If you dread bookkeeping but feel it’s not worth outsourcing, you’re not alone. Many entrepreneurs successfully handle their own financial books.

The good news is that when you learn how to keep books for small business, it makes important decisions easier and minimizes preventable financial mistakes.

Good bookkeeping—that is, the record keeping of your business’s financial information—organizes your data, files, routines, and workspaces (which, depending on what you do, can take you anywhere). The benefits are major:

  • Good bookkeeping preps your business for scrutiny, whether you get assessed in an audit, sized up for a loan, or when trying to attract investors.
  • Good bookkeeping gives you solid, up-to-date material to build insightful reports.
  • Good bookkeeping helps you plan things like staffing, growth, and supply chain management by giving you a list of everything that’s happened financially in your business to date.
  • Good bookkeeping can even improve your productivity.

Sound like things you want? Then you’re ready to learn how to keep books for small business. Start by implementing these 13 bookkeeping and accounting fundamentals.

1. Learn basic bookkeeping concepts

The first step is to familiarize yourself with some essential bookkeeping concepts.

First, you’ll have to expand your definition of the word “accounts.” In bookkeeping, accounts are categories like income, expenses, assets, liabilities, or equity. Accounts also are called journals. In this article, we’ll continue to use the term accounts for simplicity.

Another concept to familiarize yourself with is the idea of double-entry bookkeeping. Double-entry bookkeeping is the discipline of recording every transaction twice—once for where the value came from and again for where it went. (We cover double-entry bookkeeping in more detail further down in this article, so hang tight.)

Most businesses use double-entry bookkeeping because it provides a second layer of verification and documentation. This gives you a second trail to follow when eyeballing discrepancies, looking for trends, and thwarting fraud.

Of the other important bookkeeping terms you should learn, there are two to memorize from the get go.

  • Accrual-basis accounting: It’s when you record transactions when they’re made instead of when the cash, products, or services are actually handed over. The practice gives you a better picture of how revenue, expenses, assets, and liabilities can work together.
  • Cash-basis accounting: In contrast to accrual-basis accounting, it’s when you record transactions when cash is exchanged instead of when products or services are handed over.

For even more helpful context, read our spiffy glossary of bookkeeping and accounting terms, which goes more in depth about common words and processes that you may use as you start to dive into the financial side of running your business.

2. Open a separate business bank account

Experts at the U.S. Small Business Administration (SBA) say that using a business bank account gives your company personal liability protection, some seriously next-level professionalism, preparedness in the form of credit, and purchasing power. It’s also important to keep your personal expenses separate from your business expenses for reporting and liability reasons.

To find the best bank account for your business, look for more benefits than just low fees (as tempting as that may be, because who likes fees?). Find an account that gives you relevant, immediately applicable perks that map straight to your goals. For example, monthly minimum fees may be best for businesses with high volumes of transactions but not those in a retainer-based business with few clients.

3. Develop a bookkeeping database that works for you

Next up? Deciding how you’ll organize your records, the way you’ll keep track of new daily transactions, and a routine (on a cadence that you can realistically stick to) to help you stay on top of your business’s money.

In terms of tools, there are two viable options that make keeping track of expenses, income, and cash flow simple:

  • Web-based bookkeeping software. Online bookkeeping apps let you log in to any browser, and add/categorize your transactions, unlike the (outdated) on-premises tools of previous generations.
  • Cloud-based bookkeeping tools. Tools hosted in the cloud take accessibility a step further, making it easier for you to input, code, manage, recall, and store information (and corresponding source documents) offline and sync your work with your database once reconnected to the internet.

So…you may notice spreadsheets aren’t listed as a viable choice. Spreadsheets are simple, free, and seem like a reasonable choice for a new business or adventure into the gig economy, right?

Well, not quite. Spreadsheets may be an okay choice as a temporary fix for having absolutely nothing (if that’s you, we see you—you can use the templates that we created for your invoicesincome statement, and balance sheet), however:

  1. They’re simply not sustainable to keep up to date in the mid to long term and
  2. Are likely to leave you overwhelmed amid the other management tasks that you have to do without a true high-level understanding of what’s important or trending in your business over time.

If you’re still using Google Sheets or Excel and are feeling like you don’t know what the heck is going on with your business’s finances, it may be time to upgrade to software that gives you relevant, actionable information.

Whatever bookkeeping software you choose, it’s super important that it automates repetitive, soul-sucking bookkeeping tasks like data entry and transaction-record matching (because starting or running a business is hard enough—you’re gonna want time to recuperate doing something fun).

Automation, ultimately, is linked with business growth. Salesforce research reveals that “…growing SMBs [small and medium-sized businesses] are 1.6x as likely as their stagnant/declining counterparts to say they’re using technology to automate business processes.”

Image showing percentage of stagnant and growing small businesses using automation

Source: Salesforce Small & Medium Business Trends Report

For example, NeatBooks, our own bookkeeping app for small businesses, automates bookkeeping tasks and stores transaction data in a tidy, secure, cloud-based system that you can access on your laptop or phone.

A screenshot of NeatBooks File Cabinet dashboard.

With today’s mobile, intuitive tools, you don’t need to have an accountant’s knowledge—or hire a professional bookkeeper—to log, categorize, and match transactions. Apps like NeatBooks free up time that you can dedicate to other tasks (like selling more of your products/services or finally watching that gerbil video your friend texted you four days ago).

4. Chart your accounts

As payments start coming in and expenditures begin adding up, you’ll see you need to do more than just record them—you’ll have to sort them into their own categories. If you categorize your transactions, then at the end of a month or year, you’ll be able to see how much money each category added to your income or costs.

Remember that these categories are called journals or accounts. If you organize those categories into a table, you have a (title cased) Chart of Accounts.

Common accounts represented in the Chart of Accounts include:

  • Assets
  • Liabilities
  • Owner Equity
  • Income
  • Expenses

When you’ve created these buckets, you’ve positioned yourself to begin dropping transactions in those buckets regularly. Over time, you’ll see how much has gone into or out of each one, how the accounts relate to and impact one another, and even how to nurture one or two for a while to serve a specific business goal (like growth, operational efficiency, funding, or customer retention).

As you grow, depending on your business, you may want to get more specific to gather even more insightful data at the end of any time period. So each of the above categories can be—and usually is—broken out into explicitly descriptive classes like:

Add descriptors (like account number and account name) as shown in the example below, and voilà! You have a robust Chart of Accounts, something that would impress any accountant. You can sort your Chart of Accounts by any header you choose. The typical view, however, is to group records by category (sometimes called “codes”).

An example of a Chart of Accounts for a restaurant

Source: RestaurantAccounting.net

One of the main reasons you need a Chart of Accounts is because, without it, your accounting books will easily get disorganized. How? Say you categorize an equipment expense as a “fixed asset—office equipment” while a well-meaning employee or bookkeeper categorizes an identical expense as a “current asset” based on its book value. Immediately, you lose the ability to rely on your reports.

5. Register expenses to track them

Now that you’ve chosen and set up your system, it’s time to create processes.

Start by planning a routine to record your expenses. All costs need to be logged in your new bookkeeping tool in the expenses account. Depending on the size and maturity of your business (or even if you work from home versus working in a brick-and-mortar location), you may be spending on things like:

  • Advertising and marketing
  • Office supplies
  • Utilities and phone bills
  • Business insurance
  • Client gifts
  • Payroll (if you have employees)

Each type gets its own bookkeeping category, a.k.a. a “code.” (Sound familiar?)

Depending on which software solution you choose (see step 3), you’ll do this manually, or you’ll automate it.

In NeatBooks, for example, you can upload a picture of any bill, receipt, invoice, or other source document from your phone. When you get back to your car, office, or couch, you’ll find that the data on that file has been automatically extracted, parsed, categorized, matched, and stored for future recall.

6. Record and monitor receivables

When you’re learning how to keep books for small business, income is your top priority (naturally). But you can’t improve what you don’t measure. Meaning, to monitor income long term, you need to watch your receivables closely.

Your bookkeeping system should make logging your income as simple as recording expenses. As data goes in, you’ll see your accounts receivable (AR) category grow. This account is simply the total amount of funds owed to your business.

What, exactly, are you regularly scanning your AR for? Two specifics:

Accruals

Here’s the deal: When customers ask you for changes, extras, and add-ons, you’re allowed to celebrate. After all, that’s revenue.

But if the client’s bill skyrockets without a healthy deposit, regular retainer agreement, or strong personal history, beware: They could bolt, leaving you in a lurch. Overall, a trend of swollen AR accounts signifies a problem with payment terms and communication.

Aging accounts

Some customers allow their old, unpaid bills to linger. Your job is to nip this in the bud before it becomes an issue.

In the short term, unpaid invoices debilitate your cash flow. In the long run, they hurt your vital customer relationships by putting you in the awkward position of nagging customers for payment. No, thanks.

Aging accounts receivables don’t indicate an administrative problem. They signify a failure to qualify or clarify the initial sales relationship in the first place. Set reminders for yourself on your calendar or use the invoice reminders feature in NeatBooks to follow up with customers who are close to their invoice due date and past due.

7. Log both invoices and receipts—but handle them differently

Let’s get this right from the start: invoices are not the same as receipts and vice versa. Too often, business owners confuse the two file types for one or the other or treat them as synonyms.

Invoices are a request for payment. They come to your business from vendors, service providers, manufacturers, and other partners. These files include details like:

  • The names of the businesses/persons involved
  • The amount owed specifically for the products purchased or services given
  • A description of those products/services
  • A unique invoice number (meaning that this invoice number is attached to one invoice only)
  • Any additional charges like taxes and fees
  • The total amount owed that includes taxes, fees, and cost of products/services
  • The due date of the total amount owed

When you receive an invoice, log it as an open vendor invoice and as a credit in your accounts payable account.

Then, when you pay that bill, you’ll get a receipt from the business associated with the bill.

Receipts are a record of payment, also called proof of purchase (if you’ve been to a grocery store, you’re familiar with this). They can come from the same entities as invoices do. Receipts show:

  • The name of the vendor/service provider
  • The date of payment
  • The total amount paid
  • Extra amounts like taxes and fees

An example of an invoice and a sales receipt

Source: Kohler

Once you approve and pay an invoice, you can then log the receipt as a source document to verify the debit (or multiple debits, if the transaction is split) of another account.

8. Establish sales tax procedures

The next step in learning how to keep books for small business is to understand your responsibility to pay sales tax.

Depending on your industry, business model, and state of operation, you may not need to pay sales tax. To know what compliance looks like for your business, start by visiting your state government’s revenue agency website to clarify. For help finding that site, simply type “My state’s comptroller” in any search engine and look for a link with a URL that ends in yourstate.gov.

If you find you don’t have to pay sales tax to remain within compliance, then skip to step 9. If, however, you learn that your business needs to file this tax, take the following steps:

It may sound complicated, but it’s not once you get started. When you run into a hurdle, stay focused. Keep searching for answers, and you’ll find yourself on the other side of this taxing business startup task in no time (we’ll just let that pun sink in for a moment).

9. Determine how your customers will pay you

The next step in learning how to keep books for small business is to decide what payment types you’ll accept and then set your business up to receive funds through those channels.

First, ask yourself what matters most to you and your customers’ interactions with your brand. Do you want to provide a quick payment setup for customers? Would you like to offer ongoing auto-drafting (for bank accounts) or auto-charging (for credit cards) options?

Once you’ve prioritized your needs, you can consider the options:

  • Cash
  • Personal checks
  • Credit and/or debit cards
  • Automated Clearing House (ACH), when money is withdrawn automatically from a bank account
  • Cryptocurrencies
  • Product and service trades

When you’ve answered these questions, talk with your commercial banker to learn about the merchant account products they offer. If you accept in-person payments, you’ll buy and set up an online payment processor with in-person credit and debit card reader hardware and sync it to your online store. Examples of payment processors include SquareShopKeepShopify POS, and Stripe. If you work with other businesses or work directly with clients using invoices, you can use tools like NeatBooks that have custom invoices and online customer payments wrapped up in one system.

10. Start using double-entry bookkeeping

The double-entry bookkeeping method mentioned earlier now begins to show its value. As a reminder, this is the practice of recording two corresponding events for every financial transaction: a debit (outflow) in one account and a credit (inflow) in another.

Double-entry bookkeeping shows where money comes from and where it goes—not just one or the other. The only type of business that may not benefit from double-entry bookkeeping is the service provider that only has a couple of large transactions a month and that rarely spends a dime. Anything more than a half-dozen expense or revenue transactions warrants this method.

To use double-entry bookkeeping, simply plan to handle every transaction twice—one in an expected way and another in a corresponding equal-and-opposite way.

Sally, who sells seashells, uses the business’s cash to buy a brand new “Seashells!” sign for her shop at the seashore. This is what that purchase would look like if she uses single-entry bookkeeping:

A spreadsheet example of single-entry bookkeeping

And here’s how Sally would record the transaction if she’s using double-entry bookkeeping:

A spreadsheet example of double-entry bookkeeping.

When you begin using double-entry bookkeeping, you have a greater ability to create financial reports, one of the most valuable decision-making tools.

11. Prepare financial statements

Applause, applause: If you’ve taken the above steps, you no longer need to dread your small business bookkeeping.

A tweet that says, "i hate bookkeeping"

Source: Twitter

Instead, you’re ready to transform the cringey task into a powerful mechanism for creating financial business reports.

First, meet the three main financial reports:

  • Income statement (also called the profit-and-loss report or “P&L”). This insightful snapshot shows what revenue and other income have made their way into your business and what money has gone out. It’s good for deciding whether to increase or decrease spending.
  • Balance sheet. This report shows you the value of your assets and liabilities and how those elements work together for an overall business position.
  • Cash flow statement. The cash flow statement reveals the rhythm of money movements within your business. With it, you can determine what you need to do regularly to accelerate, hit the brakes, or change directions.

We recommend using one of the kinds of bookkeeping systems that we mentioned earlier to prepare these reports because of how much time it will save you. But if don’t have one yet, you can use our income statement template and balance sheet template in addition to this cash flow statement guide by the Edward Lowe Foundation to get by until you find a bookkeeping app that works for you.

12. Pay attention to your cash flow

What we’ve covered so far has focused on what’s happening financially in your small business. Now, we’re going to focus on when everything happens. This synchronic money management is called wizardry.

Just kidding. It’s just called cash flow.

The cash flow report you learned about in step 11 lets you analyze your business’s data and make decisions. Some of the moves you may make based on what it shows include:

  • Balance growth with sustained spending and earnings
  • Shorten your sales cycle and tighten up your payment terms to get cash faster (e.g. by cutting 90-day payments)
  • Move inventory like it’s expensive to keep—because hey, it actually is
  • Continually renegotiate with partners/vendors to cut overhead costs
  • Learn when (and how) to hire for measured, lasting team growth

Remember that your cash flow management is less about what you have coming in and out and more about when your money moves. And now that you know how to keep books for small business, you can use this timing to your advantage.

13. Maintain it all: Tips for keeping your books organized

Okay, deep breath. We’re almost done.

One last step: Learn to keep these new systems humming.

Many business owners set up a great process only to watch it deteriorate over time, resulting in a disastrous mess and a frustrated office staff. Here’s how to prevent that slow train wreck.

GIF of train crashing through a bridge

Ensure your finance tools communicate with one another. Today, most cloud-based solutions integrate with other software tools for harmonious work. An example of that is making sure your billing or invoicing software and bookkeeping software sync up. If any of your systems don’t connect, reach out to your software’s support teams to learn whether you’re getting the most out of your tools.

And finally, work bookkeeping into your daily and weekly routine. Automating the tedium streamlines bookkeeping, yes, but you’ll still be involved. For example, your new tool may suggest pairing certain receipts to various expenses, but you must still approve those regularly. So set aside a time at the end of each week (or a few times each week) to review your app’s work and look over your financial reports.

Maintenance is a crucial ingredient that many businesses neglect. Making sure your finance tools work seamlessly together and looking over your finances regularly ensures your new systems and processes don’t fall apart over time.

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