8 Bookkeeping Tips for Small Businesses
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Every business needs bookkeeping; it’s how they keep track of their money. Bookkeepers record a business’ daily transactions from payroll to billing. Without following bookkeeping best practices, businesses could lose a significant portion of their revenue from fraud or miscalculations.
Unsure if you’re adhering to the bookkeeping best practices with your small business? You’re not alone. In fact, 60% of small business owners worry they’re not knowledgeable enough to do their own accounting.
Ideally, those business owners should rely on an accounting professional to handle their finances, but that’s not always an affordable option. Even those who can afford a professional should practice good bookkeeping. No matter how good an accountant is, bad data will still create bad reports.
Luckily, the following bookkeeping best practices can help businesses with and without a professional accountant keep their records organized and effective.
Choose an Accounting Method
There are generally two methods of accounting: cash basis and accrual basis accounting. Cash basis accounting hinges on reporting revenue and expenses immediately after cash changes hands. Accrual basis accounting, on the other hand, only reports on expenses when they contribute to revenue. This concept is known as a matching principle as the expenses are reported only when there is revenue to match it to.
Businesses that handle most of their finances with cash transactions will often stick with using cash basis accounting. It’s a straightforward method that’s quick, simple, and easy to track. But that doesn’t mean that you should always choose this method just because you can.
While its simplicity makes it attractive to smaller businesses, cash basis accounting doesn’t tell the whole picture. Certain expenses – such as new equipment – may take years to turn a profit. With cash basis accounting, those expenses are always reported as soon as they make the purchase – for better or worse.
While that may be fine for some, businesses that are looking for investments or to sell their company may want to avoid that as those heavy expenses can make their business seem less profitable than they are. In these cases, it’s likely better to choose accrual basis accounting.
Divvy out Responsibilities
One of the best ways to prevent fraud or accounting errors is to share and split responsibilities. The more people with eyes on invoices and payments, the more likely any errors – intentional or not – will be caught. It’s why many banks require employees take time off at least 5 consecutive days a year. If someone attempts to embezzle funds or commit fraud, they’ll need to be continuously present to cover it up if the proper controls are set up.
This also applies to splitting responsibilities. It’s best practice to separate responsibilities along any financial chain. For example, the person who opens the mail shouldn’t also handle the accounting functions. Whoever is looking at the mail should also track when any physical checks were received.
In general, one of the best methods to prevent fraud is to ensure that one person isn’t in control of an entire financial process.
Organize Your Accounts
Most businesses organize their accounts in an alphabetically ordered chart. Traditional account ledgers do not separate payroll, cost of goods sold, and overhead expenses. While great for tax compliance purposes, this method doesn’t allow businesses to easily separate their expenses and see where their money is really going.
Instead, businesses can keep a separate chart of accounts that splits indirect expenses into three categories: customer acquisition costs (CACs), general and administrative (G&A) expenses, and product and industry expenses.
CACs cover any money spent on acquiring new customers. This includes all marketing and sales expenses. When you document these costs in a separate chart, you can use the expenses to calculate your return on investment (ROI) on all your marketing efforts.
G&A expenses cover your most consistent operational costs. Things like phone bills, rent, utilities, and licenses. Your G&A expenses show you the bare minimum your business needs to stay open.
Product and industry costs are your discretionary expenses. You don’t necessarily need them to operate, but they help your business grow without directly generating revenue. Things like research and development costs and continuing education for your employees fall under this category.
Pay Close Attention to Accounts Payable and Accounts Receivable
Nobody likes to see late fees on your AP or missing payments on your AR. Diligently updating your AP and AR ensures that there aren’t any gaps that could deeply hurt your credit score or your final revenue calculations.
Keep a Regular Routine
Good bookkeeping requires up-to-date records and up-to-date records require regular attention. Building a routine for all your bookkeeping tasks can go a long way. They don’t need to be complex or time-consuming either; something as simple as recording your daily transactions every day or producing monthly revenue reports can make a big difference.
Automate When Possible
Automating certain bookkeeping processes can save you time and prevent human errors. If your business can afford it, accounting software like QuickBooks can do a lot of the work for you without requiring any manual input.
If your business can’t afford accounting software, no worries. There are plenty of ways you can automate your bookkeeping using clever Excel or Google sheets. Just be mindful of potential security issues and always keep your files backed up in the cloud or another external storage (like an external hard drive).
Practice an Upfront Strategy
Not all bookkeeping best practices need to be internal processes. Sometimes your clients or vendors can help you out too. Encouraging your clients/vendors to digitalize their purchasing documents or bills can save you a significant amount of time.
Even if you follow these best practices to a T, there is always room for error. Something as simple as a misplaced decimal or one extra 0 can create a major headache that may take days or weeks to fix.
That’s why it’s important to double or triple check your documents before submitting them. The more you examine and verify, the less likely it is that a mistake makes it through to the final document.