How to do bookkeeping for a small business
You’ve started a new business and you’re making sales, starting marketing campaigns and doing all sorts of awesome stuff that’ll hopefully see your business grow and prosper.
But in order to keep doing that you need to make sure you’re keeping track of all your business activities. It’s really important you do this as the old adage goes nothing in life is inevitable except death and taxes.
So we’re going to jump into a crash course on the basics of bookkeeping so that you know how to check the health of your business especially your cash flow, after all you have to be able to pay the bills if you want to keep your business running
Bookkeeping: A brief history
Bookkeeping is about recording the transactions that take place by a company. These transactions can include purchases and sales for example.
Most bookkeeping is carried out using double entry bookkeeping, it was developed during the renaissance in Italy by merchants as a more accurate means of keeping records of ingoing and outgoing transactions, this is because each transaction is recorded twice as a debit to one account and a credit to another. This lessens the likelihood of errors and provides checks and balances which lessens the likelihood of fraud.
You don’t need a book
We’re a cloud based SaaS company, in the old days you’d probably have a book, a huge ledger within which you’d have the names and contact details of your customers and some notes against them.
Now all of that is on computers in the cloud, it’s a lot easier to search for what you want. Similarly you don’t need physical ledgers for your bookkeeping either.
We’d suggest picking a cloud based accounting solution like Xero. It integrates with RealtimeCRM so you can see in house how prompt customers are before signing off on more work, it allows you to send invoices and reminders to customers, automatically import bank account transactions which makes reconciling them easier, calculate your sales tax liability and file them (if relevant) and produces useful accounting reports that can give you insights into how your business is doing. It does a lot of the hard work for you so you can then make decisions based on the outputs it produces.
Xero integration (Company record inside RealtimeCRM):
Habits that’ll make bookkeeping easier
Firstly, you should separate yourself from your business. Set up an account exclusively for the business and make sure the only transactions that take place are business ones not personal ones.
This cannot be stressed enough. If you want to make sure that the liabilities of the business remain with the business then you must keep your personal transactions separate. If you don’t it can be used against you as evidence by creditors and others who have claims against your business that it’s not a real business and that you as the owner are liable for the debts incurred. Doing this from the start will make bookkeeping going forward much easier.
Secondly, you need to be able to substantiate any transactions that take place. What this means is whenever a purchase, expense or sale is made you need to be able to show receipts and invoices.
So get into the habit of recording these. You don’t need a giant filing cabinet, within Xero you can attach photos of these to each transaction and as its on the cloud you don’t need to worry about running out of room. You can record your purchase orders in RealtimeCRM and then link to the document which substantiates it by linking to a third party file storage platform like Google Drive.
It’s also good practise of using a consistent naming procedure for these electronic copies of receipts and invoices that includes the date on the document, who its from, an invoice or receipt number and of course the net amount plus any sales tax. This makes it easy to find them later on because everything is properly catalogued.
In addition, by systematising things in this manner it’ll get you into the habit of recording these transactions. This allows you get a more accurate picture of what money is coming in and going out.
In this way you don’t get caught out of left field by a supplier for example asking you for money and you can’t remember how much you owe them or whether their claim is even legitimate. Proper record keeping negates all of this, and making it a process you can do unthinkingly is the key to making sure it happens.
Try to minimise cash expenses as much as possible. If you can get a company credit card make as many of your purchases through it as possible. This is because it makes it easier for you to track what money is being spent especially if you’ve linked it to a cloud based accounting solution like Xero. Furthermore, it affords you greater protection when making purchases too.
When it comes time to pay the credit card make sure that money comes from your company checking account. If you need to reimburse yourself or an employee, make sure you keep records of both the expense and the reimbursement.
Cash accounting vs Accrual accounting
In the cash method payment receipts are recorded during the period they are received, and expenses are recorded in the period in which they are actually paid.
It’s the simplest method and most often used in the very beginning of a business, and even those without an accounting background can easily grasp it.
The accrual method is more complex but it allows for a more accurate picture of the business. This is useful when third parties come and take a look at the books.
Basically, revenue is accounted for when it is actually earned not when money is actually exchanged. Expenses of goods and services are are also recorded despite no cash being paid out yet for those expenses.
So for example:
- Revenue: A company sells $100 of pens to a customer in March, which pays the invoice in April. Under the cash method, the seller recognizes the sale in April, when the cash is received. Under the accrual method, the seller recognizes the sale in March, when it issues the invoice.
- Expense: A company buys $50 of business cards in May, which it pays for in June. Under the cash method, the buyer recognizes the purchase in June, when it pays the bill. Under the accrual method, the buyer recognizes the purchase in May, when it receives the supplier’s invoice.
Most investors expect to view the books under the accrual method, as the cash method allows for ways to report the health of the company to make it seem healthier than it actually is.
If it’s something you’re looking for in the not too distant future it might be better for you to start off under the accrual method as switching down the road from cash to accrual will take a non trivial amount of effort.
Separate received income from borrowed loans
Make sure you keep income from goods and services sold separate from funds received from loans. Mixing the two will cause a problem in the future when it comes to untangling who owes what and figuring out what exactly are the business’ debts.
Do it like clockwork
Reviewing your books weekly, making sure transactions are reconciled will make sure that you as the business owner know the health of your business, are aware of your cashflow and who you owe money to and who owes money to you.
It’s crucial to do this weekly otherwise you’ll end up with a giant backlog that will eat up time you don’t have to get it done and it has to be done!
Plus it encourages you to not lose receipts as you process them in a timely manner.