How to Keep Books for a Small Business

A small business owner has a lot to think about.  Sales, marketing, legislation, production,  customer service, employees and finances – the list is endless.

However, there is one function that cannot be neglected.  Did you say sales?  That’s only half right, it’s the accurate keeping and monitoring of financial records.

If this is true, how does one pull all these aspects together and document the effect on company finances?  It can feel overwhelming.

A riddle puts the challenge like this: How do you eat an elephant?

The answer is ‘one bite at a time’

There is no other way to tackle a big project than to break it down into manageable steps.  

You can do your own bookkeeping by following these 13 simple steps. Still, if that thought scares you, this article also suggests how to outsource your bookkeeping function.

1. Understand basic accounting concepts 

Small business accounting does not have to be complex to be effective.  The main objective is to keep track of financial transactions in a way that is consistent but not cumbersome.

The main categories in accounting are income (revenue), expenses, assets, liability, and equity.  And all these transactions are recorded in a bookkeeping journal.

An accounting software package comes with these journals and uses the information to create financial statements.  Regardless of your business model, this software is essential. 

This will be discussed later in the article.

Set up a routine as soon as possible and continue following this process to ensure your finances are accurately recorded.  

What is double-entry accounting?

This is a method of bookkeeping that relies on a two-sided accounting entry. 

Every entry will have a corresponding and opposite entry to a different account, known as a debit and a credit [1]. The purpose of this system is to detect financial errors and even fraud.

For example, if a business takes out a bank loan for $100,000, recording the transaction would require a debit of $100,000 to an asset account called “Loan Received” and a credit of $100,000 to a liability account called “Bank Loan Payable”.

The basic entry to record this transaction in a general ledger will look like this:

	Debit	Credit
Loan Received	$100 000
Bank Loan Payable		$100 000

Choose your accounting method

The two main accounting methods are accrual accounting and cash basis accounting. The main difference between them lies in the timing of when income and expenses are recognized

Accrual accounting records revenue and expenses when transactions occur but before any money is received or dispensed. This method gives a more accurate reflection of the financial situation by including accounts receivable and accounts payable. It is the accounting method used by medium and large businesses since it will even out the earnings over a period of time. 

Cash basis accounting records revenue and expenses only when cash is received or dispensed. This method is popular in small business bookkeeping and sole proprietors.

Running an enterprise is not always predictable, but having an up-to-date record-keeping system will help. Envoice has packed its website with information to help customers with accounting principles and concepts. 

2. Open a separate bank account for the business

This keeps business and personal finances separate, which makes reporting less messy for business owners.  

You should apply to a financial institution for a separate business credit card.  This is a convenient way to make purchases and have one card that records expenses.

How can you select an appropriate account?  The business bank accounts available are savings accounts, which help you to receive money and save it, and current or cheque accounts.  This type of account requires an opening balance but will allow you to make regular transactions and provide benefits that assist you in managing company finances.

Choose a bank with benefits for small businesses, such as reduced monthly charges and higher interest rates on saved funds. Some banks will give you access to payment systems that allow you to pay employees and generate payslips, which can be helpful. 

Take the company registration documents, your personal ID and anyone who has signing powers on the account with you to the bank. The representative will take you through the process and discuss your needs with you.  

3. Manage tax obligations

Establish sales tax procedures and register to pay sales tax, business tax and compulsory employee deductions as soon as you begin trading. The business must do tax preparation regularly and submit the returns to the relevant authorities when tax time rolls around.  

Without updated records, it is easy to lose track of what amounts are due, leading to penalties and fines.  You cannot avoid or delay tax payments, so it’s to the company’s benefit to keep tight control over this.

During tax season, the financials will be submitted and business owners will be held responsible for payments.  Tax returns can be completed by the owner, a business partner or a tax advisor. 

You must keep documents for at least five years from the date you file a return. Typical paperwork is income, payment and receipt reports. The tax office may conduct an audit at any time and you will need to produce evidence of all transactions. 

Sales tax is placed on the sale of goods, so if your business sells products, you will have to include this tax in the invoice to your customer. 

There are tax professionals who can advise you how to structure your business to make the most of tax allowances.

4. Purchase accounting software that meets your business needs

It is tempting to think that a small business only requires a manual accounting system such as excel spreadsheets to save money.

This may work initially, but setting up your financial tracking system like this has its downfalls.  Basic financial reports, which are the driving force behind all business, will have to be compiled manually, and this is time-consuming.

Bookkeeping software allows easy access to financial information. You can track the bank balance, and know the revenues and the expenses of running the business.  

Wave Accounting and Manager are two options that allow you to use the basic level for free, with a choice to upgrade to a premium account which includes cloud storage.  The added advantage of cloud storage is that your accounts will be available on multiple devices and anywhere you can connect to the internet. 

Freshbooks is a paid option but is intuitive enough for anyone to learn quickly. It is even appropriate for sole proprietors [1] 

Envoice integrates with popular software to enhance their functions. See what they have to offer. 

5. Sort out the chart of accounts

The chart of accounts (COA) is an index of all financial accounts in the general ledger.  It provides an accurate view of the revenue and expenses to which transactions can be allocated. This chart drives the bulk of accounting work.

The accounting software will provide a section to set up the COA and manage it.  The accounting process coming from here will allow a balance sheet to be produced.

A comprehensive example of a chart of accounts can be found at wikipedia.com [2]  

6. Accounts receivable (customers who owe you money)

Accounts receivable (AR) are the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers [3]. 

An important aspect to consider is how long you will give your customer to pay for the goods or services you provide.  Customer accounts must be opened and payment terms and conditions set up. Any new business should not be concluded before the customer has been made aware of the payment terms. This is usually around 30 days maximum for small businesses.

A key element of bookkeeping tasks is to monitor customer payments and decide how to deal with customers who do not pay their accounts on time.

The bank statement must reconcile to your revenue account by month end so that all payments are included in the cash flow report

The main differences between receipts and invoices

Its common practice among small businesses to confuse invoices with receipts. Invoices are requests for payment and are issued before payment is made and receipts are proof of payment made immediately.  If a customer pays cash for a product or service, you issue a cash receipt.  

7. Track expenses 

Small business accounting does not work without a cash flow statement. It provides you with an understanding of how much money is moving in and out of the bank account.

Any money taken from the business for day-to-day operations must be carefully recorded. All invoices, cash slips, receipts and account statements must be recorded in the bookkeeping system to show that money has been used by the business.  These documents must be authorized as valid expenses.

Paper receipts must be kept up to date so that there is evidence of expenditure.  Digital invoices and receipts must also be kept in a shared folder or attached as files using accounting software.

Tax returns have a section that allows for the expenses to be claimed, and this decreases the profit a business makes allowing less tax to be paid. 

Envoice provides a way for all expense documents to be scanned into their system and authorized digitally.  Nothing could be easier.

8. Accounts payable (who you owe money to)

Business transactions with companies who supply you with goods and services will cause you to owe money. 

Investopedia provides this definition: Accounts payable (AP), or “payables,” refer to a company’s short-term obligations owed to its creditors or suppliers, which have not yet been paid. Payables appear on a company’s balance sheet as a current liability.

You will need to create a supplier account to record this information and allow you to track to who you owe money. These financial records will provide you with a way to show money moved from the business bank account to the supplier. 

Business owners need to keep a good credit record so that they can continue to buy goods and services that keep them to stay in business. 

9. Be strict about monitoring cash flow (reconcile bank account)

Small business owners are concerned with business growth and keeping cash flowing for daily activities. Initially, you need as much money as possible available to keep functioning.

One consideration will be whether you can wait for the money to come in, and how long you will be able to wait before the bank account runs dry.

The company’s financial health must be understood every month.  The better you know the numbers, the more you can implement measures to stop problems. 

The funds that come into the business bank account will determine the cash flow available. An employee that can download the bank statements, check the incoming funds and allocate these to the correct accounts is needed.  

Information like this is used by finance officers who are responsible for reporting the state of the cash flow to management.

10. Record inventory (stock purchased)

Stock inventory system

The balance of buying and selling stock as fast as possible is a key to keeping a healthy cash flow.  This can be difficult and yet this process should be set up as soon as small business owners open their doors.  It will save time, money and resources later. 

The ultimate goal is to have just enough stock to supply the customers when they need it. This is called just-in-time ordering (JIT).  Basic inventory systems come standard with accounting software, even the free versions.   These will not be sophisticated but they will deliver what you need. 

Some tips to make an inventory system work for you:

• Request stock reports weekly and authorize what stock to replace
• Analyse slow-moving items by keeping track of how quickly stock is moving
• Have a system for the retrieval of stock from the holding area or warehouse, limited to one or two responsible people
• Keep records up to date on the inventory system as a best practice
• Set alerts for low stock on the system

11. Keep all accounting processes up to date

Automation

Automation is the new kid on the block but cannot be left out. Hiring clerical staff to input basic data from invoices, expense claims and other documents worked until technology advanced. This is now an ineffective way to populate data. 

Accounting software can retrieve information from scanned or saved documents and automatically populate fields within the program. 

Data input has always been time-consuming and prone to human errors.  Since cash flow tracking depends on the accuracy of reports, these errors need to be eliminated.  Large businesses that process thousands of transactions daily have found this innovation to be game-changing.

Some of the functions that can be automated include:

• Invoicing process
• Business expenses
• Commission payments
• Payroll processing

Envoice has developed powerful systems that will help you to automate your daily tasks.  Let their forward-thinking software reduce the cost of data input in your business!  

12. Do I outsource the bookkeeping function?

Bookkeepers can be a real asset to a small business.  They can save you time because they know how to allocate payments to the correct accounts and will catch an error faster than someone inexperienced. 

They also handle information daily as they process transactions,  which can be helpful when tracking mistakes and getting information about how to improve bookkeeping systems. 

The integrity of financial data handled daily will affect the accuracy of the balance sheet.  The financial statements are documents that drive strategic decisions even at the lower levels of operation. 

Accurate record keeping can be time-consuming and take away from the day-to-day running of the company.  If employing a full time bookkeeper is not financially viable in the early stages, then a bookkeeping service can be useful.

Outsource companies have packages that accommodate the budgets of start-ups and small businesses.  A monthly subscription fee will provide a qualified professional to take care of basic bookkeeping functions. 

13. Produce and actually use your financial reports

The quality of the data entered into the accounting system will determine the quality of financial statements.  These reports are vital as they will be used by auditors, investors, banks and other institutions that want to understand how financially viable your business is.

The following financials are used by most small businesses:

• Balance Sheet – shows the assets (what is owned), liabilities (what is owed) and equity (ownership) for a period of time
• The income statement – reports revenue generated from sales and operating expenses. The bottom line is called net income and is a calculation of sales-operating expenses.  This figure represents either a profit or a loss made
• Cash flow statement – measures the cash generated over a period.  Short term obligations are met from cash flow and is an indication of how well the company is being run.

Conclusion

There are many benefits to keeping good records. Here are some that were discussed:

• Helps you to keep track of your business accounts so you can make knowledgeable decisions
• Allows you to fulfill legal obligations at tax time
• Keeps a systematic record of financial transactions and create financial reports 
• Provides a way for you to get investment advice from business advisors 
• Keeps track of business assets

Too many owners have ignored these points and passed it on as an administrative task to a bookkeeping business.  They get involved only when necessary financial reports are generated, and it is to the company’s detriment to take this approach. 

Around 900 000 new start-ups begin trading yearly in the UK and Europe.  That is a lot of competition!  According to a survey done by SMB, 50% of such companies don’t have any financial tracking system in place, and 31% use spreadsheets to manage their books. 

Sadly only 20% of these start-ups are still trading after five years.  

Numbers speak for themselves.  Keeping books for your small business by using the suggested tips could well become the difference between you and those start-ups that no longer exist.    

 

Footnotes:

[1] www.pcmag.com

[2] https://en.wikipedia.org/wiki/Chart_of_accounts

[3] https://www.investopedia.com/terms/a/accountsreceivable.asp