Owning and running a small business presents several challenges including managing the business financial information. If you want your finances to make sense, then bookkeeping has to be a vital role. You as the business owner may take upon this role at the beginning, but as the business grows, you may need to outsource it or hire an in-house bookkeeper as you will no longer have so much time to spare for this task. Even if you have a bookkeeper, it is important to establish accounting processes to better manage your finances.

What is the difference between bookkeeping and accounting?

Bookkeeping and accounting are terms which are most often confused or considered to mean the same. Bookkeeping is an aspect of the overall accounting process. Bookkeeping is the process of recording and reporting financial information, while accounting is the process of analyzing such information and making decisions about the business’ financial strategy. Bookkeeping has to do with the day-to-day transactions and provides the basic information for accounting.

The following best practices are vital for your small business bookkeeping:

1. Keep track of every expense or receipt

Use your books to keep track of payments or receipts and make it clear when they were made or received so you can easily find them if you need to refer to them later.

To claim tax from business expenses, you will need receipts to substantiate your claims from the taxation authorities. Ensure to keep them organized and safely stored in the various business expenses categories.

2. Keep your business expenses separate from personal ones

It’s common for small business owners to use business funds for personal expenses and personal funds for business expenses as these can later be reconciled in the books. But this is not a very good idea. Do your best to clearly separate your business and personal expenses and also use separate accounts for both.

This is also important for you to easily identify which business expenses can be claimed against profit to reduce taxes.

3. Maintain an appropriate filing system

File all bank statements, invoices, and receipts correctly and in order of date to ensure none are missing. Moreover, this can also reduce your cost of bookkeeping because your bookkeeper will bill you for the time taken to sort out these documents.

• For purchase invoices (I.e., money that you owe), keep separate files for paid and unpaid invoices, and file both alphabetically by supplier name. Remember to move invoices over once they have been paid.
• For sales invoices (i.e., money owed to you), number them sequentially in order of when they should be paid so that you can effectively chase them.

4. Establish internal controls

Ensure that there are internal controls in place for the aspects of your business finances that are entrusted to your employees. There should be dual control of processes that involve receiving or paying out funds. For example, the employee writing cheques and making payments should not be reconciling accounts.

5. Reconcile your bank accounts

To keep an eye on your business cash balances, you may compare the register in the accounting software to your bank balance. Utilize the reconciliation feature within your accounting software each month to timely catch any duplications or other abnormalities. Even if you do not yet use an accounting software, you can do the reconciliation in an MS Excel file manually by comparing your manual bank ledger balance to your bank statement, and cash ledger to the physical cash in your till.

6. Choose suitable software

At the start of your business, you might not necessarily need an accounting software as your transactions can be done in Microsoft Excel. However, as your business grows bigger, you might need to use specialist software package for your accounting. Seek recommendations of the best software to use from your accountant.

Furthermore, if your accounting software is not a cloud-based solution such as QuickBooks online, but desktop based, be sure to back the data up regularly.

7. Keep detailed payables and receivables records

Whether or not you use an accounting software with payables and receivables features or do it manually in Microsoft Excel, ensure that they are accurate. In addition to the electronic records, keep all receivable and payable hard copy original records (source documents) as these can be invaluable if there is a question about an invoice.

8. Be strict with deadlines

Never make late payments to your suppliers and give your clients a payment deadline so you can chase them effectively. Take note of any late payers and consider not working with them if they keep missing payments. This is called credit control and the aim is to keep your cash flow healthy.

9. Produce monthly reports

To stay on top of your business finances and to avoid surprises, it is vital to generate monthly reports. If you have someone to generate these for your, ensure to review them regularly. At a minimum, the monthly reports should include an income statement (profit and loss) and a balance sheet. Most accounting software offer the option of comparing different periods to better analyze trends. There are other reports such as payables and receivables (if applicable), that will help you keep an eye on the health of your business.

10. Meet with your tax advisor regularly for tax planning

Your accountant can help review your business goals and ensure you have the correct processes and internal controls in place. In addition to this, ensure to meet with a tax professional regularly to help save time and cost for your business.

To conclude, it is important to know when to outsource your bookkeeping. If your business starts small, you can handle the bookkeeping yourself. As you grow, keep track of how much time per week you spend on the books. Work out the monetary value of your own time by comparing how much you generate for the business per hour to the cost of a bookkeeper. A professional bookkeeper may take only a couple of hours to handle a month’s accounts.

If you outsource your accounting function, bookkeeping and payroll can usually be included as part of the service. Having a comprehensive finance function can put your mind at rest, save you time, and enable your business to grow as fast as you want it to.