Bookkeeping is the process of recording, classifying, and summarizing financial transactions to provide information that can be used in making business decisions. While bookkeeping may seem daunting, it is crucial for small business owners to have a basic understanding of the process to make informed decisions about their finances.
Here are a few basics that all small business owners should know about bookkeeping:
Understand The Key Terms Of Bookkeeping
There are key terms that business owners should understand when it comes to bookkeeping. These key terms include;
- Assets: in a business, an asset is anything that has value and can be used in the future to generate revenue. Examples of assets include cash, inventory, equipment, accounts receivable, and real estate.
- Liabilities: a liability is anything that a business owes to another party. Liabilities can include accounts payable, credit cards, loans, and other forms of debt.
- Revenues/income: this is the income that a business has earned from its normal operations.
- Expenses: this is the money that a business spends to generate revenue. Examples of expenses include rent, utilities, payroll, and marketing.
- Profitability: This measures how much income a business has after all expenses have been paid.
- Expense: this is the money flowing out of business and needs to be spent to keep the business running.
Organize Your Banking
Having separate business and personal accounts is essential for bookkeeping purposes. It will make it easier to track business expenses and revenues and help to keep your personal finances separate from your business finances.
When you organize your accounts, you will be able to categorize expenses more efficiently and provide accurate information about your business’s financial health.
Store Accurate Financial Records
Storing essential documents and records is important for business owners. You will need access to bank statements, invoices, receipts, and other financial documents to accurately track your finances.
In case of any audits or legal issues, you will be able to provide the required documents if you have them stored safely. Accurate records will also help you track the progress of your business and make informed decisions about spending and growth.
Master The Three Important Financial Document
For excellent bookkeeping, small business owners should understand the three most important financial documents:
- Balance Sheet: This document shows how much your business is worth at a specific point in time.
- Income Statement: This document shows how much revenue your business has generated and what expenses you have incurred over a period of time.
- Cash Flow Statement: This document shows the movement of cash in and out of your business over time.
- Profit And Loss Statement: This document shows how much profit or loss your business has generated over a period of time. With a profit and loss statement template free download, you can easily keep track of your finances and identify areas that need improvement.
Automate Your Bookkeeping
Thanks to advanced technology, you can now automate your bookkeeping process with software such as Xero, FreshBooks, QuickBooks, and wave. These accounting software programs make it easy to track your finances, generate financial reports, and manage your business finances. Not only do these programs save you time, but they can also help you avoid mistakes and keep accurate records.
Prioritize emergency savings
Any good business owner knows that financial emergencies can happen at any time. That’s why it’s important to have an emergency fund to cover unexpected expenses. Common business emergencies include natural disasters, loss of key personnel, and financial crises.
You should aim to save 3-6 months of living expenses in your emergency fund to cover yourself in the event of a financial emergency. You can avoid dipping into your business’s operating funds by having an emergency fund or taking out a loan to cover unexpected costs.
Prepare For Tax Season
Organize your financial records and start preparing for tax season well in advance. By getting a head start on your taxes, you can avoid last-minute scrambling and ensure that you take advantage of all the deductions and credits you’re entitled to.
Understanding what is required for small business taxes can be confusing, so it’s a good idea to consult with a tax professional. They can help you identify deductions and credits that you may be eligible for and ensure that you’re filing your taxes correctly.
Bookkeeping should be a priority for any small business owner. By staying on top of your finances, you can make sound decisions about growing your business and avoiding financial emergencies. Take your time to master the above basics of bookkeeping, and you’ll be on your way to financial success.