Bookkeeping is a hugely integral part of the success of a business.
Simply put, bookkeeping is the practice of recording all financial transactions occurring on a day-to-day basis.
Although it often gets confused with accounting, bookkeeping is just one part of the accounting process. It’s kind of like the pre-match tactics before a football game – monitoring the finer details helps the team prepare for success and allow them to execute a well-thought-out plan.
The bookkeeper keeps track of all manner of financial details from invoices to transactions between customers and suppliers. A clear and organized record of this information allows for accounting practices – the analysis of this financial data – to chart a course of progress and manage the growth of the business.
So, what can Bookkeeping do for you?
The tracking of financial records and data helps provide a backbone to the growth of any small business. According to the National Federation of Self Employed & Small Business, there were 5.9 million small businesses at the start of 2020. The growth of these businesses depends on utilising proper practices that can help track and improve growth.
Bookkeeping simply tells you where your money is coming in and where it is going. This can tell you whether your sales are improving or whether your expenditures, like shipping costs, are too high and if adjustments to your business model should be made.
If you don’t keep track of your financial records, you could miss out on small details that could cost your business! Bookkeeping can tell you whether you are due a payment from a customer or if you are at risk of bank charges for overdrawing.
Not only that, but it can also make sure you don’t miss out on tax deductions. A tax deduction is an expense that you can deduct from your taxable income – like legal fees or travel expenses. These deductions can add up and save your business a considerable sum, so bookkeeping is a vital way of keeping track of potential savings.
Accurate and current books also tell you how much tax you need to pay on your net profit (= income – expenses) and lets you produce financial statements, a necessity for getting a business loan. Having a clear, identifiable record of your financial transactions gives lenders a transparent and clear understanding of the fundamentals of your business.
How can I start the Bookkeeping process?
A very important early step in the bookkeeping process is to choose one of the two main methods: single entry or double-entry.
Single entry bookkeeping is a suitable method for new businesses and start-ups. Entries into the journal are only recorded once, denoted as either income or an expense. This method is easily trackable and great for the basics of bookkeeping.
Double-entry, on the other hand, is a more comprehensive and complex bookkeeping method designed for businesses beyond the initial stages. Unlike single-entry, under double-entry bookkeeping all transactions are registered twice in the general ledger as both a debit and a credit.
Almost all accounting software uses the double-entry method as it tracks assets and liabilities, providing extra information to help create major financial statements.
Once this is done, yet another decision must be made! This decision refers to which of two accounting methods – cash or accrual – your bookkeeping will reflect.
With cash accounting, financial transactions are only recorded once money has changed hands. You only input the data once a transaction has been processed, telling you exactly how much money your business has at any one time. This is great for a small business. It means you don’t have to track money that customers owe you or money that you owe suppliers.
On the other hand, accrual accounting is more suitable for a larger business. Accrual accounting, unlike cash accounting, records income when the customer is billed. Accrual also records expenses, or accounts payable, when the bill is received rather than when the money changes hands.
Tracking receivables and payables gives a more current and realistic record of your income, expenses, and other financial transactions. This provides a business with a wider, long-term understanding of the business’ growth over a set period.
What next?
With all those decisions out of the way, you can now focus on the actual act of bookkeeping.
By using a spreadsheet you can categorize transactions depending on your industry or business. This categorization makes it so much easier for your bookkeeper to monitor errors. It also helps them keep an eye out for those tax deductions mentioned above. It will also help protect you if your business is audited.
Categorising accounts by type helps to tie together how incoming and outgoing money is classified and recorded. These account types tend to fall under one of the following five:
- Revenue
- Expenses
- Assets
- Liabilities
- Equity
If you don’t like using Excel, there are many popular bookkeeping software programmes like Quickbooks, Sage 50cloud or Zoho Books.
Alternatively, Count offers comprehensive bookkeeping services that can manage these financial services on your behalf.
If you decide to manage these accounts yourself, make sure you always keep back-up copies!
A final tip
Try to make bookkeeping a regular, commonplace practice. Even though it forms an incredibly important aspect to the running of a business, bookkeeping can be easily forgotten.
Scheduling a bookkeeping day to monitor financial statements can help keep on top of mistakes and input any forgotten data.
If you do happen to fall out of sync with your transactional records, hiring a professional service like Count can seriously help reinvigorate your bookkeeping and get you back on schedule.
If you’re ready to outsource your bookkeeping to a professional like ours, click here to look at some of our offers!