Implementing a bookkeeping system is table stakes for every small business owner. It helps your business unlock fiscal clarity, provides a foundation for making financial decisions and builds confidence ahead of tax season.
What is bookkeeping?
Bookkeeping is the process of keeping accurate records of financial transactions. Having a reliable bookkeeping system is crucial for effective financial management, allowing you to track income and expenses, manage cash flow and inform strategic decisions.
The bookkeeping process
- The chart of accounts: make a list categorizing your business’ transactions, typically including equities, assets, liabilities, revenues and expense accounts.
The chart of accounts is your framework for generating financial reports.
- Tracking income and expenses: record revenues—like sales, services and investments—and expenses—like rent, utilities, salaries, supplies and taxes—in a general ledger or accounting software..
Tracking income and expenses allows you to monitor profitability and identify trends to inform financial decisions. An income statement is the key report generated from this tracking.
- Managing assets and liabilities: track your resources and financial obligations.
- Assets: Resources such as cash, accounts receivable, inventory and property
- Liabilities: Financial obligations like loans, accounts payable and accrued expenses
Knowing this will help you create a balance sheet, which is another key financial statement.
- Monitoring cash flow: track the inflow and outflow of cash during a specific period.
Monitoring cash flow involves analyzing receipts and payments. This will help you figure out if you have positive or negative cash flow and identify issues, manage liquidity and plan for the future.
How to keep track of your books
There are two options for small business bookkeeping:
- Manual: It might sound outdated, but it can be useful for small businesses with a low volume of simple transactions. You record transactions in journals, spreadsheets or ledgers. It’s time-consuming and leaves more room for error and miscalculation, but cost effective and straightforward.
- Digitalized: Accounting software—like QuickBooks, FreshBooks and Xero—is useful for businesses with a lot of transactions. Benefits include automation, accuracy and convenience.
Tax and legal requirements
It’s crucial that your business complies with legal and tax requirements.
Here’s where you may consider hiring an accountant or tax consultant. While a bookkeeper accurately records transactions, an accountant analyzes that data, provides advice and prepares taxes. Hiring a professional can mitigate risk and ensure your business’ financial health.