Bookkeeping basics: A guide for small businesses

Bookkeeping is the backbone of the financial management of every small business, but what exactly is it and what’s involved? In this guide, we’ll go over bookkeeping for small businesses so you know what goes into strong financial management.

Understanding the importance of bookkeeping

Bookkeeping is the process of recording, organising, and analysing financial transactions. In other words, bookkeeping is about recording and categorising every expense and part of your income.

This allows you to build a clear picture of your business’s financial status, allowing you to create reports and forecasts that help you spot issues and make informed long-term business decisions.

Bookkeeping is also an important part of your tax and accounting obligations. Businesses that have to submit annual accounts must ensure they are reporting their incomings and outgoings properly. Your books will also form the basis of your tax calculations – get it wrong, and you could underpay or overpay your tax bill.

Last but not least, bookkeeping is an indispensable part of remaining transparent, which can help in loan applications and nurturing investor confidence.

Good bookkeeping practices

Implementing effective bookkeeping practices is essential for small businesses to stay organised and financially sound. Some key practices include:

  • Adopting a simplified double-entry bookkeeping system to record transactions accurately.
  • Categorising expenses to track where your money is and to identify cost-saving opportunities.
  • Reconciling bank statements with accounting records to ensure accuracy and to promptly detect errors.
  • Generating financial reports, such as income statements and balance sheets, to help you make informed decisions.

Tips for maintaining accuracy

Doing the books is a fruitless task if they’re full of inaccuracies. To ensure accuracy, small business owners can follow these practical tips:

  1. Keep records of every payment: Use your books to track every payment and clearly indicate when you made or received it. That way, you can easily find them if you need to refer to them later.
  2. Be strict with deadlines: Always 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 – sometimes, it’s worth it to keep a healthy cashflow.
  3. Focus on expenses: Accurately recording your expenses is about more than tracking your spending. It’s also about accurately claiming back tax from business expenses to reduce your overheads.
  4. Choose suitable software: Many businesses use Microsoft Excel or similar software. However, you might be better off with cloud accounting software like Xero or Sage, which come with many automation tools that ensure accuracy and save time.

Knowing when to outsource your bookkeeping

If your business is a small one, it might make sense to handle the bookkeeping yourself. But as you grow, it will become increasingly necessary to hire an accountant or bookkeeper to help out.

If money is particularly tight, we would suggest starting with the tips we provided above – particularly tip number four. After that, you need to work out the monetary value of your own time (i.e. how much you generate for the business per hour) and compare this with the cost of a bookkeeper.

Initially, you might consider engaging directly with an accountant instead of a bookkeeper. Accountants can handle not only your day-to-day bookkeeping and payroll but also provide comprehensive financial advice and strategic planning from the start. As your business grows and your financial needs become more complex, having an accountant already familiar with your operations can be invaluable.

Need help with your bookkeeping? Get in touch with us. We’ll see how we can help.

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