What Does a Business Owner Need to Know About Small Business Bookkeeping?

Properly accounting for a business’s income and expenses is critical to having a successful business.  When starting a new business, many entrepreneurs know that bookkeeping is important, but many are not really sure what all is required. 

What is bookkeeping?

Bookkeeping is the recording of a company’s financial transactions.

What is the difference between bookkeeping and accounting?

Bookkeeping and accounting are related.  While bookkeeping is responsible for recording financial transactions, accounting is the process of interpreting and reporting the financial results.

Why is bookkeeping important?

Small business accounting is often times used as a way to reduce taxes. While taxes are an important consideration, there are several other reasons bookkeeping is important.

  1. Saving Time – Taking a little time each month to record income and expenses will save you time at years end when it’s time to do taxes. All receipts are organized and numbers tallied so all that is needed is for them to go into the tax return.
  2. Getting Paid – Making the sale is one part of a successful business. If your company offers terms to customers, it’s critical to know who owes you money and making sure to get paid.
  3. Minimizing the Pain of an Audit – Having good records makes it easier to prove expenses.
  4. Better Decision Making – Without a clear picture of the income and expenses of a business, how do you know if it is making money? Up-to-date records also allow for better forecasting and budgeting. 

How does a small business owner use bookkeeping to manage a business?

With proper bookkeeping, a small business owner will have up-to-date information on the financial performance of a business through the financial statements.  There are three statements a business owner will want to focus on which include the cash flow statement, profit and loss statement and balance sheet. 

The Profit and Loss Statement, also known as the Income Statement is the most familiar of the three financial statements.  The P&L statement shows the revenues and subtracts expenses which result in a business’s profit or loss.  This statement is useful in showing whether a business is making a profit, measuring operational efficiency and to estimate tax liabilities.

The Cash Flow Statement is a summary of how cash flows into and out of the company.  While the Profit & Loss Statement gets most of the attention, the Cash Flow Statement may be more important.  Think of the Cash Flow Statement like the bank account for the business.  This statement reflects the business’s liquidity and helps owners understand the cash position of the company and whether it can cover bills like payroll, rent and loan payments. 

The Balance Sheet is a snapshot of a business at a point in time.  This statement reports the financial position of the business by showing the assets and liabilities of the business.  The Balance Sheet is usually most useful in combination with the other financial statements.  Lenders will often refer to the balance sheet when evaluating a loan request. 

What are some common bookkeeping tasks?

Good record keeping habits are important to keep up with the financial transactions for a small business.  Below we list a number of common bookkeeping tasks listed separately as daily, weekly, monthly quarterly, and annual tasks.  The following tasks may not cover all of the bookkeeping needs since every business is different, but here are some of the more common ones.

Daily Bookkeeping Tasks

  1. Check your cash position – The primary resource for running a business is cash. Cash availability is very important during slower periods, but is also important for a quickly growing business, since more money is needed for inventory, wages, etc. Get in the practice early of verifying how much cash is on hand, accounts payable (money owed to vendors) and accounts receivable (money owed by customers to the business).  The timing of the cash inflows and outflows is critical and unexpected expenses can (and will) pop up frequently in the course of running a business.  Only relying on the bank balance will give a false picture of how much cash is available. 

Weekly Bookkeeping Tasks

  1. On a weekly basis (if not daily) send invoices to clients for the work you did. The earlier you send the invoice, the earlier you (should) get paid.  It’s all too common for small business owners to get the work done and move to the next job and forget about the most important thing, which is getting paid.  Being busy is good, however forgetting to collect the money owed is not.
  2. Accounts payable is the money a business owes to its vendors. On a weekly basis, keep track of how much is owed and payment due dates for each vendor.  Some vendors will provide discounts for paying bills early so if your business is in the position, be sure to take advantage.  Be sure to not get too far behind on bills as vendors will eventually cut off the ability to order, which could critically impact your business. 
  3. Record and reconcile – Financial transactions need to be recorded, filed and reconciled and doing them weekly keeps entry from becoming a monumental task.

Monthly Bookkeeping Tasks

  1. Review the customers who have been invoiced and haven’t yet paid. This is called the receivables aging report and will show the number of days a bill is past due. Send those customers a friendly reminder to pay. 
  2. Run a reconciliation report (also called a trial balance) to ensure everything is in balance. Also review that all entries are being posted to the correct categories and there are no errors.
  3. Balance the checkbook – This will help verify the transactions are accurate. This reconciliation also ensures you are working with the correct cash position.
  4. Check inventory levels and reorder products or raw materials. This is also a good time to analyze inventory on-hand to evaluate if there is stale inventory to write off or excess inventory that should be reduced in price to help it sell faster.   
  5. Take care of tax payments – Most states require monthly sales tax payments from taxable sales of products and services. Another common monthly tax payment is payroll taxes (Social Security and Medicare) and employee income tax withholdings.  The timing of payroll taxes varies by stat, so be sure to check with your accountant or appropriate state agency for more information.
  6. Update mileage logs if any vehicles are being used for business purposes. In order to deduct mileage or the operating expenses of a vehicle, the IRS requires a log with the number of miles driven and the purpose of the trip.  There are several apps to track business mileage like Triplog or TripLogik.  A less technical (and cheaper) way is to use a mileage log spreadsheet.   
  7. Compare financial performance, by reviewing the income statement and balance sheet for both month over month and over the last year to see how well the business performed and make changes for the future.

Quarterly Bookkeeping Tasks

  1. Tax payments – Any tax payments that weren’t required to be paid monthly, will likely need to be paid quarterly. Sole proprietorships will want to look at paying quarterly self-employment taxes.
  2. Meeting with the accountant to go over the income statement and balance sheet is a great idea quarterly to assess the financial performance of the quarter, make corrections if needed and project for the remainder of the year to minimize surprises at tax time. While some accountants charge to meet quarterly (though many don’t) this is money well spent and will likely save you much more by making better financial decisions.

Annual Bookkeeping Tasks

  1. Review past due accounts receivable and decide whether these customers just need more time to pay, cut off from further purchases, send to collections or write off as a loss.
  2. Look at inventory and decide what inventory should be written off or sold at a steep discount.
  3. File W-2’s for employees and 1099’s for independent contractors. These forms indicate how much in wages they earned and the amount of taxes withheld and are due by January 31st
  4. Review full-year financial statements for accuracy and to evaluate the performance over the previous year.

Should I use bookkeeping software?

This is a common question and while there is a strong case for using software, there are simpler options.  Small business accounting software may make it easier to keep track of business transactions, but there is a learning curve and a cost. Many businesses, however, run just fine with an accounting spreadsheet.  There’s enough to do when starting a business and if there aren’t a lot of transactions, you may be better off initially recording them in a spreadsheet.  When the business grows and needs something more sophisticated, you can make the switch to software.  Some of the more popular accounting software includes Quickbooks, Xero, Freshbooks and Wave.

What are some common small business deductions?

Just about any expense incurred in the operations of a business is able to be deducted.  Some common expenses include; inventory, mileage, depreciation, wages, rent, payroll taxes, interest and lots more.  The Internal Revenue Service (IRS) has a guide on common business deductions.

A few last closing small business bookkeeping tips

It’s common when starting a business to want to save some money and the owner (or owner’s spouse) to do the bookkeeping.  This sometimes works well, but sometimes it doesn’t.  If you or your spouse is going to do the books, first get some training or work with a CPA to make sure everything is in being done correctly.  It’s critical to get the bookkeeping set up correctly up front and get business expenses in the correct category.  Otherwise, you will have bad information and all that time entering financial data will have been wasted.  Another thought is to hire someone to do the books for you.  There are only so many hours in the day and bookkeeping is usually at the bottom of the list for most business owners.  This means it doesn’t get a lot of attention and is done wrong or worse, doesn’t get done at all.  As a business owner, you should look for ways to remove yourself from the less strategic functions in the business to focus your time on the high-impact items of the business.  That isn’t always going to happen when starting, but strive to get the lower level tasks off of your plate so you can focus on growing the company.

Next, whether you hire an accountant or do it yourself, be sure to understand basic financial ratios and financial reports.  These numbers can tell a story about your business and can be powerful tools to analyze both year over year and against industry benchmarks to make your business more profitable.  Don’t completely give up the “numbers” to someone else. 

Be sure to keep a copy of all invoices, receipts, and bank statements for at least three years.  Filing paper documents can be easy, but consider also scanning and saving online as a back up to prove the transaction happened in case of an audit.  Many cloud-based accounting software programs allow for mobile uploading of receipts.  If that isn’t an option, look into solutions like Shoeboxed or Neat.  

Be sure to set aside money for taxes and don’t be tempted to dip into those funds.  Far too many businesses closed because they couldn’t come up with the money to pay their tax liabilities.  Don’t let that happen to you.

These were just a few of the basics of bookkeeping for a business.  Your actual requirements will likely vary.  Don’t be intimidated by the numbers side of the business.  Educate yourself and get help when you need it. 

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