Bookkeeping is an essential task for any small business owner. It lets you track your financial transactions and make informed decisions based on your company’s financial health. However, bookkeeping can be time-consuming and overwhelming, especially for small businesses with limited resources. This post will discuss the 8 best bookkeeping practices for small businesses to streamline their finances and make bookkeeping more manageable.
8 Key Bookkeeping Practices Small Businesses Should Adopt
1. Determine your Accounting Method
Your company can use two different bookkeeping methods: cash and accrual. The accrual bookkeeping method records expenses and profits when they occur, irrespective of cash transfers. Cash-based systems, however, register the profits when actual cash exchanges in the form of receivables and payables incur. Small Business Administration states cash accounting is preferable for effective cash management. In the initial stages, cash flow management for small businesses is tricky. Hence, using a cash-based accounting method is a more sensible option.
The accrual bookkeeping method suits larger businesses with adept accountants. Though it could be deceiving and confusing, it’s great to assess the financial status of a big company.
2. Have Separate Personal and Business Finances
Segregating personal and business funds are critical to keeping the books clean. So, ensure you enforce strict rules that restrict the use of company finances for personal use. Inaccurately allocating funds can cause cash flow issues that complicate tax filing and auditing processes. Avoid getting into legal trouble by separating personal and business funds. As a small business, you’re likely in control of the finances. In such cases, you must be even more careful to separate business expenses from personal ones. One great way to do so is to open different bank accounts and cards for your business. This move helps you avoid tax filing complications and keep business expenses strictly related to business.
3. Constantly Review Your Processes
Regular monitoring of your bookkeeping practices may create some additional work. However, we find it worth the effort. Before your invoice is approved, ensure it goes through the accounting department for review and verification. Additionally, we recommend you check each invoice properly before approving it. If you need a strong bookkeeping team, outsource your accounting and bookkeeping work to a reliable firm that delegates duties and executes controls for you. Enforce full and consistent review and approval processes across the firm to ensure everyone follows the same rules.
4. Leverage Technology
About 64.4% of small businesses own accounting software. As a small business owner, you have a lot on your plate. We recommend you leave your accounting troubles to reliable software. This software tracks your daily transactions, creates accurate estimates, manages invoices, and accesses them effortlessly. You can track your pending invoices and follow up quickly to expedite payments. Technology makes generating profit-loss statements easier during tax times. We know you’re tempted to manually use Excel sheets to control the data. However, consider how many errors you’ll avoid by leveraging technology to your benefit.
5. Establish Internal Control Authorities
Your bookkeeping is highly susceptible to fraud. Hence, you should implement internal controls to reduce the risk of fraud. Follow the standard bookkeeping practices of distributing your financial responsibilities among three sections. Ensure no single employee can control authorization, record maintenance, and asset custody simultaneously. So, you can appoint one employee to write the check, another to check in with the bank account, and a third one to complete the payment. Outsourcing is a great way to keep your accounting healthy and efficient for small businesses. Almost 37 percent of small businesses outsource their accounting and IT operations.
6. Hire the Best Talent
A Forbes article states hiring inefficient accountants is small businesses’ biggest blunder. Every small business places greater trust in its accountants. Great accountants save you a lot of money in taxes due to their in-depth knowledge of tax laws. Having the best technology will only help if your bookkeepers know how to use them efficiently. So, invest time and find the right people to run your accounting department. They’ll reduce errors, help you save taxes, and simplify the process. Even if they ask for a premium salary, we assure you, they’re worth it.
7. Plan for Taxes in Advance
You’re making a huge mistake if you’re ignoring your taxes for the end of your financial year. Instead, prepare for the tax season at least a year in advance to avoid unwanted situations. Entering expenses and deposits in the system after a substantial amount of time passes is a bad overall strategy for small businesses. You can easily forget to include all the expenses, and that may cost your business serious tax trouble. So, ensure you clearly record each loan, revenue source, fund, and profit statement in your accounting system to manage taxes efficiently. Use the best software and the best talent you can afford to keep your accounts during the tax season.
8. Consider a Phased Methodology
If you’re still keeping books manually, be careful about optimizing too many processes simultaneously. So, consider opting for a phased approach by streamlining a few processes first and then moving to others. Train the first batch of accountants on the new system and give them ample time to adjust. Eventually, roll out the solution to all accountants phase-wise and prevent shocking them significantly.
9. Hire a Professional
If bookkeeping is too overwhelming or time-consuming, consider hiring a professional. A bookkeeping service provider can help you to keep your financial records organized and provide valuable insights into your business’s financial health. They can also ensure that your records are accurate and up to date, which is especially important when it comes to tax time.
Read more: Top 10 Bookkeeping Tips for Small Businesses
Every successful business stands on the firm foundation accountants build. Hence, a great team working towards the common goal of growing your business is critical for every small business. You already realize how vital bookkeepers are for your firm. So, give them all the tools and guidelines necessary to ensure they perform well and give you the desired results.
In conclusion, bookkeeping is a crucial task for any small business owner. By following these 8 best bookkeeping practices, you can streamline your finances, save time, and make informed decisions about your business’s financial health. Remember, accurate financial records are essential for the success of any business, so take the time to develop a solid bookkeeping system that works for you.