6 Tips for small business bookkeeping

Bookkeeping was the last thing on Chuck Carter’s mind when he opened Chuck Carter Digital, a small business that produces science illustrations and digital worlds for gaming. After working for industry titans like Disney, National Geographic, and NASA, he was thrilled with the creative freedom he now enjoyed as his own boss.

“My clients come to me because they know I can translate complex ideas into visual statements,” he said from his Ellsworth, Maine digital studio. “They may not know exactly what I can do, but that’s the great part. I can create something for them that they couldn’t imagine.”

One thing Carter, himself, couldn’t imagine was what he calls “the business part of it” -- the flood of receipts, invoices, balance sheets, payroll, and accounts receivable headaches that come with success. That’s why he contracted a part-time bookkeeper.

“When money is coming in and money is going out, someone has to keep their eyes on it,” he said. “I don’t have the patience or the discipline to handle it all.”
Carter is not alone, of course. Whether you’re a dog groomer launching an upscale salon or an executive coach building your corporate clientele, your business books are the paper trail that can lead to financial solvency, success, or ruin. 

As you build your own business dream, here are six questions that can prepare you to keep those books in good shape.

1.    Are your personal and business finances separate?

If you haven’t already, you should ensure that your business’s financial transactions are separate from your own. Partnerships, LLCs and corporations are required by law to do this, but even if you are a sole proprietor, it’s a smart housekeeping step. You can start by opening a business checking and savings account. This is where your business’s income can be deposited, and bills paid, but it’s also where you can put aside a percentage of your income to pay your estimated tax bill. You can also apply for a business credit card or open a line of credit with routine vendors. 

These moves can protect your personal finances from ruin if your business’s finances stumble. They will also begin building your business’s credit profile -- a financial gift that will keep giving as your business grows. And, finally, when it comes time to file your business taxes, you will have all of the numbers where you need them – in your business ledger, not your personal checkbook.

Related: Why a profit and loss statement is essential for your business – and how to create one

2.    Do you know what books need to be kept?

You may be having someone else crunch the numbers, but your own business savvy should extend to a rudimentary understanding of your books.  Here’s an overview of the things you should track:

Revenue -  Any income derived by your business through its services or sales is considered revenue. This is the money that comes in the door. It has a lot of places to go. 

Assets - These are the physical items or resources that are owned by your company. Their cash value should be assessed and documented, along with their proposed use, their date of purchase, their price, and any estimated depreciation. Typical assets include unsold inventory, equipment, office furniture, and office buildings. 

Assets are not just physical, however. For a small or start-up business, it’s critical to keep tabs on accounts receivable – an asset that can quickly become a liability. Defined as “all the revenue a business has earned but has not yet collected,” these accounts represent the bills that others owe your business. Savvy business owners should always monitor vendors who generate large bills – pre-emptively offering credit repayment plans when circumstances merit – so that the promise of this asset delivers. Find out more about how accounts receivable work.

Liabilities - These are the items or resources that your business uses but does not entirely own. They are the loans, credit purchases, and bills (accounts payable) that indebt you to suppliers, banks, lenders, or other vendors. If your jelly and jam company purchases large amounts of Maine blueberries to produce your product, you may open a line of credit with that the blueberry farmer to keep pace with a sometimes outsized purchase. Find out more about how accounts payable work. 

Expenses - Every cost your company incurs daily to provide services or produce goods is considered an expense, including rent, utilities, and employee compensation. Documentation of expenses can range from cash register tape receipts to bank account statements, credit card statements, invoices, and electronic funds transfer slips. 

Equity - After all accounts have been assessed and updated, your equity account will tell you how much of your business remains in your ownership. Your assets are equal to your liabilities plus your equity, so it’s the business equivalent of your personal net worth. 

3.    Will you use single-entry or double entry bookkeeping?

There are two standard methods for recording your financial transactions. The one you use will depend on how detailed a picture you want to generate. 
 
For many small or start-up businesses, the single-entry method is preferred, as it records all transactions in a single leger, much like a checkbook. Revenue and expenses are treated as deposits and withdrawals. 

As its name suggests, double-entry bookkeeping involves two records for every transaction – a debit and a credit. It is the preferred method of professional bookkeepers and accountants, as it can accommodate a higher level of analysis. It allows you to track not only where money comes from but where it goes.

Every transaction consists of a debit and a credit in the same amount. It works like this: If your jelly and jam company purchases a new fruit-washing unit for $2500, it would show up first as a $2500 debit to your cash account. (Bookkeepers refer to outgoing funds as ‘debits’). It would also show up as a $2500 credit to your equipment (assets) account. If you took out a loan to purchase the equipment, your liability account would get the debit of $2500, rather than your cash account. 

4.    Will you use a cash-based or accrual-based accounting system?

Bookkeepers use two accounting methods for tracking funds: cash-based or accrual-based. Here, again, the size of your business may be the determining factor for your choice.

Many small businesses use cash accounting to record their transactions because it gives an accurate snapshot of their available cash without any delay. In essence, this method only records what is actually in your coffers, not what you are owed. So, if a customer leaves your business with $2,500 in goods today, that $2,500 will not show up as an accounts receivable credit of $2,500. It will show up as cash when the customer pays his bill. And if you order $2,500 in supplies from a vendor, that money will not be debited until you write the check. 

The opposite is true with an accrual method. The bill you issue that customer will immediately be recorded in the books as a credit to accounts receivable. And your inventory account (assets) will be debited by $2,500. 

Not surprisingly, many larger businesses choose the accrual method to achieve a more complete picture of their financial and operational health. 

5.  Are you ready to document your expenses?

No matter who is keeping your books, it will be you paying the taxes at year’s end. There are a lot of expenses that could reduce your burden - and the list of allowable deductions is always changing. Your bookkeeper can deliver the numbers at tax time, but it’s up to you to retain records along the way. That means documenting the time, place, and purpose of every claimed expense – from business dinners to home office expenses. If you think an expense might qualify, document it and file the paperwork in an appropriate folder. You can easily retain receipts in a digital file by scanning or photographing them with your cellphone. A business credit card statement can also keep track of many deductible expenses. 

Related: Contractors: Don’t leave these tax deductions on the table

6.    Do you need a bookkeeper or an accountant?

The terms are often used interchangeably, but bookkeepers and accountants have differing levels of expertise, and, accordingly, differing price tags. A bookkeeper will track and manage your business’s day-to-day financial transactions, including purchases, sales, receipts, and payments. Basic bookkeeping services will organize and process records of all financial transactions, balance sheets, invoices, and payroll. Good bookkeeping means you will know your numbers. 

From there, it’s up to you to determine how those numbers will transform your company’s future.

That’s where an accountant often becomes helpful. An accountant brings another layer of financial education (and certification) to the hefty task of analyzing and forecasting your business’s long-term financial health. Accountants can perform bookkeeping functions – and often do – but their true value comes in being able to give advice that considers a larger universe of variables. A good accountant can help you forge a smart business plan, a savvy tax strategy, or wise capital investment plan. A certified public accountant (CPA) can prepare the legal documents required of an audit. Find out more about what accountants and bookkeepers can do.

Whichever skill level meets your company’s needs, remember that you do not have to commit to hiring a full-time employee to fill the role. Many business owners, like Chuck, opt to outsource the bookkeeping or accounting role with a contract worker.  You can also choose from one of many commercially available bookkeeping software programs. (Hiscox customers are eligible for 40-50% off QuickBooks Online.) 

Related: How outsourcing can grow your business

Don’t let the details, the jargon, and the rules of small business bookkeeping overwhelm you. There is a lot to learn, but the most important lesson is to remain involved in the process. Whether you opt for a full-time accountant or a bookkeeping software program, make sure you check the numbers, question the assumptions, and analyze the results on a regular basis. Let your own curiosity – about new tax breaks, improved logistics, or better business strategies – push you to improve your processes. And schedule regular reviews to check your progress.

In the meantime, there are multiple resources ready to support your dream. The Small Business Administration offers practical financial management information geared to start-ups.  LinkedIn Learning, Udemy, and edX have each produced some great online courses, dedicated to teaching bookkeeping basics to entrepreneurs.