As a small-business owner, you’re a jack-of-all-trades. You can confidently switch your “business operations” hat to “chief marketing officer” hat in the blink of an eye.

But when it comes to bookkeeping, a feeling of dread grows in the pit of your stomach. You’re not alone.

I [expletive] hate it — the worst part of running a startup (along with taxes),” says one business owner. “It all just feels so cumbersome and inefficient.”

Another business owner agrees. “It just feels like I am drowning, I have tried to set up my books a few different ways, but nothing works for me.”

These feelings toward bookkeeping are not surprising. Small-business bookkeeping is needlessly annoying and time-consuming, causing small-business owners to dread and avoid their books as long as possible. But therein lies the rub: putting off bookkeeping tasks for months at a time ultimately winds up hurting you and your business. When you’re not familiar with business transactions in real time, it’s harder to understand your business’s health, stop problems in their tracks, and identify new business opportunities.

In short, traditional bookkeeping is holding your business back. Bookkeeping for small-business owners is in desperate need of a makeover — and we know exactly what that makeover should look like.

Traditional small-business bookkeeping is confusing and painful

By definition, the traditional basic bookkeeping process is simply the recording of financial transactions. While this process sounds simple in theory, it’s a maze in practice.

Small business owners are saddled with time-consuming, manual bookkeeping tasks — from identifying and recording transactions and coming up with an unadjusted trial balance to creating a worksheet and producing the right financial statements. These frustrating activities are a thorn in the side for small-business owners. In fact, one study found that 46% of entrepreneurs would rather get stung by a bee than do a month of bookkeeping.

The top three Challenges with bookkeeping for small businesses

These top bookkeeping problems can be boiled down into three categories:

1. Collecting, sorting, storing, and retrieving paperwork

You have to manually collect all source documents — bills, statements, and receipts — and then store them in a way that you can match the documents with the right transactions (a headache enough by itself). Many owners simply store these documents in a box or filing cabinet. You could store documents digitally, but, even then, you have to take pictures of and correctly tag them.

Also, whether you have a stack of documents sitting in a manila folder or scanned/stored in Evernote, these documents are not easily searchable. If your business is ever audited and the auditor wants to see details for a specific transaction, it takes manual effort (and valuable time!) to find and send the right source document.

2. Categorizing all transactions correctly

To produce a profit/loss statement, you have to be able to write in the correct accounting category for each transaction (e.g., by revenue categories and expenses categories). This is normally difficult, especially if, for instance, you make one deposit at the bank that can be categorized by multiple accounts:

  • Customer Check: $500
  • Real Estate: $150
  • Fees Earned: $50

On your bank statement, you’ll see only the total amount ($700) and not the different types of transactions. You then don’t know how to accurately categorize the transactions on your chart of accounts.

3. Spotting and fixing inaccuracies

Struggling with inaccurate information has become a way of life with bookkeeping. For example, when your trial balance doesn’t match your bank statements, you have to try and make it match, and then do another trial balance. Same goes for adjusting journal entries and comparing these entries with your bank-statement balance.

There’s also the task of dealing with fraud, duplicates, and illegitimate purchases. On top of the manual labor of finding these types of purchases, you have to clean them up, requiring massive effort to categorize transactions by the correct chart of account. And since there’s no real-time insight with transactions, you might not catch problems until months later.

The impact of bookkeeping for small-business owners

What do business owners do as a result of the problems above? They procrastinate. They put off balancing the books for weeks or months on end, leading to more lost paperwork and more confusion, creating more work and more headaches as they make mistakes or catch inaccuracies late in the game. We refer to this concept as “garbage in, garbage out.”

When you delay bookkeeping tasks, you’re not aware of real-time business problems, which makes it difficult to course correct. You’re also not ready for tax season or audits. But perhaps the worst challenge is that you have no idea what’s going on with your business until it’s too late.

The bookkeeping status quo is deeply rooted in tradition

The traditional bookkeeping process is riddled with problems and isn’t easy for small business owners to complete every month. So why is it followed?

The process is viewed as the status quo for of two main reasons: (1) the assumption that since bookkeeping has always been done this way, it doesn’t need improvement, and (2) the overall bookkeeping environment is resistant to change.

Bookkeeping has barely been updated in 500 years.

Bookkeeping dates back thousands of years. Early auditing systems were used by ancient Egyptians and Babylonians. The Romans kept detailed financial records. Italian Luca Pacioli, the father of modern accounting, described double-entry bookkeeping in 1494. For years, business owners and accountants even used actual journals to record transactions.

These methods might have been considered revolutionary back in their day, but the process hasn’t changed since. In other words, the ancient practice of small-business bookkeeping hasn’t been properly introduced to the 21st century.

Sure, there are digital bookkeeping solutions that slightly streamline the process (e.g., digital filing cabinets), but they don’t challenge bookkeeping’s core problems: things like managing journal entries or painstakingly matching transactions with bank statements. These tasks are considered necessary rather than processes that need disrupting.

Bookkeeping environment is resistant to change.

Small-business bookkeeping is viewed as a process that can’t truly be modernized. Many small-business owners think they have to grin and bear the challenges associated with bookkeeping because “that’s how it’s always been done.”

It’s not surprising that the traditional accounting environment holds to convention. The bookkeeping workflow might be complicated, but the steps within the process are familiar, stable. After all, when your entire bookkeeping process is based on legacy systems, and you have seven different revenue accounts and 45 different expense accounts, it’s intimidating to rock the boat.

Storing bookkeeping data in the cloud can also feel less safe than the bookkeeper organizing documents on their desktop or in a filing cabinet (despite the cloud actually being more secure, but that’s another story). Business owners and accountants avoid the perceived risk as a result.

How small business bookkeeping should be done

Eighty-two percent of all businesses fail because of cash flow mismanagement. Small-business owners MUST have visibility into their business transactions to stay on top of their business’s financial health and make changes as needed. In short, they can’t afford to not change. But that doesn’t mean the change has to be stressful.

The new three-step approach to bookkeeping

At Neat, we hold to two guiding philosophies: bookkeeping should be easy, and business owners should be in control of their businesses.

At its core, the purpose of bookkeeping is to ensure that all of the transactions your business incurs are recognized, reviewed, and confirmed to be accurate.

Instead of following the traditional eight-step accounting cycle, the small-business bookkeeping process can be stripped down to three simple steps. Your transactions should be:

1. Recorded and legitimate

Each business transaction should be recorded, verified, and categorized correctly and in an automated fashion by your chart-of-accounts category.

2. Categorized correctly and automatically

Transactions should add up and reconcile against your bank statements so you can produce your financial statements — without having to compare transactions with journal entries. Transactions in journal entries are the same as the transactions in your bank statements, so there’s no reason to compare the two; it’s the same data.

3. Right document attached

Each transaction should have a source document — invoice, receipt, bill, statement — affiliated with it for both reconciliation and tax purposes.

“If you’re able to consistently and easily do those three things, you are fully satisfying all the requirements of bookkeeping, and you will always be up to date on the health of your business,” says Garrett Baird, President and CEO of The Neat Company.

Garrett Baird President and CEO of The Neat Company

The steps above also don’t have to be completed manually — not in an ideal bookkeeping world. Instead, there is a simpler, more streamlined approach coming to small-business bookkeeping.

Neat will soon offer the ability to have business transactions sent to your phone so you can approve them whenever it’s convenient, wherever you are. The bookkeeping system will also match source documents with the correct item automatically, without requiring you to lift a finger.

But perhaps the most important capability? You’ll be able to take care of all of your bookkeeping and get a complete picture of the financial health of your business in just a handful of minutes per month.

A better approach to bookkeeping for small business is coming

If you don’t attend to your books consistently, your books are never going to be properly managed. But, as a result, there will always be transactions that you will be unable to account for because they happened three months ago. This cycle makes bookkeeping an incredibly painful experience. But it doesn’t have to be.

As a small-business owner, you deserve to know what’s going on in your business WITHOUT spending hours of valuable time in the process. By simplifying the process, you can don your “bookkeeping” hat as confidently as your other small-business-owner headwear.

At Neat, we have a plan for a smarter, simpler approach to bookkeeping that follows the philosophy outlined in this article. Stay tuned!