Bookkeeping can be tedious—reading reams of data, compiling reports, and checking everything twice (or more!) But rushing it can lead to mistakes, which can put your business in serious trouble. With these bookkeeping tips, you can still stay on top of your finances even with little financial management experience.
Practical Bookkeeping Tips
Choose a bookkeeping system
First, you must decide which bookkeeping method you’ll use. There are two widely used approaches. Pick the one that better matches your workflow and business size.
- Cash accounting is a cash flow-based system where all of your cash transactions are recorded. A business records its revenue when payments from customers are received. Expenses are also recorded when it makes payments to external entities, like suppliers. In this accounting system, accounts receivable and accounts payable aren’t included until the actual cash transaction occurs. This system is typically used by small businesses and sole proprietors.
- Accrual accounting operates in the opposite way. With this method, transactions are recorded before a business receives or dispenses cash—accounts receivable and accounts payable—providing you with a comprehensive view of your finances. The accrual accounting system is commonly used by publicly-traded companies or any large company.
|Simple way to see cash status||Inaccurate financial results|
|Not required to pay taxes for cash it has not received||Not accepted by generally accepted accounting principles (GAAP)|
|Accrual Accounting||More accurate and comprehensive financial results for planning and forecasting||Requires more bookkeeping for accrued liabilities, prepaid expenses, receivables, etc.|
|GAAP compliant, which is required for specific companies like publicly traded companies||Has the risk of overlooking short-term cash flow issues|
Create separate bank accounts for your business
Regardless of which bookkeeping system you choose, you will still need to make your business accounts separate from your personal ones. With no unnecessary data to sort through, your bookkeeping process becomes simpler. An account, in this case, consists of financial transactions of a particular type. Below are five basic types of accounts:
- Asset accounts – tangible and intangible resources your company owns (e.g. vehicles, equipment, property, copyright, logo)
- Expense accounts – costs made by your company for operations (e.g. payroll, insurance, facility costs, marketing costs)
- Income accounts – money earned from products or services sold
- Liability accounts – costs your company incurs but has not paid yet (e.g. credit memo liability, accounts payable, payroll tax liability, monthly rent payments)
- Equity accounts – remaining value after deducting total liabilities (e.g. stock shares, retained earning)
Record every transaction
After choosing a bookkeeping system and creating your business accounts, you need to record all of your financial transactions. Some expenses may be more difficult to forecast than others, so tracking them will help you plan for the unexpected. Some of these may include your supplies, insurance, and utilities. Monitor your account receivables and their due dates as well to prevent your cash flow from drying up.
Traditionally, business owners or bookkeepers manually write them down in a cashbook or spreadsheet. Today, you can transfer your sales data to your books much easier using accounting software. They often have mobile versions for you to access anytime and anywhere. If you have recurring transactions, most accounting software can automate your invoices and set up recurring payments.
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Invest in accounting software
There are various types of accounting software that have different capabilities. Small businesses may not need one that has extensive features. But as they grow, they may require custom accounting software to supplement more complex bookkeeping demands.
Here are some examples of accounting software for small businesses:
- Intuit QuickBooks is a cloud-based software suited for small and medium-sized businesses. Even with no accounting or bookkeeping experience, business owners can easily set this up and use its features (e.g. sales tax calculations, automatic sorting of transactions into tax categories, filing of quarterly and annual tax returns, integration with PayPal, Shopify, and more)
- FreshBooks is another cloud-based software used for accounting and invoicing. It’s beginner-friendly for those with little to no bookkeeping experience, and you can also access it through mobile devices and apps. Some of its features include payment reminders, online credit card payments, automatic sales tax calculations, bank integration, recurring and customizable invoices, and more.
- Wave Accounting has similar features as the previous items—cloud-based, beginner-friendly, and easy to use. They also offer features with no charge such as accounting and invoice services are free, which is ideal for startups with a limited budget. Other features include a double-entry system, tax categories to use for sorting, and reports for financial statements.
Optimize your financial reports
Bookkeeping doesn’t stop at the collection of data. You have to create high-level analyses of the books you’ve balanced through financial reports. Some common financial reports in bookkeeping are:
- Balance sheets provide a summary of your business’s liabilities, assets, and equity at a certain point in time. Through this, you can have a quick view of your financial health at that time period. A strong balance sheet also attracts lenders and investors to your business.
#Pro tip: To strengthen your balance sheet, maintain a good debt-to-equity ratio. The less debt and more cash your business has, the lower the risks are for shareholders.
- Profit and loss statements, also known as income statements, show you what your net income is by breaking down your profit and loss. This is critical in understanding your business’s financial health as looking at revenue on its own will not give you an accurate reading of your profits. So, you must calculate loss together with your profit to determine your total net income.
#Pro tip: When organizing your expenses, try listing them alphabetically to make transferring information easier. Make sure they are listed in the same order as your business tax return.
- Cash flow statements show where your cash comes from (shareholder investments and sales) as well as where it goes (equipment and rent payments). It can show you whether you have a negative cash flow (losing more money than gaining) or a positive cash flow (gaining more to scale up). A cash flow statement is different from a balance sheet and a P&L statement because it does not take into account the projected incoming and outgoing cash.
#Pro tip: You can create separate cash flow statements for a specific activity. For instance, one is dedicated to your investing activities, while the other is for your operating activities. This allows you to have a comprehensive view of your cash flow.
Do regular bank reconciliations
Bank reconciliation is done to check a company’s cash records for discrepancies such as overdraft fees and bounced checks. To do this, you cross-check your balances with the corresponding information on your bank statements, which includes all the transactions in that particular bank account during a certain period. To speed up the process, you can use accounting software that offers this feature.
As a small business owner, you must do this process at least once at the end of each month. How often you do it depends on the volume of transactions of your business, so you might do bank reconciliations weekly or monthly. However, it’s ideal to do them more often to detect and correct errors sooner.
Outsource your payroll
As your business grows and company size increases, running payroll can become stressful and time-consuming. You also have to comply with several legal requirements which, if not done correctly, could mean serious risks for your business. Outsourcing payroll is one solution to that.
There are several payroll providers that have varying capabilities and can be categorized broadly into two, namely:
- Full-service payroll provider – The scope of their responsibilities covers everything from start to finish—printing of checks, direct depositing, payroll processing, tax filing, and tax payments. This type of service costs more but gets the majority of the work done efficiently.
- DIY payroll provider – If you just need certain parts of your payroll process outsourced or if you need certain tools to do payroll yourself, there are payroll providers that offer online software options you can customize.
Hire a bookkeeping assistant
With the bookkeeping tips listed above, it may be challenging for a small business to manage its financials on top of its core duties. By hiring a bookkeeping assistant, you can delegate these tasks to ensure that your books are properly managed.
Magic can match you with a virtual assistant to fulfill your bookkeeping needs. Here’s a list of what they can do:
- Financial data entry – record and update daily transactions, manage accounts payable and accounts receivable, scan corporate documents for your database, assist in managing your accounting software
- Preparation of financial documents – create cash flow statements, update vendor and credit card statements, process invoices from vendors, create invoices for recurring services
- Records maintenance – organize corporate documents, reconcile transactions, verify documents and postings for accuracy
- Client and customer relations – send statements to clients regularly, answer clients’ inquiries about billing and payment, follow up on past due accounts
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