Bookkeeping Basics for Small Business Owners

Introduction

Small-business bookkeeping can be intimidating if you don't carry experience in doing finances. When done poorly, 'Do-it-yourself' bookkeeping can result in costly errors like underestimating your cash flow, paying fines for filing taxes erroneously, or eventually having to undergo lengthy financial audits. 

Alternatively, you can have your books updated by internal or external bookkeepers, usually on a monthly basis. However, knowing the fundamentals of bookkeeping is beneficial regardless of whether you choose to handle bookkeeping in-house or hire an accountant. Here is a quick introduction to bookkeeping for small businesses.

But let's first review some fundamental concepts related to bookkeeping:

Maintaining precise financial records of your business operations, including your revenue and expenses, is known as bookkeeping. There are two basic types of bookkeeping for small businesses:

Single-entry bookkeeping: when each transaction—whether a credit or debit—only has one entry made.

Double-entry bookkeeping: when a transaction is recorded as a debit in one account and a credit in another, with two entries made for each transaction.

You can handle financial transactions and contribute to the expansion of your company with confidence if you have the necessary tools. Read on to learn the benefits of small business accounting and how to simplify your company's finances.

Here are some fundamental bookkeeping duties:

• Invoicing clients
• Recording invoices, customer and supplier payments
• Updating payroll system
• Drawing financial reports

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Considerations Before Bookkeeping

Before taking any action on bookkeeping, there are a few crucial factors to consider.

Consider carefully whether you can dedicate time to internal bookkeeping or if you require outside assistance, such as from an accountant or bookkeeping software/tool. The finances are relatively manageable if your company is just getting started and is poised for growth.

Only when your business is growing, and you have to process a large number of transactions or employee payroll does it get difficult. You might not have enough time to do all of your bookkeeping work and meet all your deadlines and other responsibilities. 

Accurate bookkeeping is essential. When it comes to filing taxes or making business decisions that are contingent on your financial status, inaccurate accounts might lead to serious problems. To prevent the pitfalls that startups make, ensure you have a firm grasp of bookkeeping procedures.

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Essential Bookkeeping Tips To Follow

The essential concepts listed below will help you maintain a firm handle on your company's finances and make sure it is headed on the proper path.

Adhere to stringent timelines

Give your clients a deadline for payment so you can follow up with them efficiently and never be the one to miss the deadline. Keep track of any late payers, and if they continue to skip payments, you may want to consider terminating your collaboration with them. The goal of credit control is to maintain a healthy cash flow.

Choose the right software for your business

You can get away with using Microsoft Excel or its freeware substitutes for bookkeeping instead of specialised software at the initial stages of your business with a low volume of transactions. As your requirements grow, you might need a more specialised package software solution, like Inkle Books, to assist with your bookkeeping. 

Produce periodical reports

The best approach to stay on top of your company's finances and make sure you don't get caught off guard is to generate reports at least once a month. At the very least, your monthly reports ought to contain the balance sheet and the profit-and-loss statement. 

Do Not Combine Personal and Business Expenses

The first step in segregating personal and corporate finances is opening a separate bank account. When personal and corporate transactions are combined, bookkeeping becomes more challenging. Ensure all cash, credit cards, and other financial transactions are kept apart.

Be ahead for taxes

Effective bookkeeping requires foresight, which means that a company should constantly prepare for forthcoming financial obligations, such as tax season. Timely payment of taxes, especially payroll taxes, is contingent upon meticulous planning and documentation. 

Set aside an emergency fund for major expenses

The size, scope, and operational expenses of a particular business may affect the precise amount of an emergency fund. In any case, make sure there is enough cash in the bank to cover unforeseen expenses by collaborating with your accountant and bookkeeper. A comprehensive cash flow prediction and cash monitoring are necessary to determine the appropriate amount of cash to be maintained on hand. Companies may decide not to keep all of their cash on hand because doing so could result in lost opportunities for investment revenue. 

Regular audit trails

Never take a chance when it comes to your business's assets or the bookkeeping process. Regardless of the technology you use, make sure to establish a reconciliation process by comparing the data in your system with the original documents, such as bank statements, invoices, and receipts. This practice encourages compliance and longevity while enhancing communication and transparency with your bookkeeping staff. 

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Importance of Bookkeeping for Small Businesses

It is not acceptable to disregard bookkeeping as a task. Before using accounting software or outside assistance, it is imperative that you have a firm understanding of what bookkeeping for your small business entails. Without recordkeeping, obtaining an accurate picture of your company's financial health would be challenging.  For proprietors of small businesses, the following are some of the primary reasons why bookkeeping is crucial:

Diligent business management

Knowing your company's financial situation depends on maintaining precise records of sales and expenses. Making informed operational decisions, allocating resources to the company's expansion, paying taxes, organising and producing comprehensive financial reports, deciphering business transactions, identifying fraud and mismanagement, and devising a profitable plan that boosts cash flow and ensures long-term success are all made possible by small business bookkeeping.

Helps prevent errors

Making mistakes is natural. Whether an error was made by you, a mistake made by an employee, or a calculation error on the part of your bank, bookkeeping enables you to monitor every transaction in detail and identify individual faults. Even though one calculation error probably won't cause your entire company to miss its financial targets, a series of little errors over time might have an impact. Maintaining timely bookkeeping helps you avoid making the same mistakes twice and keeps your profit margin unaffected.

Helps you understand where you stand

You may find areas for improvement and obtain a clear view of your company's finances by routinely recording your transactions and keeping an eye on cash flow, earnings, and retained earnings. In addition, by examining the precise sources of your income, you may make more informed decisions about where to reduce expenses and concentrate your efforts on the areas that are yielding higher profits. 

Makes tax season easier

If you haven't been monitoring your money all year, filing taxes can turn into a nightmare for small business owners. Having been bookkeeping the entire year and knowing what tax deductions your company is qualified for makes it much easier when it's time to assemble all the paperwork and give it to your accountant. This will also provide you with greater peace of mind by lowering the possibility of any surprises after filing your tax return.

Allows you to obtain a loan

Determining the actual startup costs can assist you in determining if you require a loan. If you own a small business, you'll be requested to provide documentation, such as financial accounts and records. The details of your company's finances are important to lenders, so your chances of being accepted will probably suffer if they aren't well-organised from the start. Keeping accurate records of your company's cash flow, income, liabilities, and debts will make it much easier to get capital.

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Conclusion

One of the most significant responsibilities that a business owner will be assigned during the lifetime of the enterprise is bookkeeping. Accurate documentation of financial transactions that impact profit, equity, payroll, and other aspects is practically hard to achieve without bookkeeping.

Fortunately, bookkeeping doesn't have to be difficult. Using practical tools like Inkle Books accounting software, which makes bookkeeping simple for you, there are many efficient ways to handle bookkeeping obligations internally or externally.

Acquiring control over your bookkeeping policies is a never-ending task. It will be easier for you to lay a solid financial foundation for future expansion, profitability, and ultimate success if you adhere to this guide's advice and best practices.

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