Top 14 Bookkeeping & Accounting Tips for Small Business Owners
This article is part of a larger series on Accounting Software.
As a small business owner, it’s critical that you’re involved in the financial management of your business. Here are my top 14 accounting and bookkeeping tips to keep the process simple and help you understand how accounting information can increase the success of your business.
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.
Legal tip from Lea Uradu, JD: Keeping personal finances separate is more than just good bookkeeping. Corporations and limited liability companies (LLCs) that commingle the funds of the company with funds of the owners can lose the liability protection typically afforded to these entities.
Sorting through personal transactions in your business account is time-consuming, is expensive, and can lead to mistakes. While the goal should be to completely segregate business and personal expenses coming out of your credit cards and bank accounts, you can also use business expense tracker apps to filter out personal expenses with just one swipe. For more guidance in this area, read our guide on how to separate business and personal finances.
2. 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. If you need assistance, check out our article on how to pay yourself from your business.
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.
Our guide on reasonable salary for an S-corp shareholder may be of interest to you. It covers the factors affecting an S-corp reasonable salary.
3. Reimburse Yourself for Business Expenses
Despite your best efforts, there’ll 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.
4. Track & Reimburse 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 tip three above.
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.
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 and make mileage expenses tax deductible in your tax filing.
5. Keep Your Receipts for an Audit Trail
While bookkeeping systems don’t rely on receipts to identify transactions, the IRS does require receipts for all tax deductions. 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. Whichever method you use, keeping receipts creates an audit trail that the IRS can follow to substantiate your deductions if ever in question.
6. Reconcile Your Bank & Credit Card Accounts Monthly
Bank and credit card accounts are the primary source of your bookkeeping data. You can ensure you haven’t missed any transactions listed in your accounts by performing a monthly reconciliation, as a reconciliation will also uncover any duplicate or voided transactions that are incorrectly showing in your account. Our article on how to do a bank reconciliation will guide you through the process.
Bank reconciliations can vary in difficulty based on how you account for expenses. If you manually enter expenses as they occur—which is what I suggest—then there will likely be transactions you’ve entered in your accounting system that have not cleared the bank. However, if you never manually enter transactions and only record them when they come through your bank feed, then reconciliations should be very easy.
If you enter transactions as they occur, good accounting software will greatly help with the reconciliations. You need a solution that will allow you to select transactions from your books that have cleared the bank while leaving the uncleared book transactions as reconciling items.
Many free and low-priced accounting software claim to offer bank reconciliations but can’t accommodate reconciling items like expenses recorded on the books that haven’t yet cleared the bank. Check out our roundup of the best bank reconciliation software for help in choosing the right platform.
7. 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 the accounts receivable (A/R) best practices because it helps speed up collection, which increases your business’s cash flow.
Invoicing customers is one of the most important aspects of bookkeeping. I encourage you to spend time learning about invoicing and other bookkeeping responsibilities if you’re considering doing this work yourself.
8. Send Payment Reminders
When customers miss a deadline, act swiftly by contacting and reminding them of a due 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.
9. 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.
If you do outsource payroll to a service, I recommend opening a separate business checking account dedicated solely to payroll so that your payroll provider doesn’t have access to your primary account. In addition, when times are tough, you can ensure there’s money in the payroll account, even if your primary account is overdrawn. There are few things worse for employee morale than bouncing payroll checks.
10. 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.
Given, 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.
If you don’t use QuickBooks, you’ll want to find a local accountant who is familiar with your software. Another option is to use an online bookkeeping firm that will help you get started and then perform crucial duties for you each month. See our guide to the best online bookkeeping firms for our top recommendations.
11. 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 | Weekly | Owner or employee |
Record Customer Payments Received | Weekly | Owner or employee |
Deposit Customer Payments in Bank | Weekly | 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 | 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 weekly tasks to become familiar with any software to be used. If you’re using QuickBooks Online, we have some great free QuickBooks Online tutorials to get you started and some QuickBooks tips (including keyboard shortcuts) to save you time. As your company grows, these weekly tasks should be transferred to an office employee to become possible daily tasks.
12. Analyze Your Accounting Reports
Don’t rely on your bookkeeper to analyze your accounting reports—their job is to input data into the software. 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.
13. Prepare a Budget at Least Quarterly
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
You can use our downloadable spreadsheet to prepare each of these budgets—and the results will automatically flow into budgeted financial statements. Be sure to read our guide on how to create a small business budget to learn more about budgeting and how to use the spreadsheet.
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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.
14. Keep an Eye on Your Credit
One of the most common signs of an insolvent business is an inability to make payments on time. The business may struggle with a lack of funding, poor credit score, or difficulty fulfilling its working capital needs. When businesses use bank financing to fund their daily operations, they often struggle to pay back the high-interest debt. Before taking on any external funding, it’s important to perform adequate due diligence.
Maintaining a high credit score can assist you when planning for major purchases. If you have poor credit, it may be difficult to obtain the necessary funding for business expansion or complete capital expenditures. If you have a low score, our tips on improving your credit can help. Also, it’s a good idea to learn how to build business credit so that you can secure the best possible outcome.
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 14 tips, good bookkeeping and accounting are about how you organize and operate your business, which is something only the owner can do.
