are often remote, and business owners can communicate with their bookkeeper through email or phone without having to worry about scheduling a time to meet in person. Services may vary depending on the provider, but even the slightest assistance can make small business bookkeeping more simple.

Adding a Bookkeeper to Your Staff

For more direct experience, hiring an in-house bookkeeper is another option. These bookkeepers can work part-time or full-time and use their expertise to manage as much of a business’s finances as an owner is comfortable with. They likely can’t handle everything, however, so it’s important to distinguish between the responsibilities of a bookkeeper and what a small business owner is still responsible for.

How to Start Small Business Bookkeeping

Set Up Accounting Software

If you’re a small business owner who is prepared to take on your own bookkeeping, there are a few ways to establish a strong foundation. The first step is setting up accounting software to connect bank accounts, allow for data entry, and reconcile any transactions when necessary.

Once this accounting software is set up, it’s essential to become familiar with it as it will become the central hub for all bookkeeping tasks. 

Choose an Entry System

When you’ve finished setting up your accounting software, you must then decide if you want to have a single-entry or double-entry accounting system. In single-entry accounting, all transactions are recorded once as either an expense or income. This method is often used by newly started small businesses, as they don’t have much inventory or equipment to manage. Double-entry accounting records transactions twice, as both a debit and credit, to prevent errors in recording transactions.

Choose an Accounting Method

In the last step of your initial bookkeeping setup, you’ll want to decide if you’re going to rely on cash or accrual-based accounting. In cash-based accounting, transactions are recorded only when there’s an exchange of money, and invoices aren’t recorded for your company’s outstanding bills until they’ve actually been paid. 

Accrual-based accounting works by recording bills and invoices as they occur, even if funds haven’t been exchanged. This kind of accounting is usually recommended, but it mostly comes down to personal preference.

How to Manage Day-to-Day Finances

Manage Transactions

To keep your business running smoothly, bookkeeping should be done consistently to ensure all transactions are correctly recorded. Basic transaction management includes properly importing and categorizing transactions, reconciling transactions, and making sure they’re recorded in accordance with your chosen entry system and accounting method. If you’ve become familiar with your accounting software, this should be relatively easy to figure out with some practice.

Handle Accounts Receivable and Payable

One of the most essential parts of running a small business is getting paid for your work. Managing your accounts receivable and payable is an integral part of that. Handling accounts receivable ensures your business is paid for its services, as well as estimating the value of a finished product, preparing and sending invoices, and providing statements. Accounts payable is essentially everything your small business must pay to keep running, such as regular bills and invoices.

Set Up Payroll

Much like other aspects of small business bookkeeping, you have a couple of options for how you set up your payroll. Some accounting software allows you to process payroll directly through them, while other forms of standalone payroll software can get the job done as well. Whichever method you choose, it’s important to get payroll set up quickly so you and your employees can be compensated appropriately.

How to Manage Important Documentation

Coordinate with a Tax Specialist

One tedious aspect of running a small business is making sure all of your tax documentation is in order. To minimize time spent pouring over every tax-related detail, it can be helpful to find a tax specialist who can handle filing business taxes and managing other paperwork. Some accounting software can connect you to a tax specialist, but it’s also possible to connect with one in person so they can become more familiar with your business as a whole.

Organize Financial Statements and Important Documents

Running a small business can be a delicate process. The best way to make sure everything runs smoothly across the board is by organizing all of your important statements and documentation. This includes paperwork on transactions, income, assets, expenses, and many more, all of which are essential for financial statements. Just as many types of accounting software can aid in other aspects of bookkeeping, they can also store documents and make keeping track of documentation easier as your business grows.

Seek Bookkeeping Help When You Need It

While there are many tools to manage your small business bookkeeping on your own, it’s okay to seek help when times get tough. If you know a certified public accountant or tax advisor, ask them if they personally know any quality bookkeepers that could give you a hand. You could also consult professional bookkeeping communities online, which provides the added benefit of researching a bookkeeper’s services before you hire them.

Owning a small business is a complex experience with many moving parts, and it’s important to ensure that all of those parts move as smoothly as possible. Bookkeeping may seem like a small detail compared to some of the more pressing aspects of your small business, but to keep money coming in, it’s crucial that your bookkeeping is thorough and consistent.

Roni Davis

Roni Davis is a writer, bookkeeper, and legal assistant operating out of the greater Philadelphia area. She writes for First National Realty Partners, a national commercial real estate investment firm.

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