Learn how to keep books so you can establish a system that works for your business.
Small business leaders who handle their own accounting often find it challenging to keep their books. The same goes for accounting department leaders who may be too preoccupied with other tasks to master their bookkeeping. These leaders have a desire to learn more about the basics of bookkeeping to save time and minimize errors.
By gaining an understanding of the basics of bookkeeping, you make it easier to keep track of your business’s finances. Many companies face the challenge of adjusting their spending and operational procedures in a way that helps them stay within budget. By keeping accurate books, you give yourself reliable numbers you can use to gauge progress toward your budgeting goals. This article is your guide on how to keep books for a small business. Using this, you can get a sense of the basics and start using dependable books to guide your budgetary decisions.
What is the importance of bookkeeping for small businesses?
What is bookkeeping for small businesses? Small business bookkeeping involves recording and organizing transactions. What do you need to understand as you look into how to do bookkeeping for small businesses? A comprehensive bookkeeping system also involves tracking expenses and different kinds of transactions. This makes it easier to identify ways to improve your financial management system.
Bookkeeping can also be a powerful tax tool. As Dee Bowden, Revenue Recovery Specialist and author of “Collect the Cash,” notes, “By maintaining up-to-date records, you make the process smoother for your CPA, potentially saving money on their time and ensuring a hassle-free tax filing experience.”
For SMBs, bookkeeping is essential because they need to get as much out of their limited budgets as possible. With a reliable bookkeeping system, you can identify precisely how much you have available to spend on marketing, human resources, and product development—without having to worry about overstepping budgetary boundaries.
Since the stakes are so high for SMBs, many turn to bookkeeping services for small businesses. Not only can these providers handle your books, but they can also teach you how to track your finances and guide you in choosing an accounting system. Armed with this knowledge, you can create a customized bookkeeping and accounting system tailored to your business’s challenges and goals.
Going with an outside bookkeeping provider is a popular choice. According to Capterra’s 2023 Accounting Shortage Survey,* 71% of SMBs outsource some level of accounting and finance to outside firms.
Considering this data, it’s no surprise that taking a chunk out of your bookkeeping workload using external providers may be a necessity for many SMBs. And, according to further research from Gartner, 80% of a finance team’s time is spent on reviewing historical data and bookkeeping because most businesses are still so investing in day-to-day reporting.[1]
Bookkeeping vs. accounting
While both bookkeeping and accounting involve maintaining records of financial transactions, they’re very different disciplines. Bookkeeping refers specifically to recording and tracking expenses. Accounting, on the other hand, focuses on analyzing financial data and providing reports to help stakeholders make decisions. It’s also important to note that the two aren’t interdependent. A good accounting system depends on accurate bookkeeping, as it provides the data accountants use to make decisions.
For example, suppose a software development company purchases three new computers. The bookkeeper would record details such as:
How much each computer costs
When they were purchased
The costs associated with additional support plans or warranties
An accountant could use this data to figure out:
How to depreciate the computers’ values for tax purposes
How this purchase impacts the organization’s overall cost of goods sold (COGS)
After a computer fails, whether transferring risk by investing in an extended warranty provides adequate ROI
The basics of bookkeeping
Interested in how to do bookkeeping for small businesses? To get started with bookkeeping, you’ll want to start with the basics, which involve differentiating your funds and setting up systems for recording specific transactions.
Open a separate business account
By opening a separate business account, you draw an essential line between your business and personal funds. In this way, personal expenses won’t impact your business balances, and vice versa. Differentiating your funds also makes it easier to avoid accidentally recording a personal expense as a business one, which could be problematic when you have to analyze your financial performance.
Record expenses
Knowing how to keep your books for a small business centers on recording your expenses. This involves keeping track of what you spend on more than just materials. It also includes other forms of overhead, such as:
Utilities
Travel
Salary and bonuses
Advertising and marketing
Subscriptions to software
Log invoices and receipts
Logging your invoices and receipts is critical because they simultaneously give you an accurate account of your cash flow and provide a reliable record of when and how you spend and make money. For example, by setting up a receipt and invoice logging system, you can associate each expenditure and cash inflow with specific customers.
Develop a payroll system
Your payroll system is integral to your bookkeeping because it’s probably one of your most significant—and variable—expenses. But when you have a dependable system, it’s easy to:
Adjust pay as necessary
Associate payroll overhead with specific clients or accounts
Analyze how your payroll impacts your overall COGS
It’s important to keep in mind that getting these basics down may take significant training. While the winning training formula will depend on your staff and their knowledge gaps, Capterra’s research reveals that conducting a combination of in-house training (30%) and certification(s) (27%) are avenues SMBs use to ensure their in-house accounting teams are well-qualified.
The specific skills gained through in-house training and certifications may vary as well. The defining traits respondents say make a strong accounting department include the ability to conduct timely and accurate financial reporting (25%), being knowledgeable about regulatory standards (23%), and understanding their company’s goals (20%).
How to keep books
Keeping your books is simpler if you take the following steps in sequence:
1. Learn the basic bookkeeping concepts
This serves as your foundation. While you don’t have to have a deep knowledge of all bookkeeping nuances, knowing how bookkeeping works can help you avoid critical errors. Also, if you decide to outsource your bookkeeping, you can use your knowledge of its concepts to check your provider’s work periodically.
2. Choose an accounting system and tools
Your accounting tools and system should be rooted in software. With a software-based system, you can automatically integrate financial data from a variety of sources, such as your inventory or marketing systems. A digital system also makes the process of generating reports more straightforward.
3. Develop a bookkeeping database
Your bookkeeping database serves as a central repository of the documents and figures used to support your bookkeeping figures. You can refer to it later on while filing taxes, undergoing an audit, or assessing your expenses and revenues. A database can also be integrated with an accounting application, streaming data directly into your software, which can reduce the chances of errors.
4. Understand the taxes involved
Working with a tax specialist can save you both time and money because a professional understands how the tax code works and how you can navigate it to your benefit. For example, calculating sales tax and tax obligations can be tricky, especially when you have to factor in discounts, promotions, and varying prices. But a professional can ensure you file accurate reports that keep you from running afoul of the IRS.
5. Manage and track all transactions
Managing and tracking your transactions puts you in a better position to make analytical decisions down the road. For example, by tracking how much you spend producing individual products, you can ascertain which ones are the most expensive to produce. You can then use this data to price each item according to your profitability goals.
6. Prepare financial reports
Your financial reports are valuable for accountants, other analysts, and decision-makers when they need to justify a decision to other stakeholders. They can also use these reports to identify trends indicating overspending, under-charging, or wasteful investing that could impact your bottom line.
7. Maintain and adjust accounting entries as needed
Maintaining and adjusting your accounting entries consistently ensures you catch and correct as many errors as possible. This results in more accurate records you can depend on as you make strategic decisions. A straightforward bookkeeping maintenance program can also make your books easier to read by auditors and others who may need to read and understand them.
8. Consider working with an accounting service provider
Accounting service providers typically have years of experience keeping accurate books. By relying on professionals, you reduce the chances of making mistakes. Also, they may have access to the latest cybersecurity technology, which can safeguard your sensitive financial data, keeping it out of the hands of hackers.
Bookkeeping tools and technologies
Using bookkeeping technology to boost efficiency and accuracy is a common move, with 58% of small businesses planning to spend more than $10K on new accounting software between 2023 and 2024, according to Capterra’s survey earlier. The types of software these companies invest in vary, and range from invoicing, budgeting and forecasting, and accounts payable and receivable software.
These technologies are available from a variety of vendors, so it’s best to check their features before you make a final purchasing decision. However, many of them offer:
Automated integration of bookkeeping figures with other business applications
Preset forms that fit the needs of businesses from multiple sectors
Pre-designed charts and graphs to use while analyzing financial performance
Leverage effective bookkeeping to support your business’s financial health
With this guide, you understand the basics of bookkeeping and what each element involves. You can also develop a step-by-step systematic approach to designing an effective bookkeeping system. In addition, you have insight into the technologies needed to create a winning solution.
Your next step is to dig deeper into bookkeeping and accounting software and how to architect a successful system.