Bookkeeping is the act of recording and classifying an organization’s financial transactions. To understand bookkeeping for small businesses, we’ll start with a list of three broad transaction types that make a business’ “books”:
- Expenses: what your business has spent (and will spend)
- Income: what your business has earned (and will earn)
- Liabilities: what your business owes (and will owe)
But beware the simplicity. Bookkeepers do not generate financial summaries; instead, bookkeepers create and maintain a complete, specific, and precise record of all your business’ transactions and liabilities.
Bookkeeping is the who, what, when, and why of your financials. Your books are a foundational data set that supports the complex and delicate structures of accounting, planning, and forecasting.
In this article, you will find information on:
- Why New Small Businesses Need Bookkeeping Fast
- Benefits of Bookkeeping for Small Businesses
- How to Choose a Bookkeeping Firm
- Common Bookkeeping Tasks
- Selecting Bookkeeping and Accounting Methods
Small Businesses Must Keep Financial Records
Under the auspices of The Internal Revenue Service (IRS), federal law requires that every business, big or small, keep financial records. In the unfortunate event of an audit, bookkeeping comes in handy. Even better is a bookkeeping firm lead by a Certified Public Accountant (CPA).
The more thorough, detailed, precise, and organized your bookkeeping, the easier an audit will be, generally.
And did we mention that every successful business starts with professional bookkeeping? That’s a point to remember.
Small Business Bookkeeping Is a Day One Priority
Some small business owners are content to handle their own bookkeeping, some manually and some with online software. This is fine if their business does not record a lot of transactions. (Or, frankly, if the owner is short on ambition)
It’s a different story for small businesses with high-growth potential. The same goes for businesses that record a large number of transactions. For these businesses, bookkeeping is a day one priority.
Start Bookkeeping Before Growth, Not In Response to Growth
Say an entrepreneur starts a small business that sells software. It’s a crowded market but breakouts happen every day. What happens when slow bookkeeping meets rapid growth?
Here’s what could happen to your business:
It’s business as usual. The business owner watches his software company expand at a modest but consistent pace. Bookkeeping is simple. Then, the owner senses urgency. He puts together a high-performing sales team, and sales increase exponentially, along with transactions. The volume and complexity of transactions forces the owner to make a tough choice: pause growth or grow blind.
This is a bad place to be. So, at a certain point in the growth stage, it becomes infeasible to handle bookkeeping without the help of a professional.
The Benefits of Bookkeeping for Small Businesses
Bookkeeping is the who, what, when, and why of your financials. Here are some of the benefits of good bookkeeping for small businesses:
- Keep track of expenses
- Identify income sources
- Prepare financial statements
- Monitor the progress of their business
- Supply accountants with data to reduce tax burden
Put all the bullet points together, and you see that bookkeeping creates a foundational data set that supports the more refined activities of accounting, planning, and forecasting.
How To Choose a Bookkeeping Firm For Your Business
Once you’ve decided that your business needs a bookkeeper, you can either hire someone to work for you in-house or you can outsource the role.
Today, small business’s outsource bookkeeping in two different directions: to freelancers or bookkeeping and accounting firms.
Decide Between Freelancers or Bookkeeping Firms
Freelancers are easy and affordable in the short term and edge out CPA firms on affordability and availability.
Accounting firms, however, are far more capable, can deal with complexity, and can provide bookkeeping for small businesses, as well the option to connect bookkeeping to monthly accounting services, strategic tax planning, and financial analysis.
For example, Jeremy A. Johnson, CPA offers bookkeeping in addition to services like accounting, strategic tax planning, and analysis.
Let’s take a look at some specific considerations.
Hire a Certified Bookkeeper
While an unlicensed, untrained bookkeeper might be cheaper, they’re more likely to make a mistake that could cost you in the long run.
Hire a Certified Bookkeeper who can prove that they’ve passed examinations as CPB or CB. Never accept anything less than certified knowledge and skills.
Find a Bookkeeper Who Understands Your Business
There are some basic attributes that you should look for in a bookkeeping service: qualities like organization and attention to detail are crucial for success, but they’re the baseline.
For your small business, a good bookkeeper or bookkeeping firm should be familiar with your industry, business structure, and goals.
The right bookkeeper or bookkeeping firm will know the particulars of your industry. That expertise makes them better situated to simplify your business’s finances. You want someone who can keep a critical eye trained on your financial health.
Common Bookkeeping Tasks & Responsibilities
On a day-to-day basis, bookkeepers have a variety of tasks:
- Send out invoices
- Prepare financial statements
- Monitor cash flow
- Perform data entry
- Collect transactions
Bookkeepers also oversee several kinds of accounts, ensuring they are logged correctly and accounted for in financial statements.
Accounts Receivable
Accounts receivable is what customers owe you. When you send an invoice or bill, that money becomes part of your accounts receivable.
Accounts Payable
Accounts payable is what you owe for items purchased on credit. When you purchase goods or services, the amount you owe is added to accounts payable.
Payroll Administration
Payroll is the payments made to your employees. It’s a bit more complicated than multiplying hours worked by pay rate: the bookkeeper must deduct taxes, healthcare costs, and retirement contributions and then correctly distribute the funds.
Choose Between Single Entry or Double Entry Bookkeeping
When you start a business, one of your first financial decisions is whether to use single or double-entry bookkeeping.
Single Entry is Simpler, But Gives a Limited View
Single-entry bookkeeping means recording each transaction (incoming or outgoing) as one entry in a cash book.
Since a single ledger does not allow you to produce a balance sheet, it’s not appropriate for most businesses. If you want to work with banks or investors, you’ll need to use the more robust double-entry bookkeeping. And now that all bookkeeping software uses double-entry, there are very few situations in which single-entry will be applicable.
Double-Entry is Preferable for All but the Smallest Businesses
In double-entry bookkeeping, every transaction is recorded in at least two accounts as a debit or credit. The amount recorded as debits must be equal to the credits.
This system is based on the accounting equation (assets = liabilities + equity).
Double-entry accounting gives you more complete information about a transaction when compared to the single-entry method, as each transaction consists of both a destination and a source.
Select An Accounting Method For Your Business
The other bookkeeping decision you must make in the early stages of your business is which accounting method to use.
There are two choices, and each has its benefits and drawbacks:
- Cash-basis accounting
- Accrual-basis accounting
Cash-Basis Accounting: A Simple System With Serious Shortcomings
Cash-basis accounting recognizes income and expenses only when money is exchanged. Bills do not register as expenses until they have been paid. The same goes for invoices as income.
This system helps small businesses keep a solid grasp on how much cash on hand they have, but it can be restricting in terms of understanding long-term financial health, at times causing faulty decision-making.
Businesses
Accrual-basis accounting recognizes income as soon as an invoice is sent or a bill is received. This system is more accurate and more helpful for long-term planning.
Accrual-basis involves more work. Cash flow, accounts receivables, and accounts payables must all be tracked. And sometimes, accrual-basis accounting can give a misleading view of short-term finances.
Alert! Bookkeeping is Not Accounting
Bookkeeping for small businesses is a necessary function of accounting for small businesses, but it is not accounting. Think about this way: A bookkeeper’s function ends where an accountant’s work begins.
First, a bookkeeping firm produces financial records and organizes the information in coherent and consistent fashion.
Next, an accountant firm takes this record of financial information to create financial reports, devise tax strategies, and evaluate the performance of your business from a financial perspective.
So, with diligent small business bookkeeping, you’re taking the first step toward building a more profitable, sustainable, and growth-oriented company.
To learn more about the process and documentation of financial analysis, read this blog.
Get Small Business Bookkeeping & Accounting In One CPA Firm
Jeremy A. Johnson, CPA, P.C. is a Fort Worth accounting, bookkeeping, and financial strategy firm that handles all your company’s financials, from financial records to tax planning. Click here to schedule an appointment with one of our expert bookkeeping professionals.