Whether you’re starting a small business or you’re already running one, keeping all transaction records is important.
But, some entrepreneurs are still hesitant to do so. Here’s why:
About 40% of small business owners believe bookkeeping and tax preparations are the worst part of being a business owner. Approximately 47% say they are against the financial cost, and 8% hate all the paperwork.
But, business owners need to realize that bookkeeping is vital to keep their records accurate. Also, it helps them pay their taxes accurately.
Basic bookkeeping may mean a lot of work, both manual and digital. Yet, it’s a way to keep everything organized and accurate. It reduces the risks of mismanaging your finances.
So, to learn more about the basics of bookkeeping, here’s a rundown on how to set up a bookkeeping system.
1. Decide What Bookkeeping System You Need
Once you’ve decided which business structure you need, choose a bookkeeping method to use.
The thing is, you have plenty of bookkeeping systems to choose from. After all, long since have people used manual bookkeeping. Though it’s one of the widely used methods today, it’s time-consuming and needs a lot of storage for your papers.
If you’ve already been running a business using manual accounting methods, you know how hard it can be. First off, there’s a potential for mistakes. And when it comes to numbers, even the smallest error, like entering a wrong digit or misplacing the decimal point, can already lead to massive losses.
Use automated or digital bookkeeping systems, on the other hand, and you benefit from the added security and reduced risks for errors. Be mindful, however, that keeping your records in basic computer programs could also put the company at risk.
About 43% of cyber attacks target small businesses. Hence, security is as important in your bookkeeping system as in any other component of your organization.
2. Decide How You Will Record Financial Transactions
You have all the power to decide how to manage your financial transactions. But, there are three primary ways you can do so.
First, is to record by hand. Second is to use an accounting software. And third, hire an accountant or basic bookkeepers to do all the work.
For small businesses, hiring an accountant may seem too expensive. Many entrepreneurs resort to recording everything by hand. The thing is, manual recording may take too much time, not to mention the high risk of errors.
If you have a little money to spare, opting for accounting software is ideal. It’s automated, so all you need is input all data. Also, you have all your records in one small computer.
Remember, though, that keeping a manual record of your transactions aside from the digital ones can help you. When your computer bogs down or you have corrupted records, you can rest assured that you have easy access to back up data.
3. Choose a Good Accounting or Bookkeeping Software
At first, you may need a simple and low-cost accounting or bookkeeping system. There are many options available today.
Even if you’re tight on the budget, worry not, as you’ll find bookkeeping applications that can still do the work. They’re excellent for tracking expenses, among many other things.
For those who have some money to spend, Quickbooks is easy-to-use and affordable. This system works by keeping your financial transactions intact and accessible. Also, this software is ideal for small businesses that don’t handle multiple currencies or carry inventory.
The software monitors your expenses, profits, and income. It also manages your payroll and sends invoices.
4. Set up a Chart of Accounts
Regardless of what bookkeeping system your business uses, you need a chart of accounts (COA). This pertains to an accounting system, designed for your company. This chart aligns your financial structure by recording the income and expenses of the company.
The COA is a list of accounts that shows classifications. You may assign your transactions to one account. From there, you can organize your transactions and, at the same time, ensure that you have balanced books.
The accounts include cash, revenue, and payroll. It also has lists of supplies, rent, utilities, accounts payable, and accounts receivable.
The accounts you will use depend on which bookkeeping system you want.
For instance, you want an accrual accounting system; you’ll need a double entry bookkeeping system. This includes accounts like accounts receivable and accounts payable.
5. Open Your Business Bank Accounts
Why is it important to separate your business money from your personal money? It’s simple.
Having separate bank accounts keeps records accurate and make life easier come tax time.
This is important when you hire an accountant to manage your taxes. The records should be accurate and true. If your personal money is mixed with your company’s money, it will be hard to make sure the reports won’t have errors.
Did you know that 70% of small businesses outsource tax preparations? It’s a reason why you should have organized financial reports and separate bank accounts.
Legally, corporations and partnerships are required to have a separate bank account for business. For small businesses, however, it’s not required, but it’s definitely recommended.
But before opening a business bank account, you need to have a business name. Also, you need to register it in your province or state.
6. Know What Payment Terms You Want
In setting up a bookkeeping system, you need to decide how you want to get paid. When sales start rolling in, you need a way to accept payments.
For instance, you can choose cash basis, or you can accept credit card payments. Don’t overlook the importance of effective invoice payment terms. It determines how quickly you get paid.
Of course, if it takes too long to collect payments, it might affect your cash flow. That’s why an invoice is important. Make sure to include all the information customers need to pay you.
These include your contact number, the numbers of items purchased and the due date for payments.
Moreover, keep a record of all receipts and invoices. Aside from helping you come tax time, keeping all the records will help you track your profits.
7. Set up a Bookkeeping System Maintenance
The data your bookkeeping system stores and records are important for your business. Even if you use electronic bookkeeping systems, it’s essential to ensure regular maintenance.
But the first rule is to make sure you always enter data promptly and accurately. Set aside a certain time daily or weekly, to enter your accounting data. You will have a reduced risk of errors, and you won’t have a long list of data to enter.
The more often you enter your financial data, the lesser hassle and error you will have.
8. Constantly Re-Evaluate Your Bookkeeping System
For first-time business owners, you might start off with a simple spreadsheet to manage your books. But, as the company grows, you might consider advanced methods and systems.
As you continue growing, it is good to re-evaluate your current system. Assess the amount of time you spend managing your books. Also, see how much your bookkeeping needs is costing your business.
When you evaluate every now and then, you can shift from one system to another. It all depends on how much you’re willing to spend and how big your company is.
The right bookkeeping solution means that you invest more time in the business itself and not in bookkeeping. In the long run, this will help you save money, time, and effort. Plus, you have more time brainstorming on ways to boost your sales and grow your business.
9. File Everything
File everything from transactions, receipts, invoices, and records. Business record management is a crucial part of running a successful business. File your business documents immediately to make sure that everything is in order.
For instance, start a daily regimen of entering bills, expenses, and other financial transactions. This way, you can keep track of your expenses and profits appropriately.
Appropriate record keeping ensures the critical documents and records are correct. Wrong data may cost you more and may even lead to your company’s failure.
A Basic Bookkeeping System Is the Key to a Successful Business
Starting a business can be an overwhelming and tedious process. But, if you choose a good bookkeeping system, you’ll have your finances in order.
As your business grows and you start earning, your accounting system will need to become more robust. Remember, the goal is to start right from the beginning. This way, you will have an organized financial record.
You will reduce the risks of hassles and errors in the future. The key to a successful business is to make sure everything is on track. The more organized you are, the easier for you to manage your business.
But, if your accounting system is taking too much of your time, you might want to consider hiring an assistant to help you. You can also outsource an accountant.
A bookkeeper is responsible for managing your financial documents. He or she enters the data and make sure everything is correct. As a result, you reduce the chances of errors come tax time.
An accountant may also help you during the tax filing season. All you need to do is provide all the documents needed.
To learn more about meeting your accounting needs and basic bookkeeping, visit our blog!