Bookkeeping is probably not the first thing that crosses your mind when you think about launching a small business, but it is definitely a cornerstone of the entire project. After all, you need to understand how your company is doing and is there enough money to cover all the expenses in the months to come.
However, studies show that only 40% of small business owners feel they are very knowledgeable or very good about accounting and finance.
The figure is surprising indeed – although you don’t have to be an expert bookkeeper, you should at least understand the basics if you want the firm to stay fully operational in the long run. In this article, we will present you with a simple guide on accurate bookkeeping for your small business. Let’s check it out!
Main Types of Financial Records
Professional bookkeepers divide financial records into several categories based on certain features and common characteristics. Once the categories are set up, you need to enter each transaction to the corresponding section. Here are the five main types of financial records your small business should keep under control:
- Assets: The first category includes every resource that your company currently owns. It can be the money on your bank account and/or other types of assets in your inventory.
- Liabilities: The business also has liabilities, a category that covers all of your financial obligations. For instance, it can be a bank loan or accounts payable.
- Income: Small businesses should have a regular source of income (also known as revenue). There are many ways to earn money, but the most common option is to gain profit through sales.
- Expenditures: You can’t generate the business out of nothing, so it’s natural to face certain expenses, too. This category includes the cash going out of the company to pay salaries, suppliers’ invoices, utilities, and many more.
- Equity: When you subtract liabilities from assets, the result you get represents equity. Equity is what the owners actually get from their business.
Who should be in Charge of Your Financial Records?
You’ve probably figured out by now that bookkeeping represents a complex procedure, so it’s really important to choose the right bookkeeping method for your company. Generally speaking, small business owners are likely to pick one of the following methods:
- Manual bookkeeping: If you are eager to learn more about bookkeeping, you might as well try doing it yourself. A manual approach is traditional and common among entrepreneurs running smaller, family-owned companies. But as your business starts expanding, manual bookkeeping could become too overwhelming.
- Hiring a professional bookkeeper: As soon as you notice that you can’t handle bookkeeping single-handedly, you should think about hiring a qualified accountant. This person has all the skills and tools needed to handle your financial records quickly and transparently.
- Using bookkeeping software: Another option is to use bookkeeping software to track cash flow and administer financial documents. There are a lot of user-friendly tools you can try, but the only problem is that most of these programs require a substantial upfront cost. However, reports reveal that nearly 65% of small-business owners use accounting software.
- Using a cloud-based bookkeeping platform: If you are not willing to buy a program with a hefty price tag, perhaps you could opt for a cloud-based bookkeeping platform. That way, you only pay a monthly fee for the features you actually use, so the costs become much lower and totally justifiable.
The purpose of bookkeeping is to precisely record every financial transaction daily and prepare financial reports periodically.
Three types of reports are crucial:
- Balance sheet: A balance sheet is a financial statement that reports a company’s assets, liabilities, and shareholders’ equity at a specific point in time.
- Profit and loss statement: This report – also known as the income statement – tracks all of your expenditures, costs, and revenues in a given period of time.
- Cash flow statement: It is also necessary to keep an eye on cash inflows and outflows because you don’t want to end up not having enough money to serve your everyday expenses.
With these three financial reports at your disposal, you can gain a deeper insight into the functioning of your small business and keep it profitable long-term.
The Benefits of Accurate Bookkeeping
Now that you know the basic principles of bookkeeping, the only thing left is to learn the advantages of monitoring financial transactions. There are many reasons to nurture the art of precise bookkeeping, but the most important benefits include:
- Financial planning: If you don’t know the current state of financial affairs in your company, can you really make good plans and keep the business alive and kicking in the years to come?
- Improved decision-making: Business owners should always make data-based decisions, but it’s almost impossible without accurate and up to date financial statements.
- Tax preparation: The accuracy of tax reports is also critical because you don’t want any problems with the IRS. At the same time, you can take advantage of it to file your tax return.
- Simpler scaling: You probably want to expand the business in the years to come, but it’s not something you can do based on intuition. On the contrary, it takes perfect bookkeeping to figure out where your business is headed.
- Data analytics: Financial reporting can also help you to analyze business-related information and pinpoint the pros and cons of your company.
- Easier reporting: Finally, accurate bookkeeping allows you to design better reports and impress investors with your business strategies.
The Bottom Line
Way too many entrepreneurs focus on sales and marketing so much that they forget the importance of good old bookkeeping. You should not make the same mistake, so make sure to follow the steps we showed you here in order to make your company’s financial records neat and clean.
Leon Collier is a freelance writer and the first person you should talk to if you want to buy custom essay. Leon works for professional writing services and loves writing about everything from pop-culture and business to travel and self-development. He enjoys reading and playing tabletop games on Saturday with his friends.