What Small Business Owners Should Know About Bookkeeping
Written by Bindi Gethen
Bookkeeping might seem like a tedious chore to the uninitiated, like that pile of laundry you keep promising yourself you’ll finally tackle. But it doesn’t have to be. Call me biased because this is a bookkeeping agency – just hear me out.
No one starts a business because they’re excited about bookkeeping. You’re a visionary, a dreamer, and a doer. You’ve got a product to perfect, a market to conquer, and a world to change. But if you’re not keeping an eagle eye on your numbers, you’re running your business blindfolded. Good bookkeeping is necessary to take your business beyond the survival stage.
So what should a small business owner know about bookkeeping? The most important thing is a firm grasp of financial reports and cash flow concepts. These represent your company’s financial situation. With this knowledge, you can predict future risks and plan accordingly. Other things a small business owner should know are how to have clean records, separate business accounts, accounting software, and tax filing.
- Basic financial reports and cash flow concepts
- Clean records
- Separation of personal cash and business money
- Accounting software
- Taxes
What should a small business owner know about bookkeeping?
1. Basic financial reports and cash flow concepts
Every small business owner should be familiar with basic financial reports. These include the balance sheet (a snapshot of your company’s financial situation at a specific moment in time) and the income statement (which tracks revenues, costs, and expenses over a period).
Another crucial report is the cash flow statement. You need to understand what’s coming in from sales and going out for expenses. When you’re earning more than you’re spending, you have positive cash flow – that’s the sweet spot. Negative cash flow, on the other hand, could spell trouble.
Business owners should also be aware of financial intricacies like Accounts Receivable (AR) and Accounts Payable (AP). AR are the funds owed to your business by customers who have purchased goods or services on credit. Regular, efficient tracking of these accounts can significantly impact your cash flow by ensuring you receive what you’re owed in a timely fashion.
AP represents the funds your business owes to suppliers and vendors. Keeping track of AP helps you avoid overdue penalties and maintain healthy relationships with your suppliers. Remember, working capital – the difference between your current assets (like cash, inventory, and AR) and your current liabilities (like AP) – is a key indicator of your business’s short-term financial health.
Pro tip
Keep a close eye on your cash flow to avoid nasty surprises. I promise, you don’t want to get caught off guard.
2. Clean records
This goes beyond the basic idea of knowing where your money is coming from and where it is going. Clean, well-organised financial records can make your life easier during tax season. It’s not the most glamorous part of running a business, but it’s one of those behind-the-scenes tasks that really holds everything together.
Start with meticulous income and expense tracking. This is a non-negotiable step. Categorise each expense. Reconcile your business bank account statements every month. And don’t be afraid to ask for help.
Related articles:
How Much Should a Small Business Spend on Bookkeeping?
What Do I Need to Open a Business Bank Account in Australia?
3. Separation of personal cash and business money
Sure, it might seem easier to just lump everything into one bank account. Less administration, less paperwork. It’s like tossing all your laundry into one machine without separating whites and colours. It’s quick and convenient – until your favourite white shirt comes out pink and your jeans have strange white streaks.
In the same way, mixing your personal and business finances might seem like a time-saver initially, but it can lead to costly mistakes, confusion, and potential legal issues down the line. It obscures the true picture of your business’ performance.
It’s easier to spot trends, understand where you might be overspending, and identify opportunities for investment or growth. And if you ever decide to sell your business or need to secure a loan, having separate accounts will make that process a hundred times easier.
Pro tip
Think of it as not just separating accounts, but separating headaches. The clarity that comes with separating your personal life from business is priceless.
4. Accounting software
Think of software as the equivalent of hiring an extra brain, one that’s specialised in keeping your financials in order. No more scattered spreadsheets or late-night ledger balancing. You can automate the dull stuff, reduce errors, and free up your time to focus on growing your business.
At The Bookkeeping Studio, we like to use Xero and Quickbooks (not sponsored!).
5. Taxes
Taxes are a reality we can’t ignore as business owners. But they don’t have to be the monstrous headache that you dread.
That’s why you need to treat your books with respect. By keeping scrupulous records of your revenue and expenses, you lay a solid foundation for accurate tax filings.
If you still have reservations, keep in mind that taxes are essentially your financial contribution to the society that enables your business to thrive. They fund the roads your products are transported on, the schools educating your future workforce, and the infrastructure that makes your business possible.
Related articles:
Small Business Tax Deductions in Australia
How Are Small Businesses Taxed in Australia? 2023 Guide
Price It Right: The Best Pricing Strategy for Your Small Business
How to learn the basics of small business bookkeeping
Firstly, toss out the notion that you’ve got to be a numbers whiz. Sure, a love for digits won’t hurt, but what you really need is a genuine commitment to understanding the financial pulse of your business.
Start by learning the language of bookkeeping: terms like “assets”, “liabilities”, “accounts receivable”, and “accounts payable”. Next, get comfortable with the fundamental accounting equation: Assets = Liabilities + Equity. This equation forms the backbone of all bookkeeping systems.
Get acquainted with the main types of accounts (i.e., income, expenses, assets, liabilities, and equity) and financial statements (i.e., balance sheet, income statement, and cash flow statement).
Invest in a good bookkeeping software. Practice makes perfect.
Learn how to reconcile your books.
And lastly, remember that you’re not alone in this. Small business bookkeeping might seem daunting, but there are resources out there to help you. Online tutorials, community forums, and even professional virtual bookkeepers can offer guidance and support.
Frequently Asked Questions
First, you can DIY with bookkeeping software. Second, if your business has the financial capacity, consider hiring a dedicated in-house bookkeeper. And third, if you find yourself short on time and in-house hiring isn’t feasible, consider outsourcing to virtual bookkeeping services.
There are no right or wrong answers here – just choices and their consequences.
Traditionalists might prefer manual methods, using filing cabinets and highlighters to keep track. Yet, this is time-consuming and prone to human error. A more efficient approach would be using a digital system like Excel or Google Sheets, where you can easily update, track, and analyse your financial data.
However, we highly recommend specialised software apps like Xero and QuickBooks. These make bookkeeping tasks feel less of a chore.
There’s no one-size-fits-all approach. Find what works for you and your business.
Daily updates
Pros: Immediate insight into your financial health; quicker detection of discrepancies.
Cons: Can be time-consuming, especially for small businesses juggling multiple areas.
Weekly updates
Pros: An ideal balance of time and detail; less likely to overlook transactions.
Cons: May not capture day-to-day fluctuations; may still be time-consuming.
Monthly updates
Pros: More manageable for business owners; provides a broad overview of financial standing.
Cons: Can miss smaller transactions; more challenging to spot errors due to the volume of data.
Single-entry bookkeeping is like your checkbook register. It’s a one-line entry for each transaction, recording either income or expense – but not both. It’s simpler, easier to manage, and perfect for you if you’re running a small business with uncomplicated finances.
Double-entry bookkeeping is a two-line entry for each transaction. One line records the debit and the other records the credit. It’s a necessity for larger businesses with complex transactions.
If you’re just looking to keep track of revenue and expenses, single-entry might be your best bet. But if you’re planning to expand, expecting to deal with complex financial transactions, or need detailed financial reports for investors, double-entry is the way to go.
The best bookkeeping software isn’t necessarily the one with the most features, but the one that best fits your business needs. Are you looking for basic bookkeeping? Or do you need more comprehensive services like inventory management, billing and invoicing, payroll services, or tax support?
Many of these software solutions come with user-friendly interfaces and step-by-step guides, making it easy for you to navigate them. While the price is a factor, it shouldn’t be the only one. The right software should not only fit your budget but also provide value for money. Free doesn’t always mean better.
Let’s make your small business bookkeeping journey an easy one
Suppose you’re spending 10 hours a week on bookkeeping. That’s 10 hours less you’re spending on marketing, strategy, customer service, or product development – areas that directly contribute to your bottom line. Let’s say your time is worth $100 an hour. You’re effectively spending $1,000 a week – or $52,000 a year – in opportunity cost.
And then there’s the cost of errors. A misplaced decimal point, a missed invoice, an incorrect tax filing. These mistakes can cost you hundreds, if not thousands of dollars. Not to mention the hours you’ll have to spend untangling the mess, and the potential damage to your reputation or relationship with suppliers or customers.
Outsourcing to The Bookkeeping Studio could cost a fraction of all that. We don’t make the same rookie mistakes. We’ll save you time by handling your books faster and more efficiently.
Explore a strategic investment in the financial health of your small business today.
Hey, my name’s Bindi Gethen! I’m the founder of The Bookkeeping Studio in Australia. With over 15 years of experience in the industry, I have a deep understanding of the challenges that small and medium-sized business owners face when it comes to managing their finances.
I am passionate about empowering my clients with the financial information they need to succeed. My team and I pride ourselves on our commitment to exceptional value, accuracy, and confidentiality. Our virtual bookkeeping services include payroll, budgets, and management reporting, among others.
Not to toot our own horn, but we can assure you that you won’t find a bookkeeping partner like us anywhere else in the Southern Highlands.
