10 Small Business Bookkeeping Tips

You can feel confident managing your business’s finances with the right tools and knowledge in accounting and bookkeeping. Staying aware of how much your business is earning and where the money is going can help you make accurate decisions and focus on growing your business. Discover why small business accounting is important, and use these bookkeeping tips to streamline your company's finances.

What is small business accounting? 

Small business accounting involves keeping accurate financial records for your business. Maintaining copious financial records informs you of how much your business makes or loses and keeps you abreast of your expenditures. Whether you choose a single- or double-entry bookkeeping system, you’ll know your business's financial standing.

Importance of accounting and bookkeeping for small businesses

Accurate records are essential to good business practices. For small business owners to know the financial health of their companies, they need to keep records up-to-date to track profit and loss. Keeping up with revenue and expenses is necessary for a business to succeed. 

A business owner must closely monitor cash flow to ensure enough operating funds are available to keep the business afloat. It’s good practice to have accurate books should a bank loan be necessary and to complete your taxes. Good bookkeeping can help detect fraud and mismanagement depending on your type of business.

What are some of the challenges of small business accounting?

When setting up a bookkeeping or accounting system for your small business, you first need to decide whether to keep your records manually with a software program or hire an outside firm. 

When running a small business, tracking cash flow and covering unexpected expenses is essential. Unless you’re using a bookkeeping service to alert you when a problem arises, you’ll need to track your income and revenue closely. This and other commitments of operating a small business can be challenging.

If you have employees, you’ll be responsible for accurate payments to them and the taxing authority. Errors can result in costly penalties. 

Reconciling the books is another challenge for small business owners. If you find it feasible to keep your books in-house, you might consider using a software accounting program. This can help alleviate some problems you might run into with manual recordkeeping. 

Tips to help streamline your business finances

Smart bookkeeping practices can alleviate problems and keep your business on a good financial track. Look at the tips that can keep your business running smoothly and help you avoid costly mistakes. 

1. Choose accounting software that works for your needs.

When choosing an accounting software program, one of the first things you need to decide is how you’ll use it and the features you’ll need. You’ll also want to weigh the cost and number of users.

If you intend to do payroll in-house, you’ll want a software program matching your business type. For example, if your company hires only part-time employees, you won’t need the same features as a construction company with full-time employees and frequent overtime.

Will your business be generating invoices, cost estimates, or billing statements? If so, you’ll want a software program to prepare statements. 

Inventory tracking and tax preparation software programs can help streamline your business operations. The number of employees using the system will factor into your chosen program. If you use other software applications, you’ll want accounting software that you can integrate with those applications. Some of the accounting software available for small businesses include:

• Intuit QuickBooks: Various features are available to help your business run smoothly and stay up-to-date. The monthly cost varies by the number of users, from one to 25. 

• Freshbooks: For smaller businesses, Freshbooks charges per billable client rather than the number of users. It’s an inexpensive program for companies with small invoicing needs.

• Xero: Xero is a cloud-based program geared towards micro-business owners. While it doesn’t include the features found with QuickBooks or Freshbooks, it’s low-cost and offers a payment collection option if you need to collect payments from customers.

• Crunch: Crunch is geared towards limited companies and sole traders. It offers a free basic program and several paid programs at varying costs.  

2. Choose an accounting method.

The two primary methods of small business accounting are cash-based and accrual. While the cash-based method is the simplest, it’s unsuitable for every small business. Here's the difference between cash and accrual accounting and the restrictions. 

Cash-based accounting 

Cash-based accounting is the simpler of the two methods and is used for short business cycles with a turnover of less than £150,000. Cash-based accounting must be used if more than one business is owned. 

Income is recorded as received; otherwise, it’s not considered revenue. A disadvantage of the cash method is that it only provides a short-term look at your company’s financial health.

If you decide to grow your business or sell to consumers, you’ll need to transition to the accrual method to meet generally accepted accounting principles (GAAP). This can be challenging if you’ve operated under the cash method for a long time, but it will most likely be more efficient.

Accrual-based accounting 

The accrual-based accounting method records income when it’s billed, not when it’s received. Once the invoice is generated, income gets recorded. 

The accrual method of accounting provides a broader financial picture, so you adjust your business operations should your financial outlook not be favourable. A disadvantage is that you may not always know what funds you have and might not have the necessary funds if you have many outstanding invoices.

3. Track and record every expense. 

As a business owner, you’re responsible for recording every expense paid from your business account. No matter the payment method, each transaction must be recorded with the date, amount, and purpose.

4. Prepare a bookkeeping schedule. 

To track your business's financial health, having a bookkeeping system can help you stay organised and aware of where you stand each week and month. A schedule can include paying vendors at a specified time each month, reconciling monthly bank statements, recording revenue weekly, and making regularly scheduled bank deposits.

Create financial reports based on books. 

At the end of each month, creating a financial report is best. If you’re using accounting software, financial reports might be automatically generated. If someone on your staff or an outside accountant prepares the report, review it for accuracy and keep apprised of your financial standing.

If you’re paying employee taxes or VAT, you’ll typically need to prepare a quarterly report for remitting payments to the taxing agencies. It’s also beneficial to prepare a quarterly expense report.

A balance sheet is a glance at your business's worth. It is generated by comparing your assets and what you own to your liabilities and outstanding debts. It can help determine if your business is taking on too much debt to support its revenue.

5. Ensure your accounting method pays bills and invoices on time. 

If your small business uses accounting software, it will help you track invoice due dates. Most software programs also provide options for automatic bill payment and bank transfers. 

If you’re not using software, set a monthly time to make payments and the payment method used. You may have vendors who can pay online or mail a check. 

6. Keep personal and business expenses separate.

One of the first steps when starting a new small business is opening a business checking account. It’s important not to combine business and personal funds. You might also consider opening a savings account to deposit tax obligations. 

Unless your financial institution provides perks for keeping your personal and business accounts with them, you might consider using different banks. This will eliminate possible confusion. 

7. Pay yourself.

It’s a good business practice to pay yourself a salary. This will alleviate potential comingling problems between personal and business accounts. Setting aside a check for yourself regularly and depositing it into your personal account will alleviate bookkeeping errors. 

Should you need to pay a business expense with your personal funds, be sure to reimburse yourself by check or with a digital payment that can be tracked rather than cash. Record each transaction as you would any other business expense.

8. Have a filing system in place. 

You can keep your files on your computer, physically, or both. If you store files on your computer, be sure to have a computer backup so that there are two versions of your important documents in case one gets corrupted.

If you keep hardcopy records, choose a filing system that gives you the easiest access to your needed information. Be sure to have a good physical filing system with folders clearly labelled and the most used files easily accessible. If you have confidential information, be sure you can lock your filing system.

9. Embrace new technology.

Technological advances can help to streamline your small business bookkeeping and accounting practices. Integrating the most recent communication systems into your business allows you to communicate better with your employees and clients. To save on costs and add efficiency to your business, consider video conferencing, a cloud phone system, and having remote employees.

10. Invest in a qualified accountant if you can.

It can benefit your business if you have an accountant for more than income tax filing purposes. An accountant is up-to-date on tax laws and regulations and can sometimes find overlooked deductions.

When choosing an accountant, you should meet in person to go over your accounting needs and ensure it’s someone you can establish a good working relationship with. Be clear about your needs and expectations.

Next steps

With these tips, you can streamline your finances to give your small business the best chance of succeeding. Consider taking some short bookkeeping or accounting courses to learn about helpful tools. You might want to begin with Bookkeeping Basics or Intuit Bookkeeping, both offered by Intuit on Coursera. You can also learn how to use Excel to keep your books.