Small Business Bookkeeping for Beginners

Because it requires an eagle eye for detail, bookkeeping is a daunting task – especially for small businesses where so many things are going on and there aren’t enough people to handle it all! 

I know all too well just how challenging it is, but despite that, bookkeeping is essential for guaranteeing your financial health and paving the way for your business’s success.

If you’re wondering where to start with small business bookkeeping, you’ve come to the right place! 

Today, I’ll guide you through everything you need to know about bookkeeping so that you can hopefully get started in applying it to your business.

In this article, I’ll tell you about:

• The essentials of bookkeeping, and whether it’s really necessary.
• Different approaches you can take with bookkeeping.
• Ways to start and perform bookkeeping in your small business.
• Other smart tips to follow and rookie mistakes to avoid.

Key Takeaways

• Bookkeeping is an essential component of any successful business, no matter the size.
• Bookkeeping is undeniably daunting, but given the right tools, software, and knowledge, it can be a lot less challenging than it first appears.
• Small business bookkeeping, along with the right organizational techniques, can help your business avoid costly mistakes and safeguard its growth.
• As much as possible, consider hiring a bookkeeper not only for their skills and expertise but also because they’ll allow you to focus on other things!

What is Bookkeeping?

At its core, bookkeeping involves recording and organizing the financial transactions that a business undertakes. 

However, it’s not just noting expenses and sales that matters in bookkeeping; accuracy is, in fact, the most important consideration. 

If you’re still at a loss about what the fuss is all about (you might even think that you can just jot down transactions and throw caution to the wind!), I invite you to instead look at bookkeeping as a way to facilitate major business decisions. 

Ideally, all decision-making in a business should be driven by data, whether that’s looking at past patterns or future potential trends. 

Effective decisions are simply impossible if the data you’re working with isn’t even accurate!

Bookkeeping, with its strict attention to even the tiniest of details, makes it a lot easier to gain crucial insight into how a business is performing. 

The practice helps your business to plan accurate risk management, comply with tax obligations, and draft strategies for business sustainability!

All in all, bookkeeping is one of the most important aspects of any business. If you ask me, I’d even assert that it’s at the heart of every business triumph!

Bookkeeping Options

Now I’m going to discuss the different options that are available to you when it comes to doing bookkeeping yourself or hiring a bookkeeper.

Bookkeeping software platforms

Technology is such a powerful tool! In this day and age, bookkeeping can be quickly and effectively performed using various computer programs. 

Some even provide additional features such as payroll, tax calculations, and compliance.

External consultants and outsourcing

If your business is quite busy, outsourcing external consultants to handle your bookkeeping is also another popular option. 

I consider the biggest advantage of outsourcing the fact that the people handling your records are likely to be highly-trained, experienced professionals – especially if you post job ads on renowned sites such as Indeed or LinkedIn.

DIY

While it’s not as ideal as the two other options above, DIY bookkeeping is still an alternative worth considering – especially for small businesses! 

If you want to try this approach, it’s a good idea to look for helpful videos on the subject first. 

You can also rely on cheap tools such as Microsoft Excel, which I think is just wonderful for the job thanks to its customizability.

How to Start Bookkeeping in a Small Business

If you want to incorporate bookkeeping into your business, I outline the 3 simple steps you will need to take in order to get started.

1. Open the right accounts

In any business, one of the first things you’ll need to do is to open accounts. In accounting lingo, accounts are basically just categories where you will assign each transaction. 

There are five basic categories you have to consider: assets, liability, expenses, equity, and revenue. 

Each account can have multiple sub-accounts too! For example, cash is an asset account, but so is your inventory.

2. Choose a bookkeeping method

This is very important. The bookkeeping approach you go with dictates how complex your entire system becomes, as well as how much information you can gain from your records. 

Generally, you’ll choose between single-entry or double-entry bookkeeping. 

The first one is fairly simplistic and straightforward and doesn’t require complicated transactions. However, it also doesn’t offer you a complete picture of your business’s finances!

On the other hand, double-entry bookkeeping provides a wealth of insights, but it also comes with a more complicated system that often requires dedicated software.

As a small business, the choice is really up to you. However, I think starting out with double-entry bookkeeping (even though it’s more complex) will help a lot during the initial stages of business where you’re always adjusting strategies on the fly!

3. Establish realistic payment terms

Early on, it’s always useful to outline the payment terms and methods you’d like to implement with your customers and vendors. 

What are payment terms exactly? This is where you set expectations, define payment aspects such as due dates and late payment penalties, and prescribe payment methods.

How to Do Bookkeeping for a Small Business

Are you ready for small business bookkeeping? Here’s how you can do it!

1. Set up an accounting software

As stated previously, picking an accounting software or method is the first step in bookkeeping effectively. 

Note: It may take a day or two to really learn the ropes of your new software, so I recommend exercising patience as you take on the software’s learning curve!

2. Choose an entry system

Depending on the complexity of your financial situation, you may opt for single-entry or double-entry accounting. 

If your business participates in fairly simple transactions, single-entry might be more efficient; however, don’t sleep on the comprehensive overview of business finances that double-entry provides!

3. Choose an accounting method

You also have to choose an accounting method, and for this, there are two options: cash basis accounting or accrual basis accounting. 

The difference lies in when transactions are recorded. Cash basis records transactions whenever cash is actually exchanged (like when you actually receive it or pay it out), while accrual basis records transactions when money is earned or allocated for an expense (for example, you’ll record the expense for an invoice even before you actually pay it).

4. Recording every transaction

As much as possible, establish a system where every transaction is quickly recorded. You can do this with a bookkeeping software or an Excel spreadsheet – or even manually if you’d like!

5. Reconciling every transaction

Much like the name itself, reconciling transactions simply involves reviewing your recorded transactions with any supporting documents (like receipts and inventory reports!). 

This way, you can guarantee that the records are accurate and avoid discrepancies that could potentially throw everything off!

6. Handle accounts receivable and payable

Running a business relies on the balance of receiving (accounts receivable) and spending (accounts payable) money. 

As such, keeping these relevant accounts up-to-date and error-free creates financial harmony among you, your customers, and your suppliers!

7. Set up payroll

A payroll is basically a record of your employees, what they stand to earn in wages, any deductions for taxes, and when they are bound to receive compensation. 

Payroll can be set up through bookkeeping software and should be an ongoing conversation between you and your employees.

8. Coordinate with a tax specialist

Small businesses can create a complex tax situation, which is why I recommend consulting with a tax professional to remain financially and legally compliant!

9. Manage financial statements and documents

Creating a digital or physical filing system that organizes all pertinent financial information is particularly important for small businesses. 

Doing so will help you track down any errors and make tax filing a lot easier!

9 Small Business Bookkeeping Tips

Here are 9 bookkeeping tips to help your small business:

1. Maintain organized receipts and invoices: Figuring out a system for organizing receipts and invoices is one of the first things that I believe any business owner should plan. This helps you to track all your paperwork and retrieve them whenever the need arises.
2. Regularly reconcile bank statements: This is hands down one of the most important things you should do. Comparing bank statements with what your internal financial records say is crucial for detecting errors and resolving them immediately. For businesses, I recommend doing bank reconciliations at least once a month!
3. Utilize accounting software: They might come with a steep learning curve and require a significant time investment to properly learn the ropes, but trust me when I say the need for accounting software can’t be overstated. That’s because they are essential tools for avoiding financial mistakes, misreporting, and fraud!
4. Categorize expenses accurately: It’s a fact of any business that you’ll spend money on a large variety of products and services. That’s why it’s important to figure out what categories your expenses belong to, whether they’re part of insurance, rent, employee benefits, and so on. Doing this will help you maintain control over your cash flow.
5. Monitor cash flow consistently: Money is the lifeblood of any business, which is why it’s so important to consult your records and reconcile them with your bank statements to make sure your cash flow is as it should be.
6. Set aside money for taxes: As often as possible, set money aside for tax purposes, which will make tax season easier on your business. Deducting taxes for every relevant transaction will be a major step toward stress-free tax filing!
7. Track and record sales revenue: This is critical for carrying out any analyses of the business, such as for profitability or for decision-making. Sales records can be incorporated into a graph (using Microsoft Excel) to inform you of the best course of action.
8. Perform regular financial reviews: Performing detailed financial reviews once a month will give you a detailed view of the business – both in the present and the future – that you simply won’t get from day-to-day operations.
9. Consider hiring a professional bookkeeper: If you don’t have the time to do your own bookkeeping, hire an experienced bookkeeper! While onboarding another employee will be an additional expense, I always think it’s more than worth it to ensure you remain on top of your finances.

Bookkeeping Mistakes to Avoid

Here are some common bookkeeping mistakes that you want to avoid as a small business owner.

Mixing personal and business finances

Many people don’t clearly define their personal and professional financial matters, which can cause issues down the line if you’re not careful.

Keep all accounts separate to achieve the proper work-life balance!

Neglecting to keep detailed records

Recording financial transactions is a great first step, but the best bookkeeping methods record information regarding each transaction (such as the date, nature of the transaction, customer/vendor details, and so on) in case that information is needed at a later date. 

Besides, having detailed records will make it easier to see both the forest and the trees!

Failing to reconcile accounts regularly

Reconciling accounts keeps records in tip-top shape and helps you catch mistakes before they start affecting everything down the line. 

If you fail to do this regularly, you’ll risk getting swamped by a boatload of errors you could’ve avoided early on.

Not categorizing expenses correctly

The three most important categories of business expenses are variable, fixed, and periodic expenses. 

Learning what these mean (and their associated subcategories) can save you a lot of time and money in the long run!

Ignoring cash flow management

Whether your business is brand new or growing exponentially, ignoring the amount of money entering and exiting your business can lead to erroneous spending and an incomplete financial picture. 

Being complacent with your cash flow can result in disastrous consequences!

Neglecting to track and report sales

Underreporting or over reporting sales in a small business can be detrimental to its success. 

This is because cash flow management and long-term planning can feel impossible if the sales data is wrong. Make organizing daily sales a part of your routine!

Forgetting to set aside money for taxes

In my opinion, not meeting tax obligations is one of the worst things you can do as a business owner. 

This can put you in a precarious position as you’ll run the risk of drawing the (unwanted) attention of the authorities!

Relying solely on manual methods

We’re all human. Making mistakes when recording anything (especially sensitive financial numbers) is to be expected. 

If you rely solely on manual methods, you’re at a greater risk of accidental errors. 

That’s why I love to incorporate tech into all my bookkeeping to avoid missing something or committing costly mistakes – and I think you should too!

Not backing up financial data

Using systems that save regularly and backing up your financial data can be a lifesaver in moments of technical malfunctions. 

I personally create two backup files: one that I upload to the cloud and which is updated almost instantly, and another that I keep in physical storage.

Overlooking regular financial reviews

Financial reviews should occur at least once a month to assess the business’s performance and how it’s meeting its long-term goals. 

These reviews don’t just catch errors made in the bookkeeping process; they also provide a wealth of information you can use for effective decision-making.

Final Thoughts

Congratulations on reading this guide all the way through! 

I’ll be the first to admit that bookkeeping can be a complicated process, and you might have a hard time with it at first. However, know that it does get easier over time – especially if you commit to learning more.

As a business owner, I think it’s important that we remain curious and open to continued financial education. 

It can come in really useful during times of crises, and also just makes running a business a much easier thing to do. Happy bookkeeping!

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