Bookkeeping lets you know how your small business is doing but not all business owners understand the importance of strong bookkeeping. If you’re looking for how to do bookkeeping for small businesses in a few easy steps, continue reading.
What is bookkeeping? In its most basic sense, it’s the process of documenting and organizing all financial transactions incurred by your business. This system dates back to keeping track of overhead costs in daybooks, cashbooks, or journals which were then tabulated into a ledger. Today we may be more modernized with implementation technologies like cloud-based software, but the concept remains similar – keep an eye on what you earn versus what goes out!
The Importance of Bookkeeping For Small Businesses
Bookkeeping is essential to your small business because it helps you budget, plan and make better financial decisions. It also allows you to spot any potential problems in areas such as undercharging for products or services, or overspending on unnecessary items.
Moreover, bookkeeping will help provide an understanding of how much money you have available and what is owed to your business. This will give you the information needed to make informed decisions on everything from wages and staff benefits to planning for expansion or marketing campaigns.
Key Concepts of Bookkeeping For Small Businesses
- Accounts Receivable (AR): This is the money that you are owed by customers for services or products delivered. To keep track of AR, set up an invoice system and make sure it’s easy to use, so that invoices can be sent promptly and tracked efficiently.
- Accounts Payable (AP): This is the money you owe to vendors, contractors, and suppliers. Make sure payments are made on time and keep track of every transaction in your bookkeeping system.
- Income Statement: Also known as a Profit & Loss statement or P&L, this document provides information about your business’s current and future financial health. It shows how much money is coming in and out, and allows you to make more informed decisions about business operations.
- Balance Sheet: A balance sheet is a statement of your company’s assets, liabilities, and equity as of a specific date. This document should be updated regularly so that you can track the financial standing of your business.
- Depreciation: Depreciation is the decrease in an asset’s value over time. This should be tracked to provide accurate information about the current worth of your company’s assets.
- Equity: This is the owner’s stake in the company, which can be calculated by subtracting liabilities from assets.
- General Ledger: This is a compiled list of all the transactions, accounts, and debits/credits that occur in your business. It’s important to keep track of your general ledger so that you can accurately report and plan for the future.
- Income Statement: This document shows the financial performance of your business for a specific period of time, including sales, expenses and net profit.
- Payroll: This term refers to the salaries and wages you pay your employees. It’s important to keep accurate records of payroll, including salary information, deductions, and taxes to be withheld, which can then be reported to the government.
- Liabilities: This term refers to any outstanding debt that your business owes. From loans you’ve incurred to outstanding bills still owed, this could cover a multitude of scenarios.
How To Do Bookkeeping For Small Business In 7 Easy Steps
Create a Business Account
Create a separate business bank account to help keep track of profits, losses and expenses. This will also make it easier to manage cash flow.
Sifting through a mountain of financial documentation to uncover one tiny yet critical detail can be an absolute nightmare if you haven’t kept your business and personal funds separate. By lumping them together, it’s all too easy for everything to become jumbled and disorganized — leaving you with no clue as to where anything is hiding.
Open a new bank account to ensure that your two most important worlds, personal and business finances, remain distinct. This will provide you with immense clarity when it is time for financial bookkeeping so that you can find the information more readily.
Record Every Transaction
Record every transaction in as much detail as possible. This means recording not only the amount of money exchanged, but also noting what it was for (e.g., rent, office supplies, etc.).
Make sure you log everything that has financial implications — from something small like a coffee to more substantial purchases such as equipment or inventory.
Set Budget Aside For Tax Purposes
One of the most important aspects of bookkeeping for small businesses is setting aside a budget for taxes. This will ensure that when tax season rolls around, you are prepared and have enough funds to cover your business’s taxes.
Don’t let the taxman take you by surprise and leave you struggling to pay a huge bill. Instead, budget for taxes as soon as your income comes in so that you don’t need to scramble when it’s time to file. Create a savings account or similar fund where you can set aside part of each paycheck and have money readily available should your taxes come due – this will provide peace of mind knowing those funds are safely tucked away.
Track Your Expenses
Keep track of every expense, big and small. Whether it’s a one-off purchase or a long-term investment, document everything. Pay attention to items that are tax deductible – such as business travel expenses – so you can claim them back when filing taxes. This will help reduce your taxable income and make sure you’re not overpaying.
Categorize Your Expenses
To make your financial data easier to manage, use categories for each type of expense. This could include expenses such as rent, advertising costs and employee wages. Separating these allows you to easily track and identify the areas where the most money is being spent, so that you can adjust your budget accordingly.
Maintain Daily Records
To ensure that your business remains financially secure, one of the most crucial tips to practice is tracking daily records. Without reliable and up-to-date financial information, it can be very challenging for you to accurately assess where your company stands monetarily speaking. Therefore, make sure that you keep accurate and consistent documentation each day so you are always in control.
Establish a consistent system and adhere to it in order to ensure accurate daily records that will facilitate successful tax filing at the end of the year.
Stay On Top of Your Accounts Receivable
Managing accounts receivable is essential for running a successful business. Without proper management, you may end up losing out on payments or providing services with no guarantee of getting paid.
Stay on top of your accounts receivable by sending regular invoices to customers and following up if any payments are late. You should also set payment terms and stick to them. Make sure that customers understand how and when they need to pay you, so there is no confusion.
By following these tips, you can confidently manage your business’s bookkeeping needs without needing to hire an external service provider or accountant. Keeping your finances organized will help ensure the success of your small business, so make sure you are regularly checking in on your books and updating them as needed.
Looking For Bookkeeping Services Instead? Ready Accounting Is Here For You
If you don’t have the time or desire to manage bookkeeping for your small business, Ready Accounting can help. We offer comprehensive bookkeeping services designed to take away the burden of managing and tracking your company’s finances. Our services include payroll management, invoicing, financial reporting, tax preparation, and more.
Get in touch with us today for all of your bookkeeping needs!
