Accounting and Bookkeeping for Start-ups

You finally did it! You are running your own business- a dream come true. After all the planning and running around, your business is finally up and running; but all entrepreneurs know that it doesn’t end there. In fact, it has only just begun; sustaining your business and growing it steadily is tougher than setting it up. This is precisely why all small business owners become engrossed in running the business and end up ignoring something vital to keeping their business afloat- their accounting and bookkeeping.

Why is accounting and bookkeeping for small business so important? Simply because both keep track of your money and money is the first indicator of where your business is headed- to success or failure. First things first- let us understand what accounting and bookkeeping are and how they differ from each other. Bookkeeping is the daily activity of recording and categorizing transactions and reconciling accounts with bank statements, while accounting is the next step of analysing the bookkeeping data to understand business progress and trends to make informed business decisions.

Busy females

Now that we have established why accounting and bookkeeping for start-ups is important, the question is how can you take care of it.

  • Use spreadsheets- Well, you can always choose to handle the accounting and bookkeeping for your start-up yourself using spreadsheets; it is not really that difficult. The problem however is that this can take up a lot of time, time that you could have otherwise spent on growing your business. If you are not careful, you will end up neglecting either your business or your books; neither a favourable outcome.
  • Use an Accounting Software- This is better than using spreadsheets, but the responsibility of maintaining the books will rest on you, thereby eating into your time.
  • Hire a Bookkeeper/ Accountant- Definitely the easier option but can be a problem if you don’t have money to spare, especially when you are talking about accounting and bookkeeping for start-ups.

Research and choose wisely; find the option that best suits your needs.

bookkeeping for small business

There are a few basic things you need to keep in mind for effective accounting and bookkeeping for small business.

  • Maintain accurate and up-to-date records. Might seem obvious, but you will be surprised to know how easy it is to not do so.
  • Track expenses carefully and keep copies of all transactions, payroll data, payments and organizational documents.
  • Schedule and perform regular end-of-period procedures like balancing accounts, reconciling bank statements etc.
  • Maintain perfect tax records and pay your taxes on time.

Accounting and bookkeeping for small business is definitely not easy especially if you are a start-up but it is not impossible. With the right guidance and support and a little bit of patience on your part, you can get a handle on it.

Categorizing Small Business Transactions

Whether you handle your own bookkeeping, hire a bookkeeper or outsource it, you need to be able to understand your books to keep your finances under control and to make good business decisions. One of the first things you need to achieve this is basic understanding of business transactions and how they are categorized.

For small business bookkeeping, all business transactions have to be recorded. Noting the type of transaction is important to identify where your business stands- are you making money, are you losing money, where are you losing money, how much cash do you have in your account- all of this can only be determined by analyzing your business transactions. So let us take a look at the most commonly used terms in categorizing business transactions.

Credit– Any cash that comes into your business from somewhere, it could be a sale or fees, is technically a credit.

Stack of $100 bills

Debit– The opposite of credit, debit is any cash that your business has to give someone else, like rent or fees.

 

Journal– The record of all your credits and debits is referred to as the bookkeeping journal and the entries made in the journal are your journal entries in small business bookkeeping.

bookkeeping for small business

Account and Account Types– Pretty sure you know what an account is- it is where your money comes into and goes from. There are 5 different types of accounts from where the money flows. Understanding these accounts can help you understand your books better and categorizing business transactions.

  1. Assets- Anything that your business owns is an asset. Asset can be physical- equipment, property, inventory, cash or intellectual property. It can also be anything that promises returns in the future like a loan or an agreement.
  2. Liabilities- Any loan that your small business takes out or money that has to be paid is a liability.
  3. Equity- This refers to money that comes from the owners and is usually never expected back. There are different types of equities as well.
  4. Revenue- Revenue refers to income that is collected from customers. Revenue means increased equity.
  5. Expense- An expense refers to all cash payments made out for the purpose of keeping the business afloat like payroll, infrastructure costs etc.

Categorizing business transactions can sometimes be confusing and can take some time to get a hang off, but once you begin understanding the purpose behind each transaction it will be easy.

7 Basic Bookkeeping Elements for Small Businesses

Bookkeeping and accounting are probably the bane of every small business owners’ life; don’t like them but can’t do without them. As annoying as the tasks are, they are critical for the sustained growth of your company. Without small business bookkeeping, your business will never reach its full potential; besides you have the IRS to answer to.

Small business bookkeeping is really not that difficult. One of the first steps to get a hang of bookkeeping and accounting is to understand its common aspects, so here are some basic bookkeeping elements explained for you.

  1. Accounts Receivable- This refers to money that you are due to you, or that you should receive from clients and customers, so it technically refers to a major portion of your income. Sending out invoices and collecting the payments on time are vital to keeping your cash flow steady.basic bookkeeping for small businesses
  1. Accounts Payable- Any money that you owe or money that you have to pay is Accounts Payable in small business bookkeeping. Keep track of your Accounts Payable, pay your bills on time and accurately. This goes a long way in maintaining your business’ good will and to ensure you don’t make the same payment twice.
  1. Inventory- All the products you have in stock is technically money on a shelf, so keep careful track of your inventory. Make sure you have regular physical checks to ensure the count is correct and also to ensure that the quality of your inventory is not compromised.
  1. Revenue- Which businessman doesn’t love this word; after all it is the purpose behind starting a small business in the first place. Record all your sales so that you always know where your business stands.small business bookkeeping
  1. Payroll Expenses- This is probably the biggest cost for small businesses and big ones. Make sure you record the expenses accurately and pay your employees on time. This is also essential for tax purposes and to satisfy government reporting requirements.
  1. Taxes- Maintain up-to-date and accurate records and preparing and filing your tax returns will be a breeze. This will also reduce your chances of underpaying or overpaying your taxes, thereby ensuring good small business bookkeeping.
  1. Cash- Now this of course doesn’t require any explanation, but no list of bookkeeping elements is complete without mentioning cash. The money in your account is your cash. All cash transactions pass through the cash account and are tracked as Cash receipts and Cash disbursements. This is the lifeline of your small business.

5 Bookkeeping Tips to Remember for Small Businesses

If you are the regular small business owner, chances are that there is probably nothing that you hate doing more than bookkeeping. No surprise there because unless you have a head for numbers, it can be an arduous task. Unfortunately, whether you like doing it or not, it is essential to keep your business afloat and to keep you out of trouble with the IRS. So, here are some bookkeeping tips for small businesses that will keep you on top of your finances and make your life easier.

  1. Set Up a Bookkeeping Process

It is essential that you have a bookkeeping system and that everything is not in your head. Don’t take bookkeeping lightly. When the IRS comes knocking, you will definitely not be laughing, so make sure you have a system. If you don’t know how to proceed, get professional help.

bookkeeping tips for small businesses

  1. Keep Aside Tax Money

Who doesn’t dread tax time, but you can make it better for yourself by setting aside the money systematically throughout the year. You know when you have to pay your taxes, so be prepared and make sure you have everything in order. It would be wise to remember that the IRS can penalise you for not filing quarterly tax returns on time.

  1. Record Expenses

One of the basic rules of bookkeeping- record your expenses at all times no matter where you are. If you do not know where your money is going, you are en route to financial ruin. You will also need the information for your taxes; otherwise you might end up missing some tax write-offs.

  1. Track Deposits

Another basic of bookkeeping for small business- make sure you record all your deposits and incomes accurately. Tracking expenses and deposits are important to ensure that your activities balance each other out. Besides if you don’t, you might end up paying taxes on money that isn’t income.

bookkeeping for small business

  1.  Following Up On Invoices

Any small business will fall if the pile of late and unpaid bills continues to mount, so it is vital that you have personnel dedicated to following up on billing and collecting payments on time. If your cash flow is hit, you will find yourself in serious trouble.

Bookkeeping for small business may not be easy but you can make it easy for yourself by following these simple bookkeeping tips for small businesses.

 

Top 10 Common Small Business Bookkeeping Mistakes

It is an accepted fact that bookkeeping is not everyone’s cup of tea, but one cannot deny the fact that ignoring bookkeeping is detrimental to your business. So, of course, every business owner finds ways to maintain their books. Most big established businesses hire bookkeepers so that the owners can concentrate on running their business. What about small business owners; now that is a bit more complicated.

Small business owners most often than not have only one thing on their mind- growing their business and making profit, not that you can blame them, but what happens is that in the process, bookkeeping is sidelined and not wanting to spend too much on the “menial” task, the small business owners delegate it (to someone with no bookkeeping skills) or decide to do it on their own. Oh dear, trust me, that is definitely a recipe for disaster and mistake # 1.  It is important that your small business bookkeeping is done with the utmost care and by someone who knows what they are doing. Your books will be accurate and the task will be completed quickly and efficiently.

Mistake #2- How many times have you thrown away receipts for minor purchases? You might not think too much of it then, but when Uncle Sam asks you for documentation for claimed expenses, you will wish you had done otherwise (it happened to us and it isn’t a day we choose to remember). So make it a point, or better, a habit to keep every single receipt and maintain a separate file for them.small business bookkeeping mistakes

Mistake #3- Do you reconcile your books and bank accounts every month? Did I hear anyone say “No”? Huge mistake! One of the fundamental elements of good small business bookkeeping is that your books are reconciled with your bank accounts every month. Make time every month to get this done or else things can go really bad.

Mistake #4- If you rely on technology to take care of your bookkeeping, I hope you have backed your data. Today’s heavy reliance on technology means that everything is online, while that is good for numerous reasons, it also leaves you susceptible to data corruption and data loss; lose your data and you lose everything. So the only precaution- make sure you have accurate and up-to-date data backed up on preferably an external device.

Mistake #5- You might not have thought about this but improper categorization of your expenses and employees is a big no- no in small business bookkeeping. Your categories, sub- categories, independent contractors, freelancers, regular employees are all key elements in understanding your business’ finances, so name them right.

Mistake #6- I cannot begin to count the number of times I have been told how important communication is to life and living; well believe it or not, communication is essential to bookkeeping as well. How? Imagine what happens if the person maintaining the books- you, an accountant or whoever keeps your books- doesn’t know when $1000 is given as a bonus or doesn’t have relevant receipts? Ouch! Backtracking is such cases is not just painful but also increases the probability of errors; so make sure you have an open line of communication with your accountant.

small business bookkeeping

Mistake #7- Do you often incorrectly account your sales tax? I seriously hope not because oversight in collection and reporting sales tax would mean you have to pay significant fines and penalties. Why go through all that trouble?

Mistake #8- How many people are good with numbers? To be honest, I have no clue but not everyone is good with numbers and at the end of a long day all you want to do is relax and in your hurry to do so, you make a few calculation errors. This is a common occurrence, and you don’t need me to tell you what these math errors can do to your bookkeeping and to you.

Mistake #9- This is probably the most common mistake and the most dangerous- falling behind on your bookkeeping. Understandably small business owners often can’t find the time to enter their expenses but to not do so will leave you in a bigger mess. So fix a slot in your day’s schedule and sit down to enter your expenses without fail at the appointed time.

Mistake #10- That brings me to my last question- do you have an accounting system? If you don’t, you should consider doing something about it; it will make your life a whole lot easier and bookkeeping accurate and less painful.

I have only covered the top 10 common small business bookkeeping mistakes; there are so many more. So what can you do to avoid these errors? Be more careful with your bookkeeping, but if you ask me, I think you should let go- let go of your bookkeeping- hire a competent bookkeeper or find yourself a reliable accounting software. While this will not solve all your problems, it will take care of most of them and most of all, give you time to focus on growing your business. Always remember that bookkeeping and accounting is capable of making or breaking your business.

Taking Care of Bookkeeping for a Small Business

Bookkeeping is probably one of the most important, yet most ignored, aspects of most businesses, whether big or small. This is quite possibly because bookkeeping is annoying and tedious. Most small business owners, and even big ones, find it difficult to decipher their books, especially after a long day of managing their daily business activities.bookkeeping for small business

So why is it so important to keep track of your books? Simply because it will let you know how your business is performing, give you all the information you need to make business related decisions and most importantly, give you what you require to survive in the cutthroat world of business and make profits. Bookkeeping for small business is not a herculean task; all that you need is some discipline and patience. Ready to get started; here is what you need to do.

  1. Prepare a Ledger- A ledger is nothing but a record of the current balance in all your business accounts. Your ledger can be accounting software or the old hardbound ledger; it doesn’t matter.
  1. Enter Details of All Financial Transactions in the Ledger- Get hold of all the source documents for your business transactions and enter the details in your ledger. Make sure you identify which details are relevant before noting them down. Payments usually list the payee, date, category and the check number if a check is used. One of the first rules of proper bookkeeping is that you retain records of all business transactions for at least 6 years. This includes paper or electronic receipts, expense and sales details, payroll information and tax data.
  1. Note Revenue Data- Enter details of all money received by the business, except investments and loans, which should be tracked separately. Make sure you enter all relevant details of the payment like payee, date, amount etc .

bookkeeping

  1. Accounts Receivable- Prepare a detailed schedule of expected incoming payments which is referred to as Accounts Receivable or AR. This will help you track payments that you are supposed to receive and follow up on them, thereby making sure that you get what is due to you. A common problem that small business owners face is that they often forget to either send out invoices or to follow up on them. Maintaining a ledger will help you to streamline this process.
  1. Accounts Payable- Another important part of bookkeeping for small business is keeping track of the payments that you have to make. Prepare a schedule of all future payments anticipated by your business, like rent, payroll, tax etc.; this is called Accounts Payable or AP. This will help you make payments on time and keep track of your business’ finances.
  1. Reconciling Ledgers with Bank Accounts- This is probably the most crucial part of bookkeeping; making sure that your ledger and bank account are in sync. This process is easy if you are using a software as most accounting software are built to link with your bank accounts and download the data; however if you are taking the old paper route, things can be a bit more complicated. Reconciling is normally a monthly task, but most accounting software are programmed to perform this weekly and sometimes even daily.

Now that we have established what you need to do, the next question is can you do it. Bookkeeping for small business by itself is not that bad, however time constraints and other operational priorities can mean that things don’t go the way you intend them to. If that’s true for you or if you feel bookkeeping is not your cup of tea, hire a professional bookkeeper. A professional bookkeeper can record all your expense and income details, prepare monthly financial reports and work with your accountants to prepare annual financial statements and file tax returns. There are numerous options available for you; don’t lose out all the good proper bookkeeping can do for your business.

From the CEO’s Desk

When we started this company, like all other business owners, our main goal was to grow our business; the sky is the limit after all. Along the way we realised that bookkeeping was relegated to being a mundane task that one did when he had the time. Often it was a catch up that became a priority when it was time to calculate taxes. For small business owners growing the business took precedence and the owner often didn’t stop to hear what the numbers were
telling him- were his payments coming on time, did some account heads guzzle more than required, what was his customer demographics, what is the cost of acquiring and servicing a client, did the pricing consider the cost of overheads and inflation etc. All of these are important questions to navigate the business for which bookkeeping held the answers.From the CEO's Desk

The world of bookkeeping, like every other service, is undergoing a sea change in the way its being done in the Internet era. If outsourcing was driven by its cost advantage, cloud computing is now leading the charge. Yes, everything’s gotten cheaper and initial investments are no longer capital intensive.
It’s all about getting the right service for your business-something that can show you how your business is faring every day against the backdrop of the past and the pattern of trending. Business data at your fingertips for better informed decisions; it’s no longer about just the books. It’s technology that makes bookkeeping work for you. Customising reports, apps that can help you work on the go, business performance data you can receive at preset intervals and more. It’s no longer the prerogative of the large corporations, even a small business can have these perks at much lesser costs than keeping your books the traditional way. It needs someone who understands bookkeeping and technology with the experience of having run businesses. It needs an expert pretty much like a tax specialist who knows the tax rules, how it applies to the company and what’s best for it or a doctor who recognizes the symptoms, knows pharmacology and based in the history of the patient knows what will work. With technology it’s not just plain old book keeping; it’s getting the right advice on technology and setting up the books to show you how your business is faring real time. A bookkeeping specialist not just for books but in technology and running businesses- an expert.

Like everything that undergoing a change there are a lot of questions that arises out of the lack of familiarity. Is the information secure on the cloud?  How is an online service better? How can I get key data like cash flow, profitability etc without trawling through data? How do I get my bookkeeper to become my business advisor while saving on his salary? A lot of questions that begs answers. Some thought a blog would be a good idea to voice and share concern, find reassurance in the experience of others and to cope with challenges in transforming bookkeeping from a passive function to active advisory services. How did other business make this radical changes? How did other owners go from struggling to keep their books to read data off it while saving costs and making more time for themselves. After all there is nothing like real life experiences. This is the place to share, seek and find the strength to make the change; after all, change is the only constant.