For new entrepreneurs especially it can be overwhelming to wear so many hats so much of the time. Some things are bound to fall to the wayside, and one of the most commonly overlooked responsibilities is bookkeeping.
Very small businesses and solopreneurs tend to handle bookkeeping internally, not making enough to justify having an accountant on call. Established small businesses may have an accountant who handles their books, but that doesn’t mean there aren’t ongoing responsibilities to organize and track revenue and pending. Let’s take a closer look at some of the best practices you should follow to make bookkeeping a simpler, less overwhelming task every month.
Bookkeeping is a specific component of accounting focused on collecting, organizing, and maintaining financial documents for your company. When your accountant asks for your receipts and invoices every January, a bookkeeper (or you) should have been organizing those documents throughout the year to handoff.
The list includes invoices, receipts, tax forms, payroll, bills and statements, bank records, and credit card bills. If you go on a business trip, your receipts for travel, lodging, and food should be documented, stored, and easily accessible for when your tax return is prepared.
For many small businesses, this process carries over into several other areas, including maintaining a regular balance sheet, income statement and cash flow statement are how you’ll know the value of your company based on your current assets, debts, and liabilities, and equity (if applicable).
There are two primary methods of bookkeeping. Which you use will largely depend on the type of business you operate. They include:
- Single-Entry Bookkeeping – This means simply that when a transaction occurs, you record it once in your ledger. So if you sell something for $50, you note a $50 sale and you’re done.
- Double-Entry Bookkeeping – This method is most commonly used by companies that maintain a physical inventory of goods. You’d first enter the $50 sale but then deduct the value of the item sold from your inventory.
Which is best for you? Again, it depends both on the type of business you operate and how complex your books are. Double-entry is the most effective way to keep your books balanced when there are multiple factors to consider after a sale. And while it sounds complicated, software can make it much easier.
Another major question for your bookkeeping is whether it will be cash or accrual:
- Cash Accounting – Cash accounting records a transaction on the date that money changes hands. Even if you invoiced for a service or good in March, if the payment isn’t made until April or May, that’s when you would record the transaction.
- Accrual Accounting – Accrual on the other hand records transactions when they are initiated. So when the invoice is delivered, you would record the transaction.
Cash is undeniably a simpler way to manage your finances – you record the money when it changes hands. So, why would you choose accrual over cash? In some cases, it is required, especially if you are incorporated and operate in certain jurisdictions. Additionally, while it can be confusing because your books will rarely match your accounts, it can give a better overall picture of your company’s financial health. Outstanding expenses will already be accounted for, while outstanding invoices will show your future cashflow.
Outside of choosing your bookkeeping method, there are several things you can do to ensure you stay on top of your finances. They include:
- Set aside time for bookkeeping – This should be a dedicated activity, the same as sales, meetings, or production. Allot a set number of hours every week to keep paperwork up to date, and try not to put it off. It can be incredibly difficult to catch up on a year’s worth of bookkeeping if you’ve procrastinated on it until tax time.
- Keep your business and personal expenses separate – This sounds simple, but 23% of small business owners admit to mixing personal and business expenses. Not only is this difficult to account for in your books, but it can create large headaches at tax time, and as your company grows can be an even bigger problem.
- Track all of your business expenses – Even the small ones. If you struggle to organize receipts, download an app like Expensify or Receiptmate to capture your receipts with your phone’s camera as soon as you get it.
- Use accounting software – If you opt to do your own books, leverage software to help with the heavy lifting. Automated bookkeeping tools can streamline the process significantly.
- Manage overdue invoices – If you opt for an accrual accounting method, stay on top of your invoices to avoid overpaying your taxes or being short on cash when you need it most.
- Manage your inventory carefully – Be meticulous in managing your inventory. Not only does this help prevent theft (a common issue with disorganized stock), but it can help you stay on top of the value of current assets on hand.
- Be prepared for big expenses – Have money on hand for big expenses like new machinery, computers, broken equipment or other issues. Nothing can hurt a company more than a major unexpected expense.
Finally, if you are just getting started or are overwhelmed by everything you need to keep in mind when managing inventory, don’t hesitate to hire an accountant. Even if just for a little while to help you get things organized and put processes in place, this can be hugely beneficial for your company.