Top 13 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 13 bookkeeping and accounting tips to keep the process simple and help you understand how accounting information can increase the success of your business.
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.
I’ve personally handled bookkeeping for several small businesses, where more than half of the transactions in their “business” accounts were personal. Sorting through personal transactions 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 trackers to filter out personal expenses with just one swipe.
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.
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.
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 submit it for reimbursement with your monthly expenses as explained in tip three 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 and make mileage expenses tax deductible in your tax filing.
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. A 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.
After the delivery of goods or performance of services, you should send the invoice immediately—at least within 48 hours. Customers are likely to pay quickly since the transaction is still fresh in their minds.
Shifting to electronic invoicing can help send invoices faster and easier. Approximately 58% of finance professionals have shifted to digital processes as a result of COVID-19. Invoicing within 48 hours is an accounts receivable (A/R) best practice because it helps speed up collection, which increases your business’s cash flow.
When customers miss a deadline, act swiftly by contacting and reminding them of a due invoice. You can send payment reminders 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.
Payroll management is a burden for most small businesses, which is why 45% of small businesses outsource their payroll accounting. 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 providers even integrate with your accounting software so that the necessary accounting entries are loaded automatically.
If you do outsource payroll, 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.
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.
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.
The first nine 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 who to assign them.
Issue Invoices to Customers
Owner or employee
Record Customer Payments Received
Owner or employee
Deposit Customer Payments in Bank
Owner or employee
Record Vendor Invoices Received
Owner or employee
Issue Checks to Pay Vendors
Owner or employee
Record Credit Card Charges
Owner or employee
Reconcile Credit Card & Bank Account Transactions to Statements
Close Books to Prevent Further Entries
Produce Monthly Financial Statements
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 about to be used. If you’re using QuickBooks Online, we have some great free QuickBooks Online tutorials to get you started. As your company grows, these weekly tasks should be transferred to an office employee to become possible daily tasks.
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.
- A/R aging report: This report shows you 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.
- Accounts payable (A/P) aging report: Here, you see 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.
- Cash flow statement: 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.
Now that you’ve reviewed your accounting reports, you should have good information to project your cash flow for the next few months. The first step in preparing a good budget is to forecast sales. Reviewing the sales shown on your profit and loss (P&L) report over the past few months should provide some information on what sales should be next month. You may also want to consider what sales looked like for the same period last year to take into account any seasonality in your business.
The next step in a good budget is to examine the expenses on a recent P&L report. Try to predict what each major expense will be in your forecasted period based on your forecasted sales. Some questions to consider are
- Which expenses will increase or decrease with a change in sales? These are your variable expenses and are the most difficult to predict. For instance, direct labor costs and direct materials costs might be best predicted as a percentage of sales.
- Which expenses will remain the same regardless of sales? These fixed expenses are usually easy to predict, such as monthly rent.
- Are there any major changes to my operations? Be sure to consider any changes that may not show up on your prior financial statements. For instance, if you hire new office employees, your payroll expense will probably increase.
Be sure to 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.
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. 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 United States Bureau of Labor Statistics (BLS) reports that 18.4% of new businesses fail after one year, and 49.7% 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 need to understand how to organize your business to make the process more efficient and accurate.
Frequently Asked Questions (FAQs)
What are three common bookkeeping mistakes?
Three common bookkeeping mistakes include failing to track reimbursable expenses, neglecting to reconcile bank accounts, and failing to collect or deduct the appropriate sales tax.
What are key skills for a bookkeeper?
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.
What are the five major elements of accounting?
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.
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 bookkeeping and accounting tips have nothing to do with the bookkeeping system itself but, rather, how you conduct your business. As explained in these 12 tips, good bookkeeping and accounting are about how you organize and operate your business, which is something only the owner can do.