ou probably weren’t thinking about spreadsheets, receipts, and tracking payments when you started your business. However, the reality for any small business is that you won’t have a solid foundation to track your finances or your business’s growth without a functional bookkeeping system in place.  Whether bookkeeping is your strong suit or not, it needs to be a priority if you plan on doing business for a while. Here’s a look at the basics of building a bookkeeping system for your business to use going forward.  

What is small business bookkeeping?

Every small business owner needs to become familiar with bookkeeping. Simply put, bookkeeping is the process of recording all of your business transactions. That includes every business expense, payments, deposits, invoices, receipt, credits, and more.  

Why keeping accurate books is vital to your success

While “doing the business” of your small business is what leads to your success or failure, bookkeeping plays an important role. First, at some point, you’ll need those financial records to pay business taxes. If you don’t keep good records, there’s a good chance the IRS will want to take a closer look at what you’re doing.   Also, keeping accurate records tells you where you’ve been, where you stand now, and where you’re going. It’s not just about keeping accurate records. You can use this information to guide your business decisions going forward, make adjustments, cut costs, and find ways to improve your business. Your bookkeeping reports give you insight into the daily, monthly, and annual production within your business.   Another reason you should keep good records is to help your business run more efficiently. Imagine you or your employees having to stop what you’re doing and search for financial information every time something comes up. Good bookkeeping practices make it easier to find the correct information when you need it.  

The basics of small business bookkeeping

Developing a bookkeeping system for your business isn’t difficult, but it does require making some choices based on what will work for you, both short-term and long-term.  

Choosing a bookkeeping style

To set up a bookkeeping system for your business, you have two primary decisions to make:

  1. Cash or accrual accounting system?
  3. Single or double-entry bookkeeping system?

With an accounting system, you need to decide when to record transactions. With a cash account system, you’ll record transactions anytime cash changes hands. An accrual accounting system records transactions, like sales, immediately, even if money isn’t exchanged until later. As your company grows, you’ll probably want to move towards accrual accounting, but it’s not a necessity when starting a business.   Choosing between sing and double-entry bookkeeping often depends on your company’s volume of transactions. With single-entry bookkeeping, you only record transactions when paying bills or making deposits. If you handle a low volume of business transactions, single-entry is probably enough. Double-entry bookkeeping requires at least two entries per transaction — a debit from one account and a credit to another.  

Bookkeeping Methods

Something else to consider is whether you want to set up your bookkeeping in a traditional spreadsheet program like Excel or use accounting software. Using software may allow you to sync business accounts directly instead of manually entering the data. Excel is a good option if you don’t want to spend extra money on software since you may already have the program installed on your work computers. Plus, there are tons of free Excel templates available, so you don’t have to reinvent the wheel with your business spreadsheets. You could also use a web-based app like Google Sheets, which functions similar to Excel. It’s more a matter of preference for you and your team going forward.  Once you answer these questions, you can start to build your bookkeeping system. One of the very first things you need to do is create a chart of accounts. This spreadsheet lists all of your business’s accounts within your bookkeeping system. Think of your accounts as categories within your business, like:

  • Accounts receivable
  • Accounts payable
  • Cash
  • Sales
  • Inventory
  • Payroll
  • Loans
  • Inventory
  • Assets
  • Equity
  • Liability

Each account is also assigned a number. As you record and track your finances, every transaction gets assigned an account or category, so your system accounts for everything.    Some of the other financial reports you’ll want to create for your system include:

  • Balance sheet: A balance sheet is an overview of your business assets, liabilities, and equity, usually tracked over a specific period.
  • Income statement sheet: Many people refer to this as a profit and loss (P&L) statement. An Income statement sheet tracks company profitability over time. You can use this report to analyze different parts of your business.
  • Cash flow statement sheet: It’s always good to track how much cash your business has received or spent, from paid invoices and expenses, over a period of time. That’s exactly what a cash flow statement provides.

In the end, you should add whatever forms or documents you think are necessary for managing your company’s day-to-day finances and helps you move closer to achieving your business goals.  

Ongoing bookkeeping practices for your business

Once you’ve built your bookkeeping system, now comes the work of putting it to use. If you’re a solo entrepreneur, everything falls on your shoulders unless you outsource your bookkeeping duties. If you have employees, train them on using the system or assign bookkeeping to specific staff. As you continue to do business, you’ll want to put the following tasks into practice.  

  • Balancing the books: Depending on how your business is et up, you may close your books monthly, quarterly, or annually. Balancing your books is similar to balancing a personal checkbook. You want to make sure that all of your account credit and debit totals match.
  • Preparing financial reports and statements: After you balance your books, you can prepare the financial reports mentioned earlier. Then, set aside time to analyze the reports to determine your company’s financial health.
  • Keep your business legal: Along with tracking your business financials, you want to make sure you’re staying compliant with state and federal business laws. This can include paying taxes, various fees, submitting required business documents, and more. The U.S. Small Business Administration (SBA) offers resources and the latest information to help keep your business compliant.

How Novo can help your small business

Having a solid bookkeeping system should be one of your top priorities as a business owner. Novo small business checking accounts are a great tool to use in conjunction with your bookkeeping system. Our accounts come with the ability to add details to every transaction. You can add notes to each transaction, add categories, upload images and documents, and more. Plus, you can export your transaction information to a CSV file from within your Novo account.  Kevin Payne is a personal finance and travel writer. His work has appeared on websites like Forbes Advisor, Investopedia, Credit Karma, and FinanceBuzz. He is the family travel and budget expert behind FamilyMoneyAdventure.com. Kevin lives in Cleveland, Ohio, with his wife and four kids.  

September 14, 2021
Business Building