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Small business bookkeeping: How to do it right

November 10, 2022 / Aaron Schwaderer

Bookkeeping is the most important part of running a profitable business. If you don’t know how much money you’re making or where it’s going, you can’t make wise financial choices or help your business grow.

More than 80% of all small businesses fail due to cash flow problems, but cash flow problems don’t appear overnight. They’re usually a sign of poor bookkeeping and mismanagement of business finances.

Let’s break down the basics of small business bookkeeping and offer some solutions for managing your business’ finances.

Or skip down to the Solutions section to find out why the Small Business Administration recommends getting help managing your business’ accounting, payroll, and tax compliance.

 

Bookkeeping Basics

Select an entry method

There are two main bookkeeping methods: single entry and double entry. The method you choose will determine how and where you record financial transactions.

Single-entry records all your transactions once, falling into two categories: expense or income. This is a simpler method suitable for smaller businesses that don’t have to worry about inventory or assets, like equipment, factoring into their accounting. Unlike double entry, you don’t have an easy way to track the types of expenses.

Double-entry records every transaction twice as both a debit and a credit. Every entry should be balanced according to the accounting equation: Assets = Liabilities + Equity. For example, purchasing a Point-of-Sale machine reduces your cash account and increases your equipment account by the same amount.

Choose an accounting method

Cash-based accounting records transactions when money changes hands. With this method, you only record invoices and bills when they get paid.

Accrual-based accounting records invoices and bills even if they haven’t been paid yet. This is the most common accounting method for most businesses.

Maintain financial records

You’ll want to categorize and reconcile transactions daily and record them using your selected entry system and accounting method.

Accounts receivable, making sure your business is paid for goods or services, and accounts payable, making sure you pay your bills and invoices on time, are also daily tasks that will need to be factored into your business’ cash flow.

Creating financial reports will help you see the flow of money and understand the financial health of your business. We already discussed creating a cash flow forecast, but other common financial reports include:

  • Balance sheet: to summarize your business’ assets, liabilities, and equity for a snapshot. Again, the accounting equation: Assets = Liabilities + Equity will help you make sure your books are balanced correctly.
  • Profit & Loss (P&L) report: also called an income statement, this statement analyzes revenue, costs, and expenses over a month or quarter. The P&L will help you forecast your sales and expenses to keep your business financially healthy.

Don’t forget to store your important financial records like payroll and inventory management securely. You’ll need these for tax purposes and in case of an audit. Bank and credit card statements, cancelled checks, sale and purchase receipts, bills and invoices, customer invoices and payments, tax returns, 1099 forms, and payroll documentation should all be scanned and kept digitally, if possible.

Plan for tax deadlines

Budgeting for payroll and business taxes should begin with each quarter, and you should be aware of all local, state, and federal deadlines.

Depending on how you’ve structured your business, you’ll have different tax implications. Income tax, sales tax, and payroll tax are the most important to get right.

The goal of small business tax preparation is to be diligent, thorough, and aboveboard, so getting help from a tax professional or having an accounting or bookkeeping service prepare your tax compliance for you.

Now that we’ve covered the basics, let’s look at some options for putting them into practice.

 

Solutions

DIY bookkeeping

Managing your bookkeeping with do-it-yourself bookkeeping software like QuickBooks can be a temporary solution for new startups or businesses with less than 10 employees, but once your business begins to grow, the workload grows exponentially with it.

About 40% of small business owners say bookkeeping and taxes are the worst part of owning a business. For good reason too, those who try to manage their bookkeeping themselves end up spending 3-5 hours every month processing payroll, 80 hours or more a year preparing taxes, and 15 hours per week on accounting.

And of course, the cost of making a mistake averages out to nearly $850 per year. According to IRS estimates, about one-third of employers make a payroll mistake in any given year, totaling to $7 billion in penalties in 2021 alone.

Accountants and bookkeepers exist for a reason. Managing a small business’ finances is a full-time job by itself, and it requires experience and technical knowledge to get the job done well.

Hiring an in-house bookkeeper

Hiring a bookkeeper or accountant to work directly for your business full-time or part-time gives you access to their professional expertise, and it allows them to become familiar with your business operations.

However, this is the most expensive option for managing your business’ bookkeeping, since you will still have to buy bookkeeping software and pay $16 per hour for part-time work or an average salary of $37,000 to $47,000 a year.

Outsourcing your bookkeeping

Outsourcing your bookkeeping will save you all the headache, time, and cost of manage it yourself or paying an employee to do it. That’s why 70% of small businesses outsource at least one accounting function. Outsourcing your bookkeeping:

  • Saves you time
  • Is more cost-effective
  • Gives you access to expert skills
  • Allows you to make better financial decisions for your business

There are thousands if not millions of choices for outsourcing your bookkeeping, but at Navrae we personally believe that combining technology with decades of experience in accounting and bookkeeping makes for the best solution.

We automate and streamline your accounting and payroll processes to reduce human error, save time, and provide our services at a competitive rate.

Automation of financial processes is creating a shift in the finance and accounting industry, and we aim to pass those savings on to our clients.

 

Takeaways

Understanding the basics of bookkeeping will help you protect yourself from costly mistakes, gain a better insight into the financial health of your business, and improve your ability to grow your business.

Whether you choose to take on the full-time task of managing your own bookkeeping or outsource to an expert, understanding the basics and your options will help you better manage your business finances.

Our best advice is to save yourself the hassle and stress of doing it yourself and work with a bookkeeping expert right from the start. If you’re interested in how Navrae’s services can help you manage your small business bookkeeping, contact us here. We look forward to hearing from you.

Aaron Schwaderer

Aaron is a man of many talents. Whether he is keeping vendors up-to-date in the system or developing content, he loves to keep you up and running.

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