As a small business owner, it’s critical that you’re involved in the financial management of your business. Here are my top accounting and bookkeeping tips to keep the process simple and help you understand how accounting information can increase the success of your business.
- Keep business and personal finances separate.
- Base your bookkeeping on bank transactions, not receipts.
- Reconcile your bank and credit card accounts monthly.
- Keep your receipts for an audit trail.
- Choose the best accounting software specifically for your business.
- Pay yourself a salary.
- Reimburse yourself for business expenses.
- Track and reimburse your business mileage.
- Customize your invoices.
- Invoice customers within 48 hours.
- Send payment reminders.
- Outsource payroll.
- Hire a pro to set up your accounting software.
- Assign bookkeeping tasks.
- Analyze your accounting reports.
- Prepare a quarterly budget.
- Understand your industry accounting practices.
1. Keep Business & Personal Finances Separate
A golden rule for bookkeeping: Every business transaction, and no personal transactions, should flow through your business bank and credit card accounts.
Even if you’re self-employed or a freelancer, I highly recommend you have separate bank and credit card accounts that are used exclusively for business. By eliminating all personal transactions from your business accounts, you’ll greatly reduce the number of transactions your bookkeeper must categorize and reconcile.
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2. Base Your Bookkeeping on Bank Transactions, Not Receipts
A common rookie bookkeeping mistake is to try to accumulate your expenses based on receipts. While receipts are important if you’re audited, you’ll never know if you’ve caught every deduction.
Instead, base your bookkeeping on the transactions in your business bank account. Ensure every transaction on your bank statement appears in your bookkeeping software. Almost all modern small business accounting software will automatically transfer your bank transactions into your bookkeeping software, so all you’ll need to do is classify the transactions.
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3. Reconcile Your Bank & Credit Card Accounts Monthly
Since bank and credit card accounts are the primary source of your bookkeeping data, you must ensure you haven’t missed any transactions listed in your accounts by performing a monthly reconciliation. A reconciliation will also uncover any duplicate or voided transactions that are incorrectly showing in your account.
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4. Keep Your Receipts for an Audit Trail
While bookkeeping systems don’t rely on receipts to identify transactions, the IRS does require receipts to prove tax deductions. In addition to receipts required by the IRS, you should keep track of other source documents to help establish an audit trail for your own problem solving when issues arise.
An old-fashioned method of keeping receipts is to have a file folder for each vendor where you place paper receipts. However, the newer method is to scan receipts and attach an electronic copy of the receipt to the transaction within your bookkeeping software—a nice function that many accounting programs include for free. There are also receipt scanner apps that can scan, read, and sort receipts for you.
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5. Choose the Best Accounting Software Specifically for Your Business
There is no one-size-fits-all best accounting software for every business. Different industries and company sizes demand different types of accounting software. I recommend listing the features your company needs and then finding the software that best fits those needs. Here are some common features you should consider:
- Customize invoices
- Track unpaid bills
- Pay bills electronically directly from software
- Print paper checks
- Track employee time by customer or project
- Assign expenses to customer or project
- Add time and expenses to invoices automatically
- Track expenses by location, class, or create custom tags
- Issue estimates for large projects
- Process payroll
- Keep books on the go with a mobile app
High-end small business accounting software like QuickBooks will have all these features, while less expensive software will have fewer.
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6. Pay Yourself a Salary
Owners of C corporations (C-corps) and S corporations (S-corps) must pay themselves a reasonable salary and run it through the payroll system like any other employee. However, I suggest that self-employed owners, freelancers, and partners also pay themselves a “salary,” although it’ll technically be an owner’s draw and excluded from payroll.
Paying yourself a salary reinforces the notion that your business is a separate entity and reduces the need for you to violate tip number one by having your business pay your personal expenses directly. Instead of numerous transactions during the month where the business pays an expense on your behalf, have the business write you one check per month that you deposit into a separate account used to pay your personal expenses.
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7. Reimburse Yourself for Business Expenses
Despite your best efforts, there will be times when you pay for a business expense with personal funds. Remember, the golden rule says these business expenses should appear in your business bank account. To do so, have the company write you a check to reimburse the expense you paid with personal funds. This should be a separate check from your monthly salary.
The process for reimbursing yourself should be the same as for employees. List the expenses along with the date, vendor, and purpose on a spreadsheet and attach the receipts. Your business then writes you a check for the exact amount. While this is a bit of a hassle, it’ll guarantee that your bookkeeper deducts the expenses since they were paid with a check from the business account. It also provides an audit trail to substantiate the deduction if questioned by the IRS.
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8. Track & Reimburse Your Business Mileage
Your business can deduct a standard rate per mile―65.5 cents for 2023―for any business mileage that you drive using your personal vehicle. Track the date, miles, and purpose of each business trip, and then submit it for reimbursement with your monthly expenses, as explained in the tip above.
The business shouldn’t directly pay any expenses of your personal vehicle, even for fuel that will be used entirely for business. You should use the 65.5 cents per mile received from the company to pay for your fuel and maintenance.
Software like QuickBooks Online can track your mileage automatically using the GPS in your smartphone, which is much easier than trying to do so manually. Aside from QuickBooks, there are other mileage tracker apps that can categorize personal and business trips, plan routes, or maintain timesheets.
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9. Customize Your Invoices
I recommend spending time making your invoices attractive and professional, in addition to providing all the information for the customer to understand what they are being billed for, when it’s due, and how they can pay. Your invoice represents your company and should include your company colors and logo.
While nobody is going to pick your company because of your pretty invoices, they certainly might laugh and wonder what decade you’re stuck in if the invoice looks like it was prepared on a typewriter. Invoices are a reflection of your professionalism.
Accounting software varies a lot when it comes to creating a custom template for your business. My top picks are QuickBooks and FreshBooks. Invoices from the less expensive software are far less customizable.
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10. Invoice Customers Within 48 Hours
After the delivery of goods or performance of services, you should send the invoice immediately—at least within 48 hours, as customers are likely to pay quickly since the transaction is still fresh in their minds. Invoicing within 48 hours is one of our accounts receivable (A/R) best practices because it helps speed up collection, which increases your business’s cash flow.
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11. Send Payment Reminders
When customers miss a deadline, act swiftly by contacting and reminding them of an overdue invoice. You can ask for payment via email several days before the due date and then again one day after the due date. Always give customers the benefit of the doubt, and don’t assume that they’re trying to avoid payment.
If they continue to become unresponsive, then you can send collection letters to collect payment and for documentation, in case nonpayment escalates to legal action. Our guide on how to write collection letters contains the dos and don’ts of writing a collection letter and templates you can download and customize.
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12. Outsource Payroll
Payroll management is a burden for most small businesses, which is why payroll outsourcing is projected to grow by nearly 6% over the next four years. I highly recommend you do the same.
Issuing paychecks, withholding employee taxes, and filing payroll tax returns is a cumbersome process that can be outsourced easily for a reasonable price. Many payroll service providers even integrate with your accounting software so that the necessary accounting entries are loaded automatically.
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13. Hire a Pro to Set Up Your Accounting Software
There are many great choices for small business accounting software, but setting up a system properly is complicated. The better the program is tailored to your business, the easier and more beneficial it’ll be to use.
I recommended that you hire a pro to customize your chart of accounts, products and services, customers, vendors, and invoices. Be sure to have them show you how to make changes to these lists as necessary. Once these lists are complete, everyday transactions like issuing invoices and paying bills are very easy.
There are several ways to have a pro set up your software. If you are a new QuickBooks subscriber, Intuit will provide a free meeting with one of its ProAdvisors to get your books set up. If you’re a current QuickBooks subscriber, you can find a local QuickBooks ProAdvisor who can adjust your current books so that they are set up properly for the future.
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14. Assign Bookkeeping Tasks
The bookkeeping and accounting tips above apply to all small business owners, whether they do the bookkeeping themselves or outsource the process to a professional. Now, it’s time to decide how much of the work you’ll do yourself.
Here’s a list of some major bookkeeping tasks and my recommendation for a new small business on how often to handle them and to whom to assign them.
Bookkeeping Task | Suggested Frequency | Assign To |
|---|---|---|
Issue Invoices to Customers | Daily | Owner or employee |
Record Customer Payments Received | Daily | Owner or employee |
Deposit Customer Payments in Bank | Daily or weekly if cash flow allows | Owner or employee |
Record Vendor Invoices Received | Weekly | Owner or employee |
Issue Checks to Pay Vendors | Weekly | Owner or employee |
Record Credit Card Charges | Weekly | Owner or employee |
Reconcile Credit Card & Bank Account Transactions to Statements | Monthly | Owner or Bookkeeping firm |
Close Books to Prevent Further Entries | Monthly | Bookkeeping firm |
Produce Monthly Financial Statements | Monthly | Bookkeeping firm |
Many of these bookkeeping tasks are an integral part of your business and hard to outsource, like issuing invoices and paying bills. Meanwhile, tasks like closing the books, reconciling accounts, and producing financial statements are outside your normal business operations and might be best left to a professional.
I recommend that a new owner personally perform, at least initially, the daily and weekly tasks to become familiar with any software to be used. As your company grows, these weekly tasks should be transferred to an office employee to become possible daily tasks.
The monthly tasks can easily be done by an independent bookkeeper, but some business owners prefer to do it themselves. If you don’t go with a bookkeeping firm for these tasks, be sure that the employee doing the bank reconciliation is not the same employee recording customer payments or issuing vendor payments. This is an important segregation of duties to prevent employee theft.
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15. Analyze Your Accounting Reports
Don’t rely on your bookkeeper to analyze your accounting reports—their job is to input data into the software, and it’s the manager’s job to examine the output of the accounting system to help manage the business. Small businesses often struggle with cash flow, and there are a few simple accounting reports that can help you:
- The A/R aging report informs you of how much each customer owes you and whether the debt is current or overdue. In addition to indicating when you should contact the customer concerning payment, the report will give you a pretty good idea of how much cash you should collect in the near future.
- The accounts payable (A/P) aging report shows you how much you owe each of your vendors and when it’s due. This helps you see future cash flow needs and anticipate cash flow shortages that should be addressed immediately.
- The cash flow statement separates your cash flow by operating, investing, and financing activities. Negative cash flow from operations is potentially a serious problem that needs to be addressed.
16. Prepare a Quarterly Budget
Now that you’ve reviewed your accounting reports, you should have good information to project your cash flow for the next few months. Creating a good overall budget consists of creating a series of smaller budgets that all feed into a larger budget. You should create a:
- Sales budget
- Inventory and purchases budget
- Cost of goods sold budget
- Sales and administrative expense budget
- Capital budget
- Cash budget
Compare your actual results to your forecasted cash flows. It might be difficult to make good predictions at first, but after a few times through the cycle, you’ll see dramatic improvements. Once you’re able to make accurate projections of expenses, you can quickly identify and resolve problems. Without a budget, many business owners don’t recognize a problem until they have a cash flow crisis.
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17. Understand Your Industry Accounting Practices
All of the tips I’ve presented thus far can be useful to any small business, but lots of industries have additional factors to consider. Here are some additional bookkeeping tips that might be helpful for your particular business:
Why Bookkeeping Is Important
Bookkeeping is more than a necessary evil. An accurate, robust accounting system provides information about the business’ performance, cash flow, financial condition, and ability to continue at a going concern. The Bureau of Labor Statistics (BLS) reports that 20.8% of new businesses fail after one year and 48.4% fail after five years.
You don’t need to do the bookkeeping yourself, but research shows that 64% of business owners handle their own books. This is a good indicator that having in-depth accounting knowledge isn’t a major requirement—you simply need to understand how to organize your business to make the process more efficient and accurate.
Frequently Asked Questions (FAQs)
Three common bookkeeping mistakes are failing to track reimbursable expenses, neglecting to reconcile bank accounts, and failing to collect or deduct the appropriate sales tax.
A good bookkeeper must be highly organized with a strong attention to detail. They must also be reliable and trustworthy, communicate effectively, and specialize in problem-solving. Prior experience working with businesses in your industry is also a plus.
The major elements of accounting appear on your chart of accounts, which organizes your finances into five major account types: assets, liabilities, equity, revenue, and expenses.
Bottom Line
Small business owners cannot eliminate the headache of bookkeeping by merely outsourcing the function—remember, good bookkeeping starts with how the business is operated. Most of my accounting and bookkeeping tips have nothing to do with the bookkeeping system itself but rather how you conduct your business. As explained in these 17 tips, good bookkeeping and accounting are about how you organize and operate your business, which is something only the owner can do.
