There’s one area where even the most successful small businesses can sometimes struggle—bookkeeping. Unless you come from a financial background, dabbling in the intricacies of your business transactions is probably not how you enjoy spending your day.
However, small business bookkeeping doesn’t have to be a thorn in your side. Even the most mathematically inept can find a way to balance their books, whether that’s doing it yourself or hiring a professional. I’ll explain how to do bookkeeping and highlight tips from financial professionals to help you feel confident in your records.
What Is Small Business Bookkeeping, and How Does It Work?
Small business bookkeeping is the process of tracking your company’s financial transactions, including expenses and income. It differs from accounting, which is when you analyze a business’s financial transactions to create reports and insights.
Doing bookkeeping involves a number of standard tasks, including:
- Recording all bank transactions
- Reconciling your transactions
- Managing accounts payable and receivable
- Processing invoices and bills
- Processing payroll
- Reviewing cash flow
Why Is Bookkeeping Important for Small Businesses?
With solid bookkeeping processes, you’ll be able to have a much better understanding of your financial position, which helps with:
- Saving money on taxes. Bookkeeping helps you avoid “missed tax deductions, incorrect tax returns and an incomplete view of your business standing,” says Sherman Standberry, CPA and CEO at My CPA Coach, an online tax services provider for small businesses.
- Better decision-making. “Your accounting and bookkeeping acts as a scorecard for your business health,” says Standberry. “Without understanding it, you risk making bad decisions that can negatively affect your business.”
- Knowledge-backed cash flow management. “Without clean books, you can’t tell which services are making you money and which ones are costing you,” says Amy Coats, founder of Accounting Atelier, a boutique bookkeeping firm specializing in small businesses.
- Improving your chances of getting a business loan. If you’re ever in need of financing, having organized and detailed books can give lenders more confidence in offering you capital.
How To Do Bookkeeping for a Small Business
Bookkeeping can often be a large chore, especially if you’re already spreading yourself thin in other areas of your organization. But if you feel you have the time and capacity for it, here are the basics steps of how to do bookkeeping yourself.
1. Set Up Business Accounts
Still putting business expenses on your personal credit cards? Stop that right now.
“From day one, you should be setting up your business accounts to be completely separate from your personal accounts,” says Ella Rivkin, CEO and tax strategist, ERPS Group, an accounting firm in Brooklyn, New York.
Not separating your business and personal finances muddles your expenses and makes it hard to accurately calculate your business’s financial health. Ideally, you’ll want at least a business checking account and business credit card so you can make and receive both credit and ACH payments.
2. Choose a Bookkeeping Method
There are many ways to keep track of your expenses and revenue, but the two main ones most businesses use are cash-basis and accrual-basis accounting. You’ll likely want to stick with one of these.
- Cash-basis accounting: Records transactions whenever you actually make or receive a payment. It’s best for most small businesses because it better reflects your immediate cash flow.
- Accrual-basis accounting: Records transactions when service is delivered, regardless of whether payment was collected yet. It’s best for larger corporations, manufacturers and service providers.
3. Pick Your Bookkeeping Software
The type of software you go with depends on how in-depth your financial needs are.
For example, when doing bookkeeping for my freelance writing business, I use Google Sheets to keep records of client payments. That works well for me as a solopreneur who only offers one type of product and doesn’t have a lot of expenses, but it likely won’t work for businesses with a deeper product catalog and a lot of bills.
If you’ll have more complex needs, using lightweight accounting software like FreshBooks, QuickBooks Online or Zoho Books can be an easy way to keep track of transactions.
4. Create Your Chart of Accounts
A chart of accounts is like your business’s financial encyclopedia. It includes everything you can think of, including your expenses, revenue, liabilities, assets and more. The goal of this process is to categorize all your financial items to make it easier to track them later.
“Your categories will get refined over time as you understand your business better, so don’t get stuck trying to make them perfect at the start,” says Coats. “The goal early on is to capture every transaction so nothing gets missed.”
5. Reconcile Accounts Regularly
Once you’ve established your system, chosen your software and have your chart of accounts to guide you, you should be on a good path. But don’t get complacent. You’ll need to regularly reconcile your accounts to make sure you haven’t missed anything.
Coats recommends reconciling your accounts at least once a month to look for miscategorized transactions or other irregularities that can affect your business.
Should I Hire a Small Business Bookkeeper or Do It Myself?
Most of the experts I spoke with suggest working with a professional bookkeeper or bookkeeping service instead of trying to do bookkeeping yourself. The common sentiment is that hiring a bookkeeper is often worth the added costs because they’ll help you find and fix mistakes that would cost you more in the long run.
Bookkeepers are pros at what they do, and your company’s finances won’t faze them. Having a professional overseeing your books can make sure you’re maximizing your profits and limiting your expenses.
If you’re still not sure, consider the following examples of who should and shouldn’t use a bookkeeper:
| Do Bookkeeping Yourself If | Hire a Bookkeeper If |
|---|---|
|
You have a strong accounting background
|
You have other primary responsibilities to focus on
|
|
You’re a freelancer or very small company with limited expenses
|
You sell a variety of products and services
|
|
You only have a part-time business that operates a few months of the year
|
You’re a growing business and want support to know you’re on the right financial track
|
I always recommend outsourcing if funds are available to hire someone. As a business owner, your time should be focused on managing and growing the business, not bookkeeping.
— Kimberly Loftis, president of Loftis Consulting, an outsourced CFO service provider
Common Small Business Bookkeeping Mistakes To Avoid
If you do want to take on the challenge of small business bookkeeping yourself, here are a few common mistakes you’ll want to avoid:
- Not reconciling your books regularly. “Without performing reconciliation, it can be very difficult to find missing transactions or records in your bookkeeping system,” says Standberry.
- Mixing personal and business funds. “Most people have a hard time categorizing transactions or cleaning up their bookkeeping records because the data is too messy,” says Standberry.
- Not setting up the chart of accounts correctly. As Kimberly Loftis, president of Loftis Consulting, an outsourced CFO service provider, explains, you need to set up the chart of accounts in a way that mirrors how you run your business, otherwise you “are not getting meaningful information to drive [your] business forward.”
- Outsourcing and never checking back in. “[Some businesses] hire someone but never take the time to actually look at their numbers to understand and strategize,” says Rivkin.
- Waiting until the end of the year to do everything. Rivkin explains that this creates a bottleneck and adds unnecessary stress.
When owners stop opening the reports their bookkeeper sends or stop responding to questions, the reason is usually that they already sense something is wrong and are afraid of what the numbers will confirm. So months go by, and by the time they finally look, the problem is much bigger than it would have been if they’d faced it early. I’ve seen businesses get into serious trouble simply because the owner couldn’t bring themselves to open their own P&L.
— Amy Coats, founder of Accounting Atelier, a boutique bookkeeping firm specializing in small businesses
Balanced Books, Better Business
If you’re juggling a ton of responsibilities already, it can make sense to outsource your accounting to bookkeeping services. These types of providers can take this burden off your shoulders so you can focus on what you do best. And with their input (and balanced books), you’ll be on track to growing your business even more.