Running a small business requires knowledge of much more than just your industry. For instance, you need to be familiar with all the basic business operations — including bookkeeping.
By bookkeeping, we mean the recording of all the financial transactions of your business — and keeping that information organized. This may be one of the less exciting aspects of running a business, but it is nonetheless critical.
In this bookkeeping 101, we’ll look at why you need to understand bookkeeping and how you can ensure you’re doing it right.
Why Bookkeeping Is Important for Small Businesses
Without bookkeeping, there’s no way for you to tell if your business is profitable. Plus, it helps you see where your business is facing financial challenges, allowing you to take action now to avoid serious trouble in the future. It also shows you where opportunities lie — opportunities you may otherwise have missed — to grow your business faster.
What Do Small Business Owners Need to Know About Bookkeeping?
Before you get started, there are a few things you need to know about bookkeeping.
First, it’s important to familiarize yourself with some basic bookkeeping terminology. Some key terms to remember include:
- Accounts payable — The amount you owe to third parties.
- Accounts receivable — The amount third parties owe you.
- Balance sheet — A report that combines the money you owe and what you owe others.
- General ledger — The central record for financial data from all your accounts.
- Profit and loss (P&L) statement — A summary of your financial activity for a particular period of time.
- Cash flow statement — This is like your P&L statement, with the difference that it only includes cash items.
- Journals — Where you store the records of your transactions. You need a separate journal for each account.
- Trial balance — The worksheet you use to check that your books are balanced correctly.
Types of Business Accounts
Small businesses tend to have five main types of business accounts. These are:
- Assets — The cash, inventory, and other resources you own.
- Revenue — Cash coming into your business through sales and other types of payments.
- Expenses — The amount you’re spending on services and other items, like payroll, utility bills, and fees for contractors.
- Liabilities — The money you still owe on loans, debts, and other obligations.
- Equity — How much is remaining after you subtract liabilities from assets.
Tips for Small Business Bookkeeping
Now that you’re clear on those bookkeeping basics, let’s look at a few best practices to improve bookkeeping for your small business.
1. Keep Your Business and Personal Finances Separate
If you’re funding your startup yourself, you may think it makes sense to use your personal bank account. Whereas this may start off straightforward enough, you’ll soon find you’re creating unnecessary complications for yourself. A better move is to open a designated business account as soon as you launch your company — plus, this will allow your business to start building credit.
2. Choose the Right Software
No small business owner should still be doing bookkeeping using spreadsheets. Whereas spreadsheets may be free, you’ll find this method takes much longer and it’s far more complicated than using specialized bookkeeping software.
The best bookkeeping software for small businesses includes:
- QuickBooks — As most small business owners use QuickBooks, there’s a good chance this will be the best choice for you, too. In fact, it’s equally popular with bookkeeping professionals. A great thing about this tool is that it scales easily. Plus, there are plenty of resources to learn how to use all its features.
- FreshBooks — If you’re looking for software that offers invoicing as well as basic bookkeeping capabilities, FreshBooks is a good option. However, you should only consider this software if you’re a service-based business, as it has no inventory management features.
- Wave — Another option for service-based businesses is Wave. Again, it lacks inventory management, but it does have receipt scanning and invoicing features. This is another top choice with bookkeeping professionals, as the tool allows you to manage books for various businesses in one account.
- Zoho Books — For all the financial tools you need in one place, turn to Zoho Books. As well as payable and receivable reports, it has time tracking and allows you to import your contacts.
- Xero — If your startup is still in the micro-business stage, you may like a simple solution like Xero. This software is useful for its integrations, such as for collecting payments. It also has basic inventory management features, receipt capturing, and the option to accept multiple currencies.
3. Choose Your Bookkeeping Method
There are two main bookkeeping methods: single entry and double entry. You’ll need to decide from the start which is suitable for your business.
In basic terms, single-entry bookkeeping means you only enter the transaction one time. This may work for you if your business is based out of your home and cash transactions are uncommon. Double-entry bookkeeping is the more common method. After each transaction, you enter the opposite of the transaction in another account. Although this requires more effort, it’s necessary for many businesses.
4. Record Everything
Whichever method you choose, you’ll need to record every single transaction. Plus, you’ll need to make sure that you note down the right amount in the right place. Otherwise, when it comes time to balance your books, you’ll find that the totals don’t match up.
5. Automate Processes
You can save time by setting up automation in your bookkeeping software. Bear in mind that automation is easier if you use cloud-based software. You can sync the software with your accounts and the tool will record transactions automatically for you.
6. Budget for Taxes
Prepare for your taxes in advance. Never assume that sales will pick up later and you’ll have enough when the time comes to pay. Allocate a budget now to ensure you’ll never run into problems.
Also make sure you pay your taxes on time to avoid penalties. The IRS puts out a tax calendar that you can sync to any cloud-based calendar, which eliminates the need to manually add deadlines. You can even enable reminders.
7. Schedule Bookkeeping on a Regular Basis
Once a week, dedicate time to recording transactions. Every quarter (or, better still, once a month), balance your books. Your bookkeeping session at the end of the quarter is also an ideal time to look for trends in numbers, which you can use to guide your business strategy.
As it’s unlikely you’ll look forward to bookkeeping, schedule a time when you’ll be able to focus. Then, you can finish your bookkeeping tasks quickly and move on to something you enjoy. Near the beginning of the day at the start of the week is ideal.
Online Bookkeeping Courses
To ensure you’re clear about how to carry out all the many small tasks, you’ll need to learn bookkeeping. One of your best options is to take an online bookkeeping course. Some to consider include the following.
Choose from a number of free courses to learn everything you need to know about small business bookkeeping. The courses appear in the suggested order you should take them to keep building on your knowledge.
This eight-hour course from the Open University will teach you all the fundamentals of bookkeeping. It’s a great introduction, especially if you lack confidence in your numerical skills.
One of the top platforms for online learning in general, Future Learn has many business and management courses. Under the finance and accounting category, you’ll find a wealth of advice to improve your bookkeeping and other financial skills.
Outsourcing Your Bookkeeping to a Virtual Assistant
An alternative to investing so much of your precious time in a bookkeeping course is to find an outsourced bookkeeper. This will also mean that you keep bookkeeping off your schedule entirely, freeing up your time for the activities only you can do.
One option is to seek virtual bookkeeping services from a remote bookkeeper. You’ll simply send your bookkeeper all the necessary documentation and specify exactly what services you want, as well as how often you’ll need these services. Virtual bookkeeping is not like having an employee — you just pay for the hours you need, you don’t need to provide any office space, and it’s up to the virtual assistant to keep up with training.
At MYVA360, we have a whole team of virtual assistants who specialize in bookkeeping. We offer a full range of virtual bookkeeping services, including record keeping, inventory management, and budgeting. Contact us to receive a free trial for a day. You can try out our bookkeeping services for small businesses along with any other virtual services you require.