- What is bookkeeping?
- Why is bookkeeping important for small businesses?
- How can small businesses make bookkeeping easier and more effective?
Do you feel confident taking care of your small business bookkeeping?
If not, you’re in the majority.
A whopping 60% of small business owners feel they aren’t knowledgeable when it comes to finances and accounting.
Yet many of them do it anyway.
Approximately 72% of business owners take care of their own accounting tasks, which can range from basic bookkeeping to the full end-to-end process, including filing taxes.
Whether you take care of your own books or have an accountant do it for you, it pays to understand your business finances.
That way you’ll have greater visibility over potential problems, such as cash flow (which, by the way, is a key factor in 82% of small business failures), as well as potential money-saving opportunities.
In this guide, we explore why it’s worth taking a closer look at your small business books and how you can do so, easily and effectively.
Disclaimer: Alliance Virtual Offices does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.
What is Bookkeeping?
Bookkeeping is the process of accurately recording and tracking a company’s financial transactions.
What are the basics of bookkeeping?
Think of it this way:
Every business earns money, and every business spends money. Bookkeeping keeps track of it all.
Bookkeeping focuses heavily on day-to-day financial transactions.
This focuses largely on accounts receivable (money in) and accounts payable (money out). This is crucial, as these numbers give the business owner visibility over their business finances rather than simply showing immediate profits.
However, bookkeepers may also manage other tasks.
Here’s a breakdown of the main small business bookkeeping tasks:
- Keeping track of daily financial transactions. This could be as simple as recording bank transactions in a spreadsheet, or for more complex businesses involving inventory and multiple client accounts, it’s recommended to record transactions using accounting software.
- Reconcile financial accounts. This involves cross-referencing your books against bank statements and other source documents to confirm accuracy. For instance, checking that a payment received matches the payment owed.
- Invoicing and accounts receivable. Managing the accounts receivable ledger involves preparing and sending out invoices to clients. It’s important to ensure the information is accurate — including payment owed, company bank details, and the date by which payment should be received. Any errors could result in delayed payments.
- Credit control. As part of accounts receivable, bookkeepers may also get involved with credit control. This involves chasing up late payments from clients and keeping track of money owed. Some businesses may charge interest for late payments.
- Making payments on time. An important part of bookkeeping is making sure you have enough money to pay your expenses on time. Late payments may accrue interest, and they can also negatively impact your business credit score. If you foresee issues making a payment, speak to your supplier as soon as possible and try to work out a payment plan.
- Monitoring cash flow. Keeping accurate financial records helps make sure the company doesn’t run out of day-to-day money. Good cash flow keeps your business moving, and will enable you to lay firm foundations for future growth.
What’s the Difference Between Bookkeeping and Accounting?
Bookkeeping shares a lot with accounting. However, the two aren’t exactly the same.
The process of bookkeeping is heavily focused on day-to-day financial transactions. It involves a lot of data entry and cross-referencing.
Bookkeeping will cross over with accounting in many ways, but there are a few key differences.
What does an accountant do for a small business?
Accountants traditionally take more of an advisory role within a business. An accountant manages a business’s books, creates financial reports, and files taxes for the business.
Here are some of the key roles of a business accountant:
- Check and verify the accuracy of the accounting records (as prepared during the bookkeeping process).
- Prepare financial statements and reports as required by banks and governmental agencies.
- File taxes on behalf of the business.
- Provide monthly or quarterly insight into the financial health of the business.
- Assist with income tax planning.
- Advise on tax law, entity structure, and other crucial business decisions.
Some accountants carry out additional tasks, such as auditing.
To do this, they need to be a Certified Public Accountant (CPAs), which means they are regulated by their state board of accountancy.
The CPA designation distinguishes licensed accounting professionals committed to protecting the public interest. These professionals offer financial statement audits and other attestation services to help inform investors about the financial health of organizations. – AICPA
Approximately half of all registered accountants in the U.S. are CPAs. According to the Accounting Institute for Success, there are roughly 1.3 million accountants in the US and approaching 665,000 CPAs.
If you’re wondering, do I need an accountant for my small business?
For many small businesses, it’s not necessary to hire an accountant. However, it depends on the size and complexity of your business, your growth aspirations, and how much time you can dedicate to bookkeeping.
Remember that accountants don’t just handle company finances.
Accountants can also offer advice about your legal structure, developing a business plan, seeking credit, business growth, franchising, buying or selling a business, and more.
What are the Two Types of Bookkeeping?
The two types of bookkeeping are single-entry, which is sometimes used by very small businesses and the self-employed. The other is double-entry, which is more accurate and enables organizations to track their financial performance more efficiently.
Here’s a brief overview of each:
Single-entry bookkeeping is often used by very small businesses and self-employed people for simple transactions. It’s a record of transactions like cash, tax-deductible expenses, and taxable income.
It’s known as single-entry because only one entry is made for each transaction, similar to using a personal checkbook. In one column, income is recorded as a positive while an expense is marked as a negative amount.
It’s not efficient for large or complex businesses, as it doesn’t track transactions such as inventory, and it can’t be used to develop a balance sheet.
Double-entry booking is a more common method for businesses, even small businesses. It requires two entries to be made for each transaction — a debit entry in one account and a credit entry in another.
This system provides a much more accurate set of accounts and enables business owners to track asset and liability accounts, and closely monitor profit and loss.
Why is Bookkeeping Important for Small Businesses?
Bookkeeping isn’t just about making records and checking off payments.
It has a higher purpose: to keep a watchful eye on your business finances and ensure enough money is flowing in to match expenditure, and facilitate growth.
Big picture, efficient bookkeeping gives you an accurate overview of your small business’s progress and financial health.
When you know exactly where your money is going, you can make better budgeting and strategic decisions. For instance, whether to apply for business credit.
Overall, efficient small business bookkeeping can help you plan and set a path for financial growth.
Here are 4 more reasons why bookkeeping is important for small businesses:
Separate business and personal finances.
It’s important to keep all business and personal finances separate. This way, you will have a more accurate representation of your small business finances. More importantly, depending on your business structure, a clear divide means you may not be personally held liable for any debts or issues related to your business.
Clear separation between your personal and business finances is also important in the event of an IRS audit. Even if you’re fully compliant with IRS tax laws, you could be audited. If you do face an audit, having a clear paper trail and organized financial records will enable you to easily answer any questions the IRS may have about expenses, income, losses, tax deductions, tax returns and more.
“An audit puts the burden of proof on you to disclose your business expenses and income. Keeping good records saves you from having to dig through a huge box of receipts to figure out which purchases were for business and which were for your personal expenses. Keeping your business finances separate also reduces your legal liability and can help you manage your tax and business bills more efficiently.” – Intuit Quickbooks
Streamline tax processes.
Regular, consistent record-keeping and tracking streamlines your tax processes, and reduces any last-minute scramble to meet the tax filing deadline.
Because your business already has detailed records in place, reporting is made much simpler. When you keep on top of your business finances through organized bookkeeping, you have more time to accurately calculate deductions, and also work more efficiently with any tax professionals.
This also reduces the possibility of human error. By managing your transactions and reconciliation, and by giving yourself time to do so (rather than leaving everything until the last minute) you can more easily identify any mistakes. Catching mistakes sooner rather than later saves a lot of time and worry later on.
Provide accurate records for credit applications.
One important role of bookkeeping is that it can support any business funding applications you may decide to make in the future.
The organizational element of bookkeeping demonstrates to potential lenders that you’re on top of your finances, which helps instil trust and credibility. Plus, it means all required records are organized and easy to find.
Free up time to focus on your business.
By keeping on top of your business finances, you’ll have peace of mind knowing your books are in order. This not only frees up your time as tax deadline looms, but also means any financial statements or documentation you might need for effective planning is easily and quickly to hand.
How Can Small Businesses Make Bookkeeping Easier and More Effective?
How do you do bookkeeping for a small business?
There are three main ways you can manage bookkeeping for your small business:
- Do it yourself.
- Use an online bookkeeping service.
- Work with an accounting professional.
Research suggests that accountants only handle 25% of accounting tasks for small businesses and the self employed.
The remaining 75% do their own accounting, with around 64.4% of small business owners making use of accounting software to help them.
It comes down to personal choice and preference.
However, as your business grows, it makes sense to consider all available options to ensure your books are accurate and up-to-date.
Here, we’ll dig into these three methods and the pros and cons of each.
Do it yourself bookkeeping
It’s common for self-employed people and very small business owners to take care of their own bookkeeping, particularly when starting out.
However, this can change as the business grows and the business owner takes on more work and responsibilities.
On the plus side, managing your own books puts you in a position of control. You have visibility over your finances and can keep a close eye on money coming in, and money going out.
It saves costs too, as you’re not paying for a bookkeeping service or a professional to do it for you.
Considering most startups make use of personal equity, traditional debt, and their own personal savings, it’s easy to see why cost-saving is a top priority.
In fact, for truly small businesses, bookkeeping can sometimes be accomplished with nothing more than a spreadsheet.
To help with the process, consider using a small business bookkeeping template. Here are some examples for Excel.
However, bookkeeping can be tedious and time-consuming — especially if you’re new to it.
Spending time managing your own financial records takes you away from your core business. When time becomes short or you’re under pressure to meet client deadlines, it’s easy to let your bookkeeping duties fall behind.
When this happens, mistakes creep in.
This can lead to costly problems.
Always keep in mind that your small business could face an audit by the IRS, at any time.
If that happens, you must be able to answer questions about your financial records. If there are mistakes or holes in your bookkeeping, your business could be fined.
Not only that, it will cost you time to put the problems right — and you may need to hire a professional to help.
And if clients hear that you’ve been pulled up by the IRS, it could cost your reputation, too.
That’s not to say that managing your own books is the wrong decision. But, be fully aware of the responsibilities that come with it.
If you’re intent on managing your own small business books, here are some tips to help:
- Consider using a small business bookkeeping app rather than relying solely on spreadsheets. Systems like this help you to manage your income and expenses and also take care of tasks such as invoicing, recurring billing and automatic payments. Automating your bookkeeping responsibilities ensures vital tasks like invoicing happen on time, every time. In fact, research suggests that more than 64% of small business owners use accounting software instead of enlisting the help of qualified accountants.
- Learn or brush up your bookkeeping skills. The IRS has plenty of resources to help you along the way, including online learning programs as well as in-person workshops, meetings and seminars. View events by state, here.
- Set time aside regularly to update your books. Don’t leave everything until the last minute. As a small business owner, expecting the unexpected comes with the territory — therefore, make sure you continually stay on top of your books as often as possible. Digging around for receipts on tax deadline day is stressful, time-consuming, and leaves you vulnerable to costly errors.
We strongly advise furthering your bookkeeping knowledge and skills to ensure your processes are accurate and compliant.
We strongly advise furthering your bookkeeping knowledge and skills to ensure your processes are accurate and compliant.
Consider taking small business bookkeeping classes. Search through an online course provider like Udemy, or ask your local business advisor for recommendations.
Online bookkeeping services
If you want to reduce the responsibility on your shoulders, consider outsourcing to an online bookkeeping service.
These services are typically backed by a team of accountants that utilize online bookkeeping software, with services varying depending on what you need.
Online bookkeeping service providers typically offer different plans that may be billed monthly or annually.
Let’s take Bench as an example.
At the time of writing, Bench offers two main plans. Their first is a standard plan that provides monthly bookkeeping with year-end tax ready financial statements.
The second is a premium plan with the addition of tax advisory services, one-on-one tax strategy planning, and annual tax filing.
And since every business is unique, customized services are also available.
The clear benefit in using an online service is expertise.
Your books will be taken care of by a team of professionals, who are also available to offer help and support should you need it. This gives you complete peace of mind.
It also frees up your time, allowing you to focus more on your business and less on worrying about taxes.
Of course, you will need to pay for these services. But that is often offset by the time you will save (along with any potential mistakes you might make).
Most online services communicate through phone, chat or email, which means you won’t need to book out a meeting room or travel to an accountant’s office.
That being said, using an online service does mean that there is often a physical distance between you and the bookkeeper. When interpreting numbers or working out discrepancies, sometimes it helps to have an in-person meeting.
Work with a bookkeeping or accounting professional
The final option is to hire a bookkeeper or an accountant to work in your business.
Bookkeepers can be hired full-time, part-time or even on a freelance basis, which can help reduce costs.
The big benefit of an in-house bookkeeper is that they get to know your business, inside out, which provides valuable insights into your business finances.
It also helps them to identify opportunities for cost saving, tax deductions, and financial planning strategies.
A customized service takes the burden off your shoulders, and provides a specific person for go-to advice, anytime you have questions or concerns.
Crucially, trained specialists will ensure your business remains compliant, and can perform accounting services without flouting tax laws.
The obvious downside is cost, as hiring your own professional will take up a much larger share of your budget than using a standard online bookkeeping plan or off-the-shelf software.
However, if your business is large enough, it certainly pays to have a dedicated professional within your team, especially if they can help navigate complicated situations and maximize your tax return.
Search for local, qualified accountants via the IRS website. Or, simply start by searching online for ‘small business bookkeeping near me’.
How to Find Bookkeeping Help
At Alliance Virtual Offices, it’s our mission to help small businesses operate more flexibly, save money, and achieve growth.
We do that in a variety of ways, one of which is to recommend small business service providers on our Marketplace.
Here you’ll find a number of hand-selected partner companies, who take care of various small business needs — including small business bookkeeping.
Head over to www.alliancevirtualoffices.com/marketplace to learn more.
We can help you achieve sustainable, cost-effective growth in other ways, too.
Create an instant presence with a commercially recognized address. Every virtual office includes a business address, mail processing, and easy access to onsite meeting rooms. Use your address to register your business, open a bank account, apply for credit, and more.
Establish credibility with a dedicated business number. Choose a local area code or break free from geographic boundaries with a toll-free number. A powerful VoIP phone system keeps your business connected with unlimited extensions, user-friendly call menus, customized greetings, and more.
Strengthen your call experience with the help of our friendly, professional receptionists. We screen and connect every call, Monday to Saturday, which means fewer distractions and more time to focus on your business. Includes a business number and a market-leading virtual phone system.
Work productively with hourly or daily access to private meeting rooms and offices. Choose from thousands of meeting rooms and workspaces globally with flexible rates by the hour, half day and full day. Every workspace is prepared for your arrival, with friendly onsite staff to greet visitors and help to make your meeting run smoothly.
Coworking provides a connected, wellness-focused workplace with an established community of professionals. Flexible monthly subscriptions provide everything you need to work productively, including high speed Wi-Fi, comfortable workstations, onsite meeting rooms and helpful staff.
Bookkeeping is non-negotiable for any business.
Not only is it legally important, but it also provides you with valuable insights into your company’s financial status.
Keeping a tight grip on finances is critical for growth and success. And while it’s tempting to try to control every part of your business — including your books — often, it pays to bring in a little help.
There are many different ways to handle bookkeeping, and as a business owner you should weigh the pros and cons to find the right solution for you, and your business.
For more tips and guidance on small business bookkeeping, take a look at our list of resources below.
Further Reading and Resources
Whether you’re looking for small business bookkeeping for dummies, or a guide pertaining to the finer points of accumulated depreciation, these resources will help signpost the way: