Small business bookkeeping and accounting tips to stay on top of your finances

Aug 10, 2022

12 min read

You may be an expert in your field, but you need to wear several different hats as a small business owner. When you started your business, it probably wasn’t because you wanted to spend all your time doing small business bookkeeping and accounting (unless you’re an accountant!)

But whatever your business, you can’t avoid accounting and your finances. You need a sound bookkeeping system to track your income, expenses, invoices, and receipts, to stay out of debt and out of trouble with the tax authorities. Without basic bookkeeping and accounting skills, you won’t know whether you’re losing money or making a profit.

So to help your business thrive, we’ve put together a straightforward intro to bookkeeping and accounting basics to help you stay on track. This guide covers:

Accounting vs. bookkeeping: what’s the difference?

While some people may use the terms interchangeably, there’s a subtle difference between the two functions. According to Quickbooks, bookkeeping is the day-to-day recording of financial transactions and information about a business. Bookkeeping is more administrative and transactional.

On the other hand, accounting is the process of interpreting, classifying, analyzing, reporting and summarizing financial data collected while bookkeeping. Accounting is analyzing your bookkeeping records to understand your business, such as operational costs, revenue streams and your business’s overall financial health.

With diligent bookkeeping and accounting, you can spot cash flow problems before they start, generate financial forecasts and make informed decisions about business finances.

Bookkeeping 101: 4 best practices for any business

No matter your business type, these four bookkeeping fundamentals will help you stay on the right track. Don’t worry about getting everything right immediately; you’ll get better at budgeting and recording transactions as you gain experience.

1. Record every transaction

Keeping accurate records will make learning how to do accounting and file your taxes much more manageable. Record every payment you make and all the money that comes in, even if a client reimburses you or it’s just a dollar you found on the sidewalk.

You can even include notes to remind yourself of why the transaction happened. Keeping good records builds a strong foundation for all of your basic accounting.

2. Budget precisely

Planning is the key to basic bookkeeping for small businesses. Writing a detailed budget will remind you to set aside money for things like office supplies, marketing, and taxes, so you don’t get a nasty shock when tax season rolls around.

It will also help you set benchmarks so that you’ll know early on if you need to up your game or can afford to take a break.

3. Separate business and personal transactions

When you’re first starting out, your business might be a sole proprietorship, where there is no tax or legal separation between your business and personal finances. Even if this is the case, the best thing you can do for yourself is to have separate business and personal bank accounts.

And this doesn’t just mean separating money and transactions in one checking account; it’s better to have everything completely separate, including accounts, checkbooks and credit cards. It will make it easier to solve problems later when you come across mystery expenses and will make your accounting paperwork a piece of cake.

4. Review your books regularly

You might have the cleanest business ledgers, but it won’t do you any good unless you review them regularly. Set aside time weekly, monthly, and yearly to review your records.

Regular reviews ensure every cent is accounted for, there aren’t any discrepancies, and you understand every transaction. This is also a good time to check that your financial goals are on track and to follow up with clients about billing.

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Different accounting methods for small business

Now that you understand the basics of bookkeeping, it’s time to cover accounting and how it helps you understand your business.

There are two main methods of accounting:

Cash-based accounting
Accrual accounting

Cash-based accounting is the more straightforward option. It’s the method that most small businesses and sole proprietors use. Cash-based accounting means that you report your income and deduct expenses when they are paid.

Accrual accounting is a little more complicated. With accrual accounting, you have to report income and expenses whenever they happen, even if that’s not when they are paid. Accrual accounting is better for large businesses that often do big jobs, where it can take several months for you to get paid in full.

For example, imagine you own a construction contractors business.

In September 2021, you began a huge project which took four months to complete.
You send in your bill for the final amount in December, but the client doesn’t pay up until January 2022.
With cash-based accounting, you’d report the expense in January, when your client paid the bill.
With accrual accounting, you’d report it in December, when you sent your invoice.

You can usually choose which type of accounting you prefer. Sometimes the IRS insists that you use accrual accounting, like if you have an inventory to sell products.

Do I need a small business accountant?

Maybe you just don’t want to deal with any accounting. You may wonder, “How much is an accountant for a small business?” The average hourly fee for an accountant ranges from $30 to $55 but can change depending on where you live and the services requested.

Depending on your income and how much you dislike dealing with paperwork, it can be worth it to find an accountant to help you with payroll or preparing taxes. Not only will it reduce stress, but it will also free up time for you to spend on your core business.

You don’t need to hire one on as a full-time employee. Many small businesses have an accountant on a monthly retainer to provide routine bookkeeping services and periodic evaluations. Others have accountants with a standard hourly rate (usually for irregular consultations) or pay fixed fees (typically for projects such as tax preparation or accounting system implementation.)

Small business bookkeeping and accounting software

If you’re struggling with recording transactions and manual accounting, don’t panic. Small business accounting software can make it easier without paying for an accountant.

Bookkeeping and accounting software can be your best friend and is a great way to learn how your small business finances.

It keeps all your records in one place, tracks expenses and even does your invoicing. Some solutions offer even more, including payroll automation, tax preparation, and credit card processing. These features can save you time and help keep your bookkeeping streamlined.

Here are some popular accounting tools for small business owners.

QuickBooks Online helps you track income and expenses, create and send estimates and invoices, calculate tax, and capture and organize receipts. The monthly fee for its basic plan (one user) begins at $12.50. Other plans include more users and features, including payroll, bill management, inventory and more.
Wave is mostly free. You’ll pay for services such as credit card transactions or payroll services. However, basics like invoicing, accounting and banking are free. It syncs with your bank account, so your bookkeeping will always be up to date.
Xero is ideal if you’re on the go. It lets you create and send invoices and purchase orders, prepare a financial report, and track inventory from your phone. Xero connects with your bank account, and prices begin at $12/month.
Sage 50Cloud is another all-around accounting tool. Sage lets you send invoices, track payments, record expenses, and it helps prepare your tax returns. Prices begin at $33/month with a 1-year commitment.
Kashoo makes it easy to track expenses, create and send invoices, and produce reports. You can also use it to accept credit card payments, which sync with your bank account. Kashoo’s invoicing tool is free; their full accounting solution is $20/month.

Small business accounting tips

Small business accounting is easier when you set it up correctly from the beginning. Once you’ve got a solid bookkeeping foundation, here’s how to start learning accounting basics.

Learn the language of accounting

Sometimes, it can seem like accountants speak a different language, so your first step is to learn some key terminology so you can understand your software or accountant.

The more you understand what these terms mean, the easier it will be to understand how it all works together.

Know your deadlines

Most deadlines have to do with taxes. Avoid last-minute panic over tax return dates by giving yourself plenty of time to get organized.

Common deadlines to know include:

Income tax
Quarterly estimated tax payments
Employment tax
Excise tax (depends on your industry)
Payroll withholding and employment tax
Wage and non-employee compensation tax

Your accounting software may already keep track of these deadlines. Still, it may also be helpful to discuss deadlines with an accountant to verify which applies to your business.

Plan ahead for major purchases

There will be large costs that you have to regularly pay, like your tax return or replacing expensive equipment. Build these costs into your monthly business budget so that you won’t dent your cash flow when it’s time to make those payments.

Prepare for the unexpected

Emergencies, accidents and mistakes cost money and can disrupt your cash flow. For example, a long-term client could suddenly go out of business, or some of your equipment could break down.

That’s why it’s crucial to be prepared. You’ll want to have some savings in the bank that can get you through tough times. How much you’ll need will depend on your specific field, but include it in your budget.

Aside from having some savings, you can protect yourself with business insurance. It helps protect your business from financial losses by helping to cover expenses involving your business property, employees or customers.

For example, say a customer slips where you are working and claims their injury is your fault. In that case, you’ll be glad you have general liability insurance to help pay for medical costs, so you don’t have to pay out of pocket.

Allow for seasonal cash flow

Every business has busier times and quiet times. Put some money away during busy times, so you won’t stress when you have less work.

Create a financial report

Consider yourself an investor in your own company and compile an end-of-year report. Include your benchmarks and compare your results.

Even if you’re the only one who reads your financial report, writing it will ensure your records are in order, and you have all the information you need to plan the next step.

How NEXT helps small businesses thrive

By adhering to these small business accounting and bookkeeping best practices and tips, plus a little organization, you can stay in control of your small business finances.

You can also minimize paying for unexpected expenses by protecting your business with insurance. At NEXT, we make it easy to get coverage. You can bundle two or more of our policies and save up to 10%.

You can start a quote, view policy options, get a quote and purchase coverage fast. Get proof of insurance when you need it, no waiting around.

Get started with your free online quote today.