Bookkeeping Essentials for Small Companies

As a small business owner, you have a lot to think about on a daily basis, including managing your books. For many, keeping track of cash flow, handling expenses, and organizing invoices can quickly become overwhelming and complex.

However, without an effective bookkeeping system, your business’s financial stability and long-term success could be in jeopardy.

Let’s start with the basics and learn how bookkeeping and good financial management can help set your small business up for long-term success.

Understanding Bookkeeping Basics 

Bookkeeping refers to the process of recording and managing all the financial transactions that take place within your company. 

While several elements of bookkeeping overlap with accounting, it is important to distinguish between the two and understand that bookkeeping and accounting serve two distinct purposes:

• Bookkeeping focuses on the day-to-day, regular financial tasks and recording of data like sales, purchases, receipts and payments.
• Accounting covers broader, more complex tasks such as analyzing data, interpreting information and summarizing data for financial reporting and forecasting.

Bookkeeping is crucial, especially for small businesses that don’t have a huge cash flow to work with. Keeping a close eye on all your financial transactions will ensure that cash shortages and other issues don’t arise.

Additionally, bookkeeping helps with planning for expenses and taxes, and provides clear and accurate financial insights needed for important decisions on growth, investments, and operational changes. 

Some business owners believe that bookkeeping is overly complex, or that it is only necessary for larger companies. However, if you take the time to set up the right systems and learn the basics of bookkeeping, it can be surprisingly simple. 

The truth is that all businesses benefit from good bookkeeping practices. Whether you’re running a local store or a large software company, having organized financial records can mean the difference between success and chaos.

Setting Up Your Bookkeeping System 

Bookkeeping for small business owners starts with setting up the right systems. Once these are in place, everything becomes straightforward to manage.

Choose a Bookkeeping Method

The first step is to determine which bookkeeping method is right for your business. There are two main methods to pick from:

• Cash accounting: This method records transactions when cash is paid or received. It’s simple and easy to use, and works well for businesses with limited inventory or small numbers of transactions.
• Accrual accounting: This method records income and expenses whenever they are earned or accrued regardless of when the cash actually changes hands. While a little more complicated than cash accounting, it offers a more accurate, longer-term view of financial health.

If you’re not sure which method to pick, it’s always worth getting advice from a financial professional. Our experts at Finvisor can provide you with the guidance needed to make this decision.

Set up a Chart of Accounts 

Once you have chosen your small business bookkeeping method, you should set up a chart of accounts (COA).

This creates the foundation of your bookkeeping system and neatly organizes all your financial data into clear categories. Standard categories for your COA include:

• Assets: Cash, accounts receivable, inventory, equipment
• Liabilities: Debt, loans, credit card balances, and accounts payable
• Revenue: Income from sales and services
• Equity: Your (owner’s) equity and retained earnings
• Expenses: Staff wages, utilities, building or equipment rental, supplies, professional services (marketing, IT, etc.)

Organizing Financial Documents

Disorganization is a common problem for small businesses. Paper documents have a tendency to get lost or misplaced and are hard to find when needed.

Therefore, it’s well worth setting up a proper storage system for both physical and digital financial documentation. Make sure you have a place for:

• Receipts and invoices
• Bank and credit card statements
• Tax documentation
• Loan agreements and contracts
• Any other financial documents

It’s considered best practice to create digital copies of physical documents since it significantly decreases the likelihood of them getting lost or damaged.

For digital storage, use a secure cloud-based platform that integrates with your bookkeeping software. This also makes accessing documents easier since you can log into the system from any location.

Consistently name files and folders by day, month, and category for easy identification. Additionally, annotate receipts with notes for clarity and train staff on the naming system so everyone knows how to do it. 

Note that for audit purposes, all documents must be stored for at least seven years. 

Daily, Weekly and Monthly Bookkeeping Tasks 

What should you be doing as a small business owner to keep your bookkeeping in order? Basically, stay on top of daily tasks and schedule less frequent financial processes weekly, monthly, or yearly to avoid falling behind and spending extra time catching up. Let’s explore this further.

Daily Tasks

Usually, daily tasks are quick and take only a few minutes, especially with automated systems. These are essential for maintaining cash flow in your business.

The tasks you should perform daily are:

• Record all financial transactions including sales, expenses and any refunds you’ve had to issue.
• Monitor your cash flow by checking your bank balances. The key is to maintain sufficient funds to cover your upcoming expenses.
• Issue any invoices and check if any outstanding invoices require chasing.

Weekly Tasks

Set a regular weekly time slot for your tasks to ensure you don’t skip or forget them. You can schedule it at the end of the business week for a full view of the week’s activity, and by Monday, you’ll be set and have a clear financial outlook for the week ahead. 

The tasks you should perform weekly are:

• Update your financial ledgers by categorizing and adding all transactions.
• Review your expenses and income, check for trends and flag up unusual items. If you spot any errors, make sure you correct them.
• Back up your financial data to keep it safe and secure.

Monthly Tasks

Just like your weekly tasks, the monthly tasks should be performed at the same time every month. It’s best to do these at the end of the month or within the first few days of a new month.

The end of the month is ideal for businesses with a regular cash flow who want to close the books promptly and have up-to-date numbers the moment the month ends.

The beginning of the month is great if you need to wait for all your statements to be finalized. It’s also better for catching late transactions that take place on the last day of a month. 

The tasks you must perform monthly are:

• Reconcile your bank statements so they match your books and deal with any discrepancies.
• Generate financial reports such as the profit and loss statement.
• Review your budgets by comparing actuals against forecasts and make any necessary adjustments.
• Evaluate your cash flow statement to evaluate how money is moving through your business.

Quarterly and Annual Tasks

Finally, we have some less frequent—but no less important—tasks. Typically, these are dictated by set deadlines, so make sure you mark these in your calendar so you can prepare for them well in advance.

• Tax filing: The frequency of this depends on your jurisdiction, since some may require quarterly estimates on top of yearly tax filing.
• End-of-year reporting: Your accountant will require all your financial documentation for this.
• Overall review: Take a deep look into the financial performance of your business. Identify strengths and areas of improvement so you can go into the new financial year with a clear picture.

Tools and Software for Bookkeeping

Luckily, bookkeeping is much easier than it was a few decades ago, thanks to the wealth of technology available.

Manual vs. Digital

Small businesses can start with manual bookkeeping using Excel spreadsheets or paper ledgers. This is free and simple, but it’s prone to errors and can be time-consuming to fix. Manual bookkeeping is best suited for businesses with very few transactions.

On the other hand, digital bookkeeping solutions are faster and more accurate. They help automate tasks, integrate with banks and processors, and simplify reporting. 

However, digital tools come at a cost, typically subscription-based, and require some learning. Still, they save time and money as your business grows.

Popular Software Options

The good news is that many popular bookkeeping platforms are geared specifically towards the needs of a small business. Here are a few of our favorites:

• QuickBooks Online: Considered the gold-standard, QuickBooks provides automated invoicing, payroll integration and customizable reports.
• Xero: Cloud-based with user-friendly dashboards and strong reporting tools, Xero is ideal for businesses focused on collaboration.
• FreshBooks: Known for its simple interface, time-tracking and invoicing features, FreshBooks is a good option for freelancers and service-based businesses.

When checking out software options, you need to consider the features and ensure they are tailored for small businesses. Here’s what to look for:

• Simple integration with bank accounts and payment processors
• Invoice and payment processing 
• Bank feeds and reconciliation
• Mobile app access
• Customizable reporting 
• Payroll integration (if you have staff)
• Tax compliance tools
• Cash flow forecasting
• Automation features
• Audit trails and data security

Choosing the Right Tool

The right software for your business isn’t just about finding the right features. There are other considerations to keep in mind, such as:

• Cost: Is the monthly subscription affordable for your business?
• Scalability: Can you upgrade or downgrade as your needs change?
• Ease of use: Is the user interface beginner-friendly? Are there tutorials or support?
• Customer support: Can you easily reach a support agent if you need assistance?
• Multi-user access: Can you add additional users to the account?

Tax Considerations and Regulatory Compliance

Bookkeeping is essential for maintaining compliance and ensuring your taxes are filed promptly. Neglecting your bookkeeping can end up with you facing heavy penalties and a whole heap of stress, which we’re sure you’d rather avoid!

Key tax considerations include:

• Tracking deductible expenses to reduce your taxable income
• Keeping accurate, up-to-date sales tax records
• Recording payroll taxes correctly

You should also note the important filing deadlines so you don’t miss them.

The IRS requires quarterly tax estimates if you expect to owe $1,000 or more in taxes. The standard deadlines are:

• Q1: April 15
• Q2: June 15
• Q3: September 15
• Q4: January 15

For schedule C sole proprietors, the annual personal tax return is due on April 15.

If you pay independent contractors $600 or more within the year, you must file Form 1099-NEC by January 31. Depending on the amount of sales tax you collect, you will be required to file this monthly, quarterly, or annually.

Each state also has its own tax filing requirements and deadlines, so be certain to check what these are.

Tips and Best Practices for Effective Bookkeeping

Your bookkeeping will be even more successful if you stick to these best practices:

• Be consistent: Prevent backlogs and out-of-date records by sticking to your bookkeeping task schedule.
• Automate: Use features like bank feeds, recurring invoices and automated reminders to reduce the amount of manual input.
• Integrate: Streamline and automate workflows by linking your bookkeeping software with other platforms you use such as payroll software or CRM systems.
• Separate personal and business finances: Always use separate bank accounts and credit cards for your business to simplify bookkeeping and maintain legal protection.
• Conduct periodic reviews: Regularly audit your records for accuracy and completeness. 
• Back up data: Whether using cloud storage or external drives, ensure your financial data is protected from loss or cyber threats.

We hope this guide has been useful for you and your small business. If you have any questions or want to know how outsourced bookkeeping services can simplify your finances, Finvisor would love to hear from you.

Feel free to get in touch to find out more about how we can help your small business.