As backward as it sounds – it takes money to make money. Starting a business and keeping it running means keeping a healthy flow of money into and out of your business. You can’t be afraid to spend money and invest in the future, but you don’t want to spend too much money you don’t have, either.
One of the trickiest parts of managing this cash flow is simply keeping track of it. It might seem easy to just keep a record of all your different transactions as you spend and earn money, but it’s an important administrative task that’s incredibly easy to neglect.
Many also don’t realize the importance of small business bookkeeping for your business. As long as you know you’re not out of money, could it really be that important to keep careful records?
What those people don’t realize is that having a reliable bookkeeping record isn’t just helpful for knowing how well your business is doing – it also helps to prove how well you’re doing to others. Meticulous bookkeeping will help you with your tax return, make you look good for loans, and generally improve your chances of attracting investment.
What Is Bookkeeping?
So what is bookkeeping, and why is it so important? Put simply, bookkeeping is about tracking your financial transactions as a business owner. It’s about an accurate and comprehensive record of each income and expense.
This recording of financial transactions helps small businesses plan and budget more effectively by assessing their streams of revenue and expenses all together. With just a glance at the balance sheet, the owner or an investor can get a clear picture of the financial health of the business.
What’s the Difference Between Bookkeeping and Accounting?
Bookkeeping and accounting are related and oftentimes confused, but they refer to distinct parts of the accounting process. While bookkeepers provide a detailed and thorough record of each financial transaction, accountants deal with the big picture. Accounting is about reporting or summarizing financial activity over time, and then drawing conclusions or making plans on the basis of those financial statements.
Accounting is essential for analyzing your records over time and planning the future of your business based on that realistic assessment. However, none of that is possible without the careful work of bookkeeping to record transactions and keep the general ledger complete and accurate.
In regards to your taxes, accountants are generally the ones who prepare and file your tax returns. However, the work that a bookkeeper does to maintain your records is crucial to the work of the accountant in knowing details about your business. That way, they can ensure your tax return is accurate.
What Are the Different Types of Bookkeeping?
There are two key different types of bookkeeping, although the core difference has to do with the level of complexity. Many small businesses start out with single-entry bookkeeping. This means keeping one simple balance sheet where each transaction is recorded once as either an income or an expense.
A single-entry system is all right for a lower volume of transactions, but a more complex double-entry system is necessary for fully reliable bookkeeping in a business with many financial transactions to record.
With a double-entry system, bookkeeping requires making two different entries for each transaction. It’s all about balancing assets and liabilities and tracking where money goes. If you receive money and mark it in the credit column, it needs to be accounted for in the money that goes back out in the debits in your ledger.
Double-entry bookkeeping keeps your chart of accounts balanced and makes it much easier to put together financial statements and reports about your expenditures and revenue for long-term strategy, taxes and more.
What Are Basic Bookkeeping Skills?
If you’re just starting out as an entrepreneur, or you’ve struggled with effective bookkeeping and are looking for solutions, check out some of these tips:
1) Know Your Debits and Credits
Keeping your balance sheet complete and in balance, like it should be, means keeping track of every debit and credit. That means not only recording financial transactions when the money actually flows in or out of your business, but also keeping track of accounts payable and accounts receivable.
What money do you owe but haven’t paid, and what money is still owed to you? Your accounts should reflect all the payments you anticipate in the future, so that as soon as money comes in on one side or bills on the other, you know exactly where that money is going, or how that bill is getting paid.
2) Stay Organized
You need to know where everything is recorded and how. Keep a uniform pattern, and then double-check later so that nothing falls through the cracks. The double-entry system will let you catch mistakes if the accounts don’t line up later, but it only helps if you take the time to balance them. Establish a clear and precise way of doing things and don’t deviate from it.
3) Find a Program That Works
Finding an appropriate bookkeeping software for your business can do wonders for your efficiency and make your recording of financial transactions more reliable than ever. Take the time to adjust a program to the particular work processes of your business so that bookkeeping you can maintain your books with minimal effort.
4) Spend Time on Details
A careful attention to detail will do wonders for your record-keeping. As the business owner, you create the norms of the business. If you show a disregard for careful and precise bookkeeping, then other employees around you will think it isn’t important.
Being too relaxed with details also leads to errors and missing payments later on. You could lose money or fail to pay debts when necessary, and your business will suffer even more when you need to produce an income statement and a balanced general ledger for taxes or a loan.
5) Communicate Clearly
Effective communication with your staff is essential for maintaining a healthy cashflow and good bookkeeping. No matter how careful and responsible you are about reporting expenses and revenue and recording them, your work could be ruined by other employees if they don’t know how you do your bookkeeping or why it’s important.
If multiple people are going to be working with your ledger, set up very clear instructions for how the recording is done so that everyone who works in the bookkeeping is on the same page. If you don’t tell your employees everything they need to know and how to do the work, it will be your fault when they make a mistake, and you could easily end up with duplicate entries, missing information, or other issues.
6) Hire a Professional
When in doubt, bring in an expert. As your business grows, it will become harder and harder to keep track of your finances in a comprehensive and accurate way. Double-entry bookkeeping is difficult, especially when you’re busy leading your business. But it’s absolutely necessary for a growing business with a high volume of financial transactions to stay on top of their records. Finding a professional to do it takes the work off of you, and the benefits don’t stop there.
A professional bookkeeper on your team could provide:
- Reliable, accurate financial records and data
- Regular and timely financial statements
- An analytical big picture perspective of the financial health of your business
- Unbiased record-keeping and evaluation
- Peace of mind and more time for you to focus on growth and revenue
It all depends on what your business needs and where you want your business to go. Plan for the future and give your business what it needs in order to succeed today. However, careful financial planning and strict bookkeeping is a must-have for any business owner that wants their company to survive and grow in the long-term.