Bookkeeping is how you record, organize and track your company’s financial transactions. It is essential for running a healthy and successful small business. It tells you where your money is coming from and where it’s going. It is extremely beneficial come tax time. And you’ll need it if you ever need to borrow money.
It can be tedious and time consuming as it requires meticulous data entry, but it isn’t so bad with the right set up and tools.
Setting Up Bookkeeping for Your Small Business
Here’s a quick breakdown of all you need to know to set up bookkeeping for your small business.
Get a Separate Bank Account for Your Business
The first step is to get a business bank account. This allows you to keep your personal and businesses expenses separate, which streamlines your bookkeeping, helps with accurate tax reporting, and protects your personal assets from business liabilities.
The most common type of bank account for small businesses is a checking account. Designed for everyday use, a business checking account will give you the ability to make unlimited deposits and withdrawals and should come with the convenience of a debit card.
Choose a Bookkeeping Method
The two main bookkeeping methods are single entry and double entry. With single entry, you’ll record each entry once as either an expense or income. Assets and liabilities are tracked separately. It is the simplest and fastest method of basic bookkeeping making it a good choice for startups and hobby-stage small businesses.
Double entry is more complex, but it provides a clearer picture of a company’s financial position. It also helps cut down on errors. With double-entry bookkeeping, each transaction is entered twice, as both a credit and a debit in order to maintain the Assets = Liabilities + Equity accounting equation. Most accounting software uses double entry, and if you choose to hire a bookkeeper or outsource your bookkeeping this should be the method they use.
Choose an Accounting Method
The two main accounting methods are cash accounting and accrual accounting. Under cash accounting, you record transactions once money has been exchanged, tracking cash flow in real-time as it enters and leaves. That means when you bill a customer, you don’t enter those dollars into your ledger until the money is actually in your bank account. This method is simpler because you don’t track accounts receivable or accounts payable and you know exactly how much cash you have on hand at any given time.
With the accrual accounting method, you record income when you bill your customers, in the form of accounts receivable and when you are billed in the form of accounts payable. This method provides a more realistic image of your business’s income and expenses and offers a long-term view of cash flow.
Choose the Right Tools
Once you have a good idea of the bookkeeping methods you want to use, it’s time to pick an accounting software to help to track your business finances. A simple Microsoft Excel spreadsheet can be the perfect place to start for simple small business bookkeeping or you may want to use a more comprehensive accounting software, like QuickBooks or XERO, or you may want a more hands-off, stress-free approach and decide to outsource your bookkeeping. What tools you choose will depend a lot on the volume of transactions you have, the time you want to dedicate to it and how detailed of an analysis you are looking for.
Track Your Financial Transactions
Finally, it’s time to start tracking your financial transactions using the methods and tools you’ve selected. The business activities you’ll want to track are any that involve money, including sales, expenses, and payments.
Get Bookkeeping Help for Your Small Business
Recording and organizing these transactions in a timely, yet accurate manner is essential If managing your business’ finances is taking you away from what you do best (operating and growing your business), let us help. Our New Mexico-based accounting firm’s outsourced bookkeeping services take the stress out of bookkeeping by delivering accurate and detailed financials every month. You’ll have more time to focus on growing and running your business knowing your books are accurate and all the financial data you need to make informed business decisions is a click away. Contact us today for a free consultation.