Whether you’re just starting out or have been running an online store for a while, learning how to track your expenses and revenue can be a daunting task. You’re not by yourself. Almost three-fourths of small business owners believe they lack knowledge of bookkeeping and accounting.
As a business owner, you’re in charge of keeping track of your company’s finances. Your business will be on the right track if you keep up-to-date and accurate accounting records. However, if you fail to focus on your accounting tasks, your business will fail before it has a chance to grow.
Do you want to become an expert in your own bookkeeping? This article will teach you how to start bookkeeping for a small business and how to become more profitable right away.
What is bookkeeping?
Bookkeeping is the process of recording and managing your company’s financial transactions, such as sales, purchases, and payments. Bookkeepers keep detailed records of all expenses and income to assist businesses in making sound financial decisions.
The goal of bookkeeping is to show you your company’s overall financial picture, balance your accounts, and improve cash flow management in a more strategic way.
Keep records of business expenses.
Accounts payable refers to the amount of money owed to others for business expenses. If you buy inventory or supplies, you’ll need to keep track of the costs. You’ll also need this information when it comes time to file your taxes. Keep the following in mind:
i. Bills \receipts
ii. Statements from banks
iii. Statements from credit cards
iv. Payment proof and any other documentary evidence
Choose your bookkeeping method
There are two types of bookkeeping: single-entry and double-entry. Before you can begin keeping your financial records, you must first select a method because the method you select determines how and where you record each financial transaction.
- Cash accounting: This system tracks the flow of money in and out of your business, but accounts payable and receivable are not tracked because they are considered future expenses. A cash flow statement can be used to measure your success over a quarterly or annual period.
- Accrual accounting: Accrual accounting focuses on calculating your company’s profits and losses. An income statement summarizes financial information such as revenue, profit, and cost of goods sold.
Understand the complexities of a balance sheet
To calculate your company’s net worth, use a balance sheet. To determine net worth, add all of the company’s assets and subtract all of its liabilities. You should be familiar with the following terms:
- Assets: are valuable items that help to sustain production and growth. Assets for a business can include tangibles like machines, property, raw materials, and inventory, as well as intangibles like patents, royalties, and other intellectual property.
- Liabilities: Liabilities are legally binding obligations that are payable to another person or entity. Settlement of liability can be accomplished through the transfer of money, goods, or services. A liability is increased in the accounting records with credit and decreased with a debit.
- Revenues or income: The amount of money earned by the company as a result of sales or providing a service.
- Expenses: Cash that leaves the company to pay for goods or services (e.g., utilities, salaries).
- Equity: After all liabilities have been deducted, the remaining value of an owner’s interest in a company (e.g., stock, retained earnings).
Keep a ledger
You’ll need something to record your accounts receivable data on. Choose between a spreadsheet and a ledger book. Consider using the software as well. You can use the same software for accounts payable as you do for accounts receivable. A ledger is the best way to keep track of all your financial information in one place. Consider the following guidelines for posting to a ledger:
- Post receipts on a regular basis: Create a process for posting receipts in your ledger on a regular basis. This will help to avoid missing receipts or incorrect totals. Receipts should be recorded at least once a month. Depending on the size of your business and the number of items you purchase, you may also want to consider posting once a day or once a week.
- Schedule posts based on sales figures: If your company has seen a significant increase in clients and customers, you should set aside a specific time to enter sales figures into your ledger. To ensure that your business runs smoothly, the frequency with which you post receipts should be consistent with the frequency with which you post-sales transactions.
- Consider using bookkeeping software: When you enter information into the software, it will automatically create ledgers. This is a popular option for small business owners who prefer to spend their time strategizing on ways to grow their company rather than manually tracking financial data.
Prepare financial reports
Create a bookkeeping schedule
Record all financial transactions, including incoming invoices, bill payments, sales, and purchases, at least once a week. Also, make it a point to close your books on a regular basis. You could do it every month, but at the very least, balance and close your books once a quarter.
Another piece of advice: Make it a point to read your books when your mind is fresh and engaged, such as at the start of the day before you open your doors, rather than late at night after you’ve closed your doors. When you’re looking at figures that explain your company’s profitability and help you chart a course for growth, you want to be at your best.
Furthermore, doing your books earlier in the day can help you avoid the temptation to procrastinate.
Store records securely
Proper record-keeping for small businesses simplifies the process and ensures compliance with the law. You never want to waste time looking for last month’s missing invoice, and you certainly don’t want to get into legal trouble.
Understanding small business bookkeeping is key to growth
Understanding how money flows through your business is good business, whether you do all of the bookkeeping yourself or decide to hire a certified bookkeeper.
“Having proper data and knowing where you are, what seems to be driving your revenue, and where you might be able to trim some costs is critical,” says Charlie. “Having solid data when it comes to bookkeeping for startups puts you in a better spot to succeed in the future.”
Even if you have little bookkeeping experience, you now have firsthand knowledge of and access to all of your finances, putting you in a strong position to make informed decisions about the future of your business. And, while professional bookkeeping assistance and advice can be beneficial, make certain that you never lose sight of your goals.