10 Effective Bookkeeping Tips For Small Businesses

If you are running a business, you need to establish an understanding of managing finances. You should be aware of your income and expenses and their proper classification in order to know your profitability. Without knowledge of bookkeeping, you might spend more and earn less. 

Bookkeeping is all about tracking the business income and expenses and recording them properly. You can define bookkeeping in simple words as:

” The process of identifying, classifying, and recording financial transactions in appropriate head of accounts.”

The primary goal of bookkeeping is ensuring that a business’s financial records are accurate, organized, and recorded properly for better decision-making and reporting. Here, in this article I have listed down 10 effective bookkeeping tips for small businesses.

1- Understand your industry accounting practices

Understanding your industry’s accounting practices is crucial for effective bookkeeping. Different industries may adopt different accounting practices and its better if you keep your industry norms aligned with bookkeeping. Some of the common factors you may find varying are inventory valuation methods, revenue recognition methods, tax deductions and capitalization of costs. So, it’s better approach to establish a know how of your industry accounting practices or you can refer to some professional bookkeeping firm for help. 

2- Know and plan your expenses

Every business is different, and so are the expenses. Before starting to record your expenses, you should first know and plan for them. If you are just starting out, it can be a little challenging to know in advance what type of expenses you will incur and are those tax admissible.

Generally, tax authorities allow deductions for most costs incurred solely for business operations. However, any personal expenses from business funds are inadmissible from the company’s taxes.

It will take a little while to know your expenses, but once you become familiar, it’s easy for you to plan major expenses.

Now, planning major expenses is crucial to managing your cash flows. There will always be the possibility of some big-ticket purchase, so it’s better to make annual budgets for your business and set aside the funds for major purchases in any separate account, so it’s there for you when you need it.

3- Classify and track your expenses

Monitor and categorize all business expenses to accurately track spending and identify areas for potential cost savings. Being a business owner, you should be familiar with the operational costs of your business so you can classify and track them.

For instance, general classification of costs are either fixed or variable. Fixed costs incur evenly regardless of business activity such as office rent and salaries of permanent employees. Variable costs vary with production volume or sales such as cost of materials, direct labor, shipping and delivery etc.

Set reminders for monthly recurring expenses and update your budget if you see a consistent rise in expenses.

4- Record Transactions daily

Adopt a habit of recording transactions on a daily basis. This helps reduce the risk of errors and ensures that financial records are up-to-date and accurate. It also helps in compliance with regulatory issues. Having updated books also makes decision-making smooth and easy.  

Regular Reports

With daily bookkeeping, it’s easy to review daily affairs of business going on. You can easily create daily reports and make more informed decisions on time. 

Audit Trail

Daily record keeping also helps in maintaining audit trail at the end of financial year. If your business is subject to statutory audit at year end, then it’s more important to keep your financial information aligned with supporting vouchers and receipts.

Recording the transactions daily makes the task easy, and you are in better control and aware of your business situation. 

5- Plan for Tax Payments

Tax laws keep changing from time to time. Sometimes the tax rate is changing, and sometimes new amendments takes place. So, stay informed about tax laws and regulations relevant to your business to ensure compliance and maximize tax deductions.

Know your business expenses and keep your personal and business expenses separate as you won’t be getting any deductions for your personal expenses out of business cash. Avoid mixing personal and business finances to maintain clarity.

6- Accounting Software

Accounting software comes in cloud-based versions and offline or desktop versions. You can adopt any depending on your needs and preferences. However, accounting software is a must these days. You can use MS Excel for bookkeeping as well, but it’s not as effective and takes time. Plus, there is no comparison of features between the two. Accounting software gives greater flexibility and ease in recording financial transactions and generating reports. 

Time is money, and this principle applies here as well. It’s better to spend a few bucks and utilize your time for your core business activities. See below how accounting software is better and what benefits it can provide you:

Create and customize invoices	Send quotes & invoices directly via email
Create and print checks	Create and track bills
Create customer jobs	Track time of employees
Payroll for employees	Assigning expenses to customer jobs
Track expenses by class or customer job	Create reports for receivables and payables
Generate financial reports	Manage inventory
Integrate with mobile app	Easy access to historical data
Compare year-wise reports	Generate purchase orders

Online / Cloud Based Accounting Software

Many people like cloud based software as the data is easily accessible anywhere and at any time. 

Some of the best online accounting software are QuickBooks, Wave, Sage 50, and Xero. You can opt for any, but QuickBooks is dominant in the accounting and bookkeeping domain because of its more advanced features. 

Offline / Desktop Based Accounting Software

Desktop versions are also commonly in use. They can perform all features except your data will be available in a single space and you will need your computer or laptop to access it. Some popular providers are QuickBooks, FreshBooks, and Sage 50.  

7- Establish processes and automate record keeping system

Establish easy to follow and repeatable processes for daily bookkeeping. Identify tasks that need to be done daily, weekly, monthly, and annually. List them down and find ways to automate them. Identify areas that are repetitive, time-consuming, or prone to errors. 

Invoice customers on time

Create and send invoices to your customers within 48 hours. This is a good practice to keep yourself bound to invoice timely so you can be paid timely. 

Scan all documents

Adopt a habit of keeping all receipts and bills scanned and save them on any cloud platform such as google drive, or Dropbox. This is very helpful for accessing document anytime.  

Set timely reminders

You can set alerts and reminders in your accounting software or use any online tool to update you whenever an invoice or bill is due. 

Bank feeds

Connect your bank accounts to your accounting software to enable bank feeds. Many software like QuickBooks allows you to integrate your bank and you would be able to download bank statements and make reconciliations any time.

Keep all records organized in one place

Use separate box files to maintain receipts, invoices, and bank statements. This will keep your records all organized in one place. 

8- Follow accrual accounting

There are two widely used accounting methods in the world: accrual accounting and cash accounting. 

Accrual Accounting	Cash Accounting
Revenue is recognized when it is earned or when you invoice, regardless of when cash is received.	Revenue is recognized when cash is received.
Expenses are recognized when they incurred or when you have received the bill, regardless of whether cash is paid.	Expenses are recognized when they are paid.

Although cash accounting is simpler and easier to understand than accrual accounting, most countries require entities to adopt accrual accounting.

IFRS(International Financial Reporting Standards) and GAAP(Generally Accepted Accounting Principles) also mainly require the use of accrual accounting.  

9-Monthly reconciliations

Reconcile your bank statements monthly to ensure that your records match the bank’s records, identifying any discrepancies on time.

It is also important to reconcile your accounts receivable and payable as well on a monthly basis so there are no conflicts between your records and the records of your customers and vendors. 

10- Outsource your bookkeeping

At the end of the day, bookkeeping can be an overwhelming job as it requires expertise and adequate financial and accounting knowledge in various matters. So, it’s never a bad idea to outsource your bookkeeping to any professional or expert. 

Here at XquisiteBooks, we have a qualified and experienced team that is well-versed in accounting standards and can manage your books of accounts efficiently and effectively. So, feel free to get a quote today and allow our experts to do your bookkeeping.