At the core of every successful small business is a great product, hard work, and accurate bookkeeping. While it may not be the most glamorous aspect of entrepreneurship, proper bookkeeping is key to evaluating profitability, creating a budget, and complying with legal and tax requirements. Every small business owner needs to practice good bookkeeping if they want to maximize their profits and avoid costly mistakes and legal consequences.
At the MB Group, our accountants and tax professionals can help you establish good bookkeeping practices that will save time and frustration. Whether you do it yourself or hire a bookkeeper, we want you to understand the basics so your company can thrive.
Want to know more about bookkeeping for small businesses? Our handy guide will get you started.
First, let’s talk about what bookkeeping is and how it differs from accounting.
What is bookkeeping?
A: Bookkeeping is tracking every financial transaction your business makes. All money that goes in and all money that goes out must be recorded. Every dollar and every cent counts.
Good bookkeeping makes it possible to prepare reports that reveal the company’s financial status.
Bookkeepers collect data. They handle daily operations like preparing invoices, making outgoing payments, and managing company accounts.
How are bookkeeping and accounting different?
Accounting analyzes the bookkeeping reports to ensure that the business meets financial goals and complies with business and tax laws. An accountant uses information in the reports to devise a favorable tax planning strategy, create a budget, expose challenges, and identify untapped potential.
Good accounting makes it possible to produce annual statements that meet the rules set by the Financial Accounting Standards Board (FASB). Small businesses use these statements to secure credit, attract investors, and prepare tax returns.
Accountants interpret data. They oversee the bigger financial picture. They provide an accurate report of the company’s financial status and offer strategies to reach short-term and long-term goals.
Know the basic terms
Assets include all the resources owned by the business. Cash, equipment, accounts receivable, and inventory are assets.
Liabilities include all the debts that the business owes. Loans, accounts payable, and lines of credit are liabilities.
Revenue (or income) includes all the money the business generates. Sales are revenue.
Expenses include all the cash paid out for operating needs. Payroll, rent, and utilities are expenses.
Equity = Assets minus Liabilities
To ensure efficient bookkeeping, you must be unwaveringly consistent. We recommend that you:
- Establish a set schedule to handle the books at least once a week. The best time is when you will not be interrupted.
- Pick a format for labeling files and stick with it. (For example: date, what, who “01012021 Loan Payment MB Bank” or “01012021 Sales Receipt Customer John Doe”)
- Know your records retention obligations and follow them—always. Laws dictate that certain documents must be kept for a defined number of years. Tax documents and payroll records have legal retention policies. Adhering to these policies will keep you in compliance and make it easy to provide records in case of an audit or legal proceeding.
Choose a bookkeeping software
Before computers, small businesses used a book called a general ledger to track finances. Today’s business owners are lucky to have paper-free options that are efficient and user-friendly.
A handful of people, like freelancers, with simple bookkeeping needs and very little overhead, might use spreadsheets to track their finances. But in most cases, a spreadsheet is not enough. Spreadsheets are tricky to set-up and are cumbersome for complex finances. It is best to use software designed especially for small businesses. While the initial cost may seem high, the tools you gain are worth the investment.
Cloud-based bookkeeping software packages are popular because they are easy to set-up, easy to use, and accessible from anywhere. Since cloud software is usually subscription-based, you can reduce the upfront cost by opting for a monthly subscription.
If you would rather your bookkeeping software be offline, you can install a desktop version. Either way, you get a bookkeeping system that makes it simple to track expenses, prepare invoices, upload receipts, run reports, and share data with your accountant.
Partner with a professional accountant
Bookkeeping is complicated, and even small mistakes will cost you big. Don’t wait until after a problem arises to partner with a trusted accounting professional. Working with an accountant from day one will save valuable time and ensure that your bookkeeping methods are best suited for your business.
At the MB Group, we have an entire team of professionals who specialize in small business accounting and tax planning. We have the expertise you need to be confident that the financial engine of your business is in tip-top condition. From tax planning and long-term strategy to short term-goal setting and payroll management, we can help. Contact us for assistance with any bookkeeping needs. We love helping small business owners achieve success.