Why bookkeeping for small businesses is important, Separating business and personal finances ensures that you’re not personally held liable for any debts or issues related to your Small businesses.
Accurate, up-to-date Outsourced bookkeeping is the cornerstone of every successful small business. Irrespective of any business sector, you must practice regular bookkeeping to run your business smoothly, efficiently, and profitably – now and in the future.
Learning the ropes of bookkeeping may sound intimidating, fret not! We are listing down everything that you must know about bookkeeping and how you can play it to your advantage for your small business.
Bookkeeping is like a financial journal. Similar to how you record your day and its series of actions and happenings in a journal, bookkeeping, and accounting is similar but you will record every financial transaction that happened in a day. It is a continuous process and you must do it religiously every single day.
- It is the process of recording and categorizing a business’s financial transactions.
- It is the responsibility of a bookkeeper (or an accountant sometimes!) to maintain the books.
- It is the first step in discovering if the business is actually making any profits sailing through or just experiencing losses.
- If the condition is latter, then with the insights of your numbers from bookkeeping, you can save the last-minute crisis.
Besides, bookkeeping also gives you insights on how you can expand your profits – specific areas where your finances are drowning and where your finances could actually do good. You could interpret your financial reports easily with regular and accurate bookkeeping.
Generally, the bookkeeper monitors and documents transactions, send invoices, makes payments, handles accounts, looks after payroll, prepares financial statements, collects bank and credit card statements, and files tax forms and returns. Bookkeeping and accounting are somewhat similar, and bookkeeping forms the foundation for a perfect accounting process.
Accounting focuses on analyzing the data – that was provided by the bookkeepers – to drive decisions for business growth.
+ Monitoring profitability
Closely following your company’s profitability allows you to track your earnings over time and plan for improvisation. Profitability measures let you quickly and easily monitor transactions and calculate how much your business makes on inventory. The profitability ratios listed below will help you assess your company’s efficiency.
- Gross margin ratio
- Profit margin
- Return on assets ratio
- Return on equity
- Return on capital employed
+ Maintaining cash flow and improved financial management
As a small business owner, you should be vigilant of your revenue streams. Accurate bookkeeping will exactly tell you how much your business is spending and earning, and if you have enough cash to run the business. Maintaining proper financial statements will help you to analyze the financial condition of your business and determine areas of improvement.
+ Bookkeeping keeps you tax-ready
Running a start-up or a small business is both hectic and straightforward in terms of managing and handling daily operations. By recording every financial transaction on a daily basis, you will save a lot of time and be prepared for taxation at the end of the fiscal year. Besides, bookkeeping will help you determine the type of tax and amount you need to pay, in advance.
+ Straightforward reporting
As a business owner, it is your duty to record and report important financial data about your firm to prospective investors and other stakeholders. Bookkeeping programs that incorporate charts, graphs, and other visuals to make it easier to improve data precision and enhance communication when you’re pitching to the investors.
You are also responsible to keep your staff informed about the company’s financial status. It is important because they will understand if the company is making progress and their areas of improvement to contribute to the overall growth.
+ Assess performance and future planning
Detailed bookkeeping aids you track down your business’s financial records and assessing its performance levels. Bookkeeping gives you a larger and clear perspective of your business’s expenditure. With those details, you can look back, understand spending patterns, and analyze details. You could re-strategize to stay on top of your business’s finances.
Moreover, as a small business owner, you must clearly define projections and determine benefits from financial improvements. That is achievable with bookkeeping.
Before we jump onto the important tips to get your bookkeeping right, here is a list of the bookkeeping terms you must know.
Important Bookkeeping for Small businesses Terms You Must Know
- Accounts Payable: It is the account that holds all the details of all the money that you owe to your vendors – like suppliers, bank loans, and anyone you have borrowed money from. It is mostly on a retainer basis.
- Accounts Receivable: Accounts Receivable is opposite of the Accounts Payable. It is the account that holds all the details of the money you need to receive from others. It could be your customers, companies, banks, or anyone that has purchased a service from your business.
- Asset: Assets are the resources that your company owns. They are cash, buildings, hardware and software, tools, vehicles, furniture, etc., that help you to successfully run your business.
- Accruals: Accruals are the accumulation or increase of something over time, especially revenue, payments, and benefits. It also includes the expenses and revenue that are not yet invoiced but the provision is made. The net income should be documented before the financial statements are issued.
There are three types of accrual accounts. They are accounts receivable, accrued interest, and accounts payable. Companies track accrued expenses before receiving goods and services invoices. Businesses exhibit accrued revenue for goods and services, for which they expect to receive the payment later.
- Balance Sheet: A balance sheet is a comprehensive report that condenses the financial state of your business. In the balance sheets, you will encounter terms like assets, liabilities, and the capital of your business. The objective of a balance sheet is to show what your business owns and owes.
- Capital: It refers to an individual’s or company’s financial assets. It includes the funds in deposit accounts or the funds from financing sources. Working capital indicates the business’s liquid capital, which caters to everyday spending.
- Cash Flow: It is the total amount of money that your business receives and spends. It is the sum of all money a business generated from operations, investments, and financing.
- Cost of Goods Sold: It is all the money you spend on services and products that you would sell to your customers later.
- Credit: Credits are records that either increase an equity or liability account or decrease an expense or asset account. Credits are made on the right side of an account.
- Debit: It is the opposite of credit. A debit is an accounting entry that is made on the left side of the account. Debits must equal credits for balanced accounts.
- Depreciation: Depreciation is when an asset loses value over time. It can happen through wear and tear. The decreased value is measured as depreciation.
- Equity: Equity is all the money you invest in the company as the owner plus all the accumulated profits. As a small business owner, your equity is shown in a capital account.
- Expenses: Expenses are all the money that you spend to run your business. It is not squarely related to the sale of goods or services.
- General Ledger: A general ledger account is an account that you use to document financial transactions and data of your company. It includes credit and debit account entries.
- Gross Margin: It is the difference between revenue and cost of goods sold, divided by revenue. It is usually expressed in percentage. Generally, it is calculated as the selling price of an item, less the cost of goods sold, then divided by the same selling price.
- Income Statement: It is another financial statement that summarizes your financial activity over a certain period of time. After working out the revenue earned, the costs of goods sold, and the expenses, it works out your net profit or loss.
- Journals: Journals are where the bookkeepers store their records of daily transactions. You will use a separate journal for every active account you use, like the cash, accounts payable, and accounts receivable.
- Liabilities: Liabilities are basically all of the debts you owe. This can range from loans you have taken to any unpaid bills you might have yet to pay.
- Overhead: Overhead refers to ongoing costs of doing business, other than those related to directly creating goods and services. The income statement includes information about overhead expenses.
- Payroll: Payroll is the way you pay your employees. It is a huge part of bookkeeping and involves reporting a lot of payroll aspects to the government. It covers taxes that need to be paid on behalf of employees, compensation, and more.
- Revenue: Revenue is also known as sales. It is the gross income that the business makes through daily operations. There are a few companies that accumulate revenue in other ways, like selling assets their business doesn’t need.
Sales Revenue = Sales Price * No. of units sold
- Trial Balance: Trial balance is ensuring your books are balanced in the credit and debit columns. It is used to ensure the mathematical accuracy of the bookkeeping entries. You will achieve this before submitting all the financial reports and closing the books for the accounting period.
Now that you are fully cognizant of the important terms in bookkeeping, we have listed the basic tips on getting bookkeeping right for your small business.
1. Set up a new business account
Always maintain your personal and professional records separately. There is nothing worse than holding the same account to manage your personal and professional transactions. The statement will be a never-ending list, and it will consume a lot of your time in understanding every expense line.
Having a separate account for your business will help you save a lot of time, be a great resource while validating your books, accounting season, and all the other financial details that can be understood easily.
2. Allocate budget for tax purposes upfront
Always allocate some emergency funds and funds for your budget every month or upfront. Doing so will save you shocks when your accountant knocks on your door with a huge amount at the end of the fiscal year. Set aside some of your income as the funds of tax, so at that time you can save a lot of stress.
3. Always organize your records
Although it may sound simple, it is a huge deal. Keeping your records organized by maintaining different bank accounts for personal and professional usage, daily doing your books, maintaining clean records of the past will help you a lot with accurate bookkeeping.
Having your records neatly organized in a good shape will give you access to all the important information instantly and save you a lot of time. Besides, during the tax seasons, your business will run smoothly, you can pay your taxes in time by maintaining clean and organized records.
Maintaining your records should be a continual process and not a one-off.
4. Track your expenses
Monitoring your daily expenses is mandatory. Any amount that you spend on and for your business must be tracked and maintained. You can either allocate funds for daily expenses or use a business credit card. Either way, remember to track every single expense and categorize it. Another advantage of categorizing your expenses will give you an idea of how much you are spending on things and where you can avoid extra expenditure.
5. Maintain your records daily
A simple yet valuable tip is to regularly maintain your records. Maintaining records daily will give you great financial insights about your business and will be a savior if you are undergoing any financial crisis.
Put this system into practice religiously to maintain precise records. It will also eliminate any errors while calculating your taxes.
6. Leave an audit trail
If you are manually doing your books without software, then you must leave an audit trail. Your record keeping will be a lot more beneficial and productive if you can go back over your financial activities. However, using software to do your books is a good option as all this will be handled by the software effortlessly.
An audit trail means having your invoices in sequence appropriately so you can retrace your steps easily, even if there is a small error or a mismatch.
7. Keep your account receivables intact
If your account receivables are not cleared on time, you will have a negative impact on your cash flow and revenue management. Be straightforward and upfront about the amount your customers and vendors owe you. If the payments are overdue, act right away and don’t wait until your finances are sinking. Automate the process of reminding your customers in advance about the payments they owe you. As long as you keep your account receivables intact, your cash flow will be in good health.
8. Keep tax deadlines in mind
A tax deadline is stressful for most individuals and most businesses. Keep small reminders in advance so you could fill the forms and file your taxes without any errors until the eleventh hour. By maintaining accurate records, you can send taxes, file your taxes well in advance, and allow room for corrections without anyone chasing you till the deadline.
One of the most important, you will avoid penalties.
9. Switch to bookkeeping software
“Making Tax Digital” is the new way of maintaining and easing your bookkeeping efforts. Digital is the new approach to file your taxes as it avoids the need for you to pile stacks of papers, receipts, maintain fat journals, and eliminate stationary.
Unlike physical format bookkeeping, a digital app is quick and accurate. It completely washes away errors. A digital app will let you store every little detail – income, expenses, transactions – and organize your records clearly and precisely. Your financial management will be a breeze. The bookkeeping software will handle everything about the books and give you great insights anytime you want to understand your business’s present financial conditions. It makes the whole process painless and worthwhile.
So, avoid feeling overwhelmed while doing your books with bookkeeping software.
As the last step, we recommend you outsource your bookkeeping and accounting processes. As a small business owner, you already have a lot of different caps to wear, and worrying about maintaining your books accurately is the last thing you would want, especially if you are not from an accounting background.
Outsourcing your bookkeeping to the experts will save you a lot of time and energy. You can concentrate on your core business and use your entrepreneurial prowess to bring in more sales and create more revenue for your small business.
Bookkeeping and accounting mistakes are costly and jeopardize success.
For example, if you were under the impression that you made a lot of money last month and when your bank statements showed the opposite, then it is a direct cue that you need bookkeeping help.
As a small-business owner, you could either
- Hire an in-house bookkeeper or accountant
- Invest in bookkeeping and accounting software
- Outsource your bookkeeping to a bookkeeping expert company
In every angle, outsourcing your bookkeeping to outsourcing experts like Velan will give you access to experienced and skilled professionals, the latest software and technology, error-free books, filing error-free taxes on time, and ensuring overall revenue management.
Did we mention that our bookkeeping experts will also help you with defining your financial route towards the success of your organization?