Bookkeeping is simply the recording of all the financial transactions of a business that occur on a day-to-day basis. It is a part of accounting and includes transactions such as:
- Taxes paid
- Operational expenses such as interest on your business loans
- Payments to suppliers
- Billing for goods or services to customers
It is a specialized process that records all the aspects of these transactions including their date, source, and amounts and involves analyzing the transactions, posting appropriate journal entries, and adjusting them at the end of the accounting period.
Why is bookkeeping important for small businesses?
Small businesses function with compact operating abilities and are financially fragile as compared to larger companies. Their operations, all of which are dependent on the availability of finance, cannot be based on mere guesswork.
Stringent bookkeeping practices help them in more ways than one:
- This is the best way to know your income and expenses to plan for the future, allocate costs, meet expenses, and sustain without buckling up under the financial strain.
- Organized bookkeeping helps in smooth tax filing without having to scramble for financial details at the year-end. Clean and up-to-date books are especially helpful in preventing the daunting IRS audit.
- Bookkeeping helps in sharing your businesses’ performance with the investors for reporting and attracting more investments.
What are some tips to make bookkeeping easier for your small business?
No matter how you feel about financial figures and spreadsheets, it’s not something that you can avoid, but can use these tips for bookkeeping for small businesses to simplify this seemingly daunting task:
- Get an experienced bookkeeper: What streamlines bookkeeping from the outset is an experienced and honest person on board. This helps in maintaining clean records, fix mistakes, keeping updated with tax laws, and take corrective actions when required. If you are a solopreneur, you need to learn accurately and timely invoicing yourself to manage and plan your business.
- Keep your personal and business finances separate: Mixing your personal and business finance is never a good idea. This helps in knowing your exact financial status, making good decisions, avoiding unnecessary audits, and improving your businesses’ credit rating.
- Automate: Say goodbye to long hours of paperwork, pouring for days over spreadsheets, and manually coordinating with different teams. Automate your bookkeeping process using accounting software, third party apps, and cloud for faster and error-free processing, up-to-date records, and safekeeping of records. There are several software packages created specifically for small businesses that simplify bookkeeping. You can also make use of automated reminders and electronic reminders to stay organized.
- Be organized: Be thorough with your filing and archiving system down to the smallest expenses. Save a day each week or month to update your financial records to avoid random filing and frustrations. Double-check your records and bank accounts on that day to spot and correct discrepancies, if any. This helps in flagging bad debts and unnecessary investments in real-time.
- Plan for major expenses: Know how to find fixed costs and set aside money for recurring expenses such as office maintenance, supplies, taxes, etc. to help your business function efficiently and avoiding penalties from the IRS.
Managing your records using these tips will let you streamline your finances without having to spend endless hours working and reworking and have more time to spend on growing your business.