Bookkeeping is the process of recording and managing all your financial transactions. It is a fundamental part of running your business, not just for tax purposes but for understanding cashflow and pushing your business towards profitability. However, this can be difficult, especially if you have money coming in and out on a daily basis. Read this guide to find out the key elements of bookkeeping and best practices for small businesses.
Types of Accounts:
- Assets – These are resources that your company owns as a result of its transactions (inventory).
- Liabilities – Are your obligations and debts to suppliers, banks, lenders or other providers of goods and services.
- Revenue – This is the money earned by your company through sales or providing a service.
- Expenses – Money that goes out of a business to pay for assets or services.
- Equity – After you have deducted all liabilities this is the remaining value of your assets.
- You need to set up each account so you can record transactions in the right category.
Maintain and Update Financial Records
Bookkeeping involves basic maths and accounting, the complexity and detail of which depends on the type of business you are running. Some of the things you will need to record and organise include:
- Invoices – Keep track of invoices paid and outstanding.
- Payroll – If you have employees then you need to document their wages.
- Tax – for payroll, income, employment and even small business tax deductions.
- Budget planning – keep your small businesses finances on track.
- Financial statement preparation – balance sheets, income statement, cash flow, and changes in equity.
Communication and Organisation Skills
Bookkeeping means that on any given day, you will be collecting receipts from employees, managing travel expenses, and keeping up to date with what invoices have been sent out. To do this you need to have exceptional communication and organisation skills in order to make sure your employees understand what they have to do and when. You should create a system to make sure submissions and reimbursements are up-to-date and accurate.
Small businesses basically have two ways to do their bookkeeping. Either manually or with software. With software you can save a lot of work by streamlining data entry and automating record keeping. Software is also more accurate and eliminates repetitive tasks.
Double Entry Versus Single Entry Bookkeeping
With single entry bookkeeping you record transactions as you make deposits and pay bills into your company account, like keeping a cheque register. While with double entry bookkeeping, each transaction has two entries: a debit entry and a credit entry. For small businesses the single-entry bookkeeping system is usually sufficient while larger businesses may want to use the double entry method as it works as a more stringent error checking system.
Succeeding at Bookkeeping
Small businesses have to learn a range of skills beyond the services that they sell including marketing, filing taxes and HR. They can outsource those skills, but that can be expensive, meaning most small business owners will learn. Bookkeeping is no different, and while it is not easy to do, it is possible to do it yourself. Below are tasks you need to do on a daily, weekly and monthly basis.
Ensure that you collect, file and organise all your small businesses’ receipts. It is really important to keep any receipts because you want to claim them as legitimate business expenses to lower your tax. In addition, you need to organise all your receipts, invoices and emails as evidence when submitting your tax return. Try to be efficient and organised as possible by putting relevant mails into a separate file in your mail system and then backing up to a cloud drive.
Make sure you pay attention to cash flow and variable expenses. Cash flow issues are one of the biggest reasons why a business has to close. Many small businesses build up clients, but then find they can’t buy supplies or cover overheads; therefore, bookkeeping is essential to plan and project and manage your cash flow to ensure you can service your clients and build up your business.
At the end of each month, look at your sales, your expenses, income and cash position as a whole. The reason to do so is to try and find areas where you can save money. For example, you may find you have punctually paid a supplier every month for a while now and you have a steady monthly order with them. This is the time to start trying to negotiate supplier discounts to push up your profitability.
You should also go through all your receipts to see if things are in order and to see if there are any ways to save here.
Personalise for Your Business
The services or products you offer, the number of staff you have, and the stage of your business, will all play a part to influence the mix of revenue and expenses you need. Because of that you will need to adjust and personalise.
Choosing Bookkeeping Software for Small Businesses
Hoof’s payment solution has all the tools to help you win business and more efficiently manage payments. Its invoice and quotation software makes it easy to create and store invoices and therefore makes filing taxes for self-employed easier.