Bookkeeping might seem like a daunting task, but it’s an essential part of running a successful business. Keeping your financial records in order doesn’t just help you during tax season – it’s the key to making informed decisions, avoiding financial stress, and growing your business. If you’re new to bookkeeping but you’ve decided to take the plunge and do it yourself, don’t worry! Here are 10 basics every small business owner should know, with practical tips and examples to make things easier.
1. Understand What Bookkeeping Is
Bookkeeping is the process of recording and organizing our financial transactions. While it’s often confused with accounting, bookkeeping focuses on daily financial tasks, whereas accounting involves interpreting and analyzing financial data.
Tip: Think of bookkeeping as the foundation of your financial house. Without accurate records, the rest of your financial management will crumble.
Example: Logging daily sales and expenses into a spreadsheet or other software is bookkeeping. Using those records to create a budget or prepare a tax return is accounting.
2. Separate Personal and Business Finances
Combining personal and business finances is one of the most common mistakes small business owners make. It complicates the record keeping and can lead to tax and legal issues.
Tip: Open a separate business bank account and use it exclusively for business-related transactions.
Example: Instead of using your personal credit card to buy supplies, use a dedicated business card. This makes it easier to track expenses over time. If you don’t have a business credit card yet, make sure you keep those receipts so they can be accounted for properly.
3. Know Your Bookkeeping Method
There are two main bookkeeping methods: cash and accrual. In cash accounting, you record transactions when money changes hands. In accrual accounting, you record transactions when they are incurred, regardless of when payment is made.
Tip: Many businesses start out with cash accounting because it’s simpler, especially if you are a sole-proprietor. However, if you have a corporation, manage inventory, or just want a clearer picture of your finances, accrual is better.
Example: If you send an invoice on November 30 but get paid on December 15, cash accounting would record it in December, while accrual accounting would record it in November.
4. Use the Right Tools
Modern bookkeeping tools make it easier to manage finances without needing an accounting degree. Software like QuickBooks Online (QBO) can automate much of the process, saving you time and reducing errors. If you’re on a strict budget, you could try Wave Accounting which has a version that’s completely free.
Tip: Choose software that suits your needs and your budget. If you’re not ready for software, start with a simple spreadsheet.
Example: A coffee shop owner can use QBO to automatically categorize daily sales from their POS system and track recurring expenses like rent and utilities.
5. Track Income and Expenses Regularly
Consistency is key to avoiding chaos. Waiting until the end of the month – or worse, the end of the year – to record transactions can lead to missed deductions and inaccurate records. I mean, who can remember everything they bought last month, let alone 8 months ago?
Tip: Set aside 15-30 minutes each week to update your books.
Example: If you spend $50 on office supplies, record it right away with the correct category. This way, at year-end, you won’t be scrambling to remember what that $50 was for.
6. Keep Accurate Records
Accurate record-keeping ensures you’re prepared for tax time, audits, or any financial inquiries. It also helps you spot errors or discrepancies early.
Tip: Use an app like Dext or Hubdoc to scan and organize receipts digitally.
Example: You could upload your receipt or take a picture of it while it’s still in your hand, categorize it, and submit it. This way it’s attached in your accounting software and easy to find later if you need to verify that expense.
7. Monitor Cash Flow
Cash flow is the money coming in and going out of your business. Even profitable businesses can struggle if cash flow isn’t managed properly.
Tip: Review your cash flow monthly to spot patterns and address shortfalls.
Example: A landscaping business notices that winter months have low cash flow. To prepare, they set aside a portion of their summer profits to cover winter expenses.
8. Understand Financial Reports
Financial reports like the profit and loss (P&L) statement, balance sheet, and cash flow statement provide insight into your business’s health. They show where your money is coming from, where it’s going, and how much you have left.
Tip: Learn to read and understand these reports. Many bookkeeping tools generate them automatically and any good bookkeeper can also help explain them to you.
Example: A bakery owner uses their P&L statement to see that ingredient costs have risen, prompting them to adjust pricing or find a new supplier.
9. Know Your Tax Obligations
As a business owner, you may need to track and remit taxes like GST or HST. Staying on top of this prevents penalties and ensures compliance.
Tip: Set aside a percentage of your income for taxes, so you’re not caught off guard when payments are due. If you are using a software like QBO, you can track your GST liability every month and set aside enough money to cover each payment.
Example: A freelancer sets aside 15% of every payment into a separate tax savings account to cover their GST and income taxes.
10. Don’t Be Afraid to Outsource
If bookkeeping feels overwhelming or takes too much time, consider outsourcing to a professional. This allows you to focus on growing your business while ensuring your finances are handled correctly.
Tip: Look for a bookkeeper experienced in your industry who can provide services tailored to your needs.
Example: A small retail store owner hires a bookkeeper to handle monthly reconciliations and financial reports, freeing them to focus on marketing and inventory management.
Bookkeeping is essential for small businesses, but it doesn’t need to be intimidating. By understanding these basics and implementing the tips shared here, you can stay on top of your finances and avoid unnecessary stress.
If bookkeeping still feels overwhelming, I’m here to help! Let’s chat about how I can help you simplify your financial management and give you more time to focus on your business.
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