Bookkeeping for Your Small Business

Key Takeaways

• Bookkeeping is the recording, organizing, and maintaining of a business's financial transactions 
• CPAs and bookkeepers have distinct responsibilities, but their roles in helping small business owners overlap
• You can start your bookkeeping by choosing an entity structure, setting up business bank and credit card accounts, and utilizing an accounting software like QuickBooks
• Proactive bookkeeping promotes financial clarity, tax compliance, and better cash flow management

‍

Bookkeeping may seem like an overwhelming task at first. However, with the right practices and tools it becomes an integral part of running a successful business. Whether you hire a professional or take the DIY route, staying proactive with your financial records will pay dividends. Taking the time to set up proper systems now allows you to lay the foundation for your business’s financial wellbeing and growth.

‍

What is Bookkeeping?

Bookkeeping is the process of recording and managing all the financial transactions of a business. It involves tracking income, expenses, assets, liabilities, and equity. Good bookkeeping ensures that your financial records are correct, organized, and accessible. 

‍

CPA vs. Bookkeeper: What is the Difference?

While both bookkeepers and CPAs (Certified Public Accountants) play important roles in managing a business’s finances, their responsibilities differ.

• Bookkeeper: Primarily focuses on daily financial tasks such as recording transactions, reconciling accounts, and maintaining financial ledgers. Bookkeepers keep your financial records updated and accurate. No license or specific education is required for someone to call themselves a bookkeeper. But, not all bookkeepers are equal.
• CPA: A licensed accounting professional who may specialize in a particular area of accounting such as tax or audit, and/or may offer bookkeeping services. CPAs who provide tax services use the data from bookkeepers to prepare tax returns and give strategic advice. When it comes to bookkeeping, having a CPA complete your books is usually more trusted as they will know more about what can be written off, and how to better keep your books for tax purposes.

Put simply, bookkeepers handle the day-to-day financial groundwork while CPAs offer insights and ensure compliance with tax laws. But, many CPAs offer bookkeeping services and that is usually the better choice to ensure your books are done correctly.

‍

Do I Need to Hire a Bookkeeper?

If you are debating whether or not to hire a bookkeeper for your business, there are a few factors you should consider before making your decision: 

• Size and Complexity of Your Business: When your business has multiple revenue streams or complex financial transactions, a bookkeeper can save you time and reduce errors.
• Time Constraints: If managing your books on your own feels too stressful or takes you away from core business activities, outsourcing it may be worthwhile.
• Budget: Determine whether you can afford to invest in a professional bookkeeper or if you are better off managing your books on your own until your business grows.

If you are not ready to hire yet, you can still implement basic bookkeeping practices such as categorizing your transactions on a regular basis. 

‍

Tips for Starting Your Bookkeeping

1. Choose the Proper Entity Type

The structure of your business can greatly impact your operations, taxes, and exposure to liability. The most common types of entities are: 

• Sole Proprietorship: Simple to set up but provides no personal liability protection
• Partnership: Suitable for businesses that have more than one owner
• LLC (Limited Liability Company): Offers greater liability protection while maintaining operational flexibility
• Corporation (C-Corp or S-Corp): Provides liability protection and potential tax benefits but comes with added compliance requirements

Although it is usually possible to change your entity type later on, this can be disruptive and may come with negative tax consequences. You should carefully evaluate your goals for the near and long term before making a choice. It is also best to consult with a CPA or attorney to ensure you select the structure best suited for your business. 

2. Separate Business and Personal Finances

Open dedicated business bank and credit card accounts to avoid blending your personal and business funds. This simplifies bookkeeping and allows for a clear audit trail.

3. Use an Accounting Software

Accounting software, like QuickBooks Online, is vital for efficient bookkeeping. It allows you to automate transaction tracking, categorize expenses, generate invoices, and pull financial reports. Choose a platform that suits the size of your business and your needs. 

4. Store Receipts Digitally

Digital storage solutions eliminate the need to keep binders full of your business receipts. There are several options out there that make it easy to organize and retrieve receipts:

• Use a mobile app that has a receipt capture feature
• For online purchases, save and compile digital receipts in a cloud folder

The IRS states that supporting documentation should include the date, payee, amount paid, proof of payment, and a description of the item purchased or service received. This makes it easier to demonstrate that your purchases are for business purposes. 

‍

What are the Essential Financial Reports?

There are three main financial reports that provide insights into your business’s performance:

• Income Statement (Profit and Loss): Summarizes revenue and expenses over a specific period of time and is used to monitor profitability.
• Balance Sheet: Highlights your assets, liabilities, and equity as of a specific point in time. It provides a snapshot of your business’s financial position.
• Statement of Cash Flows: Tracks cash inflows and outflows to help you understand liquidity and plan for future expenses.

Two other reports that can offer valuable information for business owners are:

• Accounts Receivable (A/R) Aging Report: Shows outstanding customer invoices and helps you manage cash flow by identifying overdue payments.
• Accounts Payable (A/P) Aging Report: Lists unpaid bills so that you can stay on top of your vendor obligations.

It is good practice to review these reports on a regular basis. That way you can make informed decisions and identify any areas for improvement.

To run these reports in QuickBooks Online:

1. Log into your account
2. Go to the "Reports" section in the menu on the left side of your screen
3. Search for and select the desired report 
4. Customize the date range 
5. Add any additional filters

You can export reports to PDF or Excel for further analysis. Reports that you use frequently can be saved under “Favorites” making them easy to access. 

‍

Advantages of Proactive Bookkeeping

There are significant advantages to proactive bookkeeping such as: 

• Financial Clarity: Clear records provide a comprehensive view of your business’s performance
• Tax Compliance and Savings: Accurate records simplify tax preparation and reduce the risk of audits. They also make it easier to identify tax saving opportunities
• Improved Cash Flow Management: Knowing where your money goes enables you to better plan for future expenses
• Informed Decision-Making: Financial insights encourage strategic business decisions

If you need assistance with bookkeeping for your small business, and your books are on the cash-basis within QuickBooks Online, reach out to us! We'd love to help. We specialize in service businesses and non-profits.

‍