Small Business Bookkeeping - 4 Mistakes to Avoid

December 8, 2021

Starting a small business is an act of passion. But you also need to take care of the practical aspects of running a successful startup. That includes managing the bookkeeping for your operation.

As an entrepreneur, you need to cover a lot of jobs at once. From CEO to janitor, you'll do anything necessary to push your company forward. But does that mean you do your own bookkeeping?

That answer depends on your situation. But as you ramp up your small business, don't be afraid to take on the bookkeeping duties. Many entrepreneurs successfully learn the discipline and make it a part of their routine.

To do this, you just need to understand the basics of aspects of the process. Here, you'll get a glimpse of the fundamentals so you can determine how best to conduct your own bookkeeping.

What is the difference between bookkeeping and accounting?

Think of bookkeeping as the foundation of accounting. In bookkeeping, you record financial information for your company. Later, you'll use these figures in your accounting efforts.

Think of bookkeeping as the foundation of accounting. In bookkeeping, you record financial information for your company. Later, you'll use these figures in your accounting efforts.

Bookkeeping, then, represents the data-gathering phase. You need to keep records of transactions in a consistent, organized way. This process keeps a manicured summary of your business.

Accounting operates as the data-analysis portion of your financial oversight. Here, you use the data compiled during the bookkeeping stage to draw a detailed picture of your business.

Benefits of doing your own bookkeeping

If you decide to do your own bookkeeping, you're in good company. One study showed that about two-thirds of small business owners get by without a full-time bookkeeper. Another half have no plans to hire one for at least the next year.

Of course, committing to the task yourself involves a cost. Approximately 40% of small business owners who do their own bookkeeping spend more than 80 hours a year on the process. Still, just over a quarter (28%) spend less than 21 hours each year on bookkeeping.

The exact time investment will depend on the circumstances. But even on the longer end, the time commitment barely reaches 1.5 hours a week.

Still, as a harried business owner, that 1.5 hours might be more than you can give up. What benefits do you get from doing your own bookkeeping? Here are a few upsides that might justify the investment:

Save Money

As a small business, you need to conserve cash as much as possible. Doing your own bookkeeping allows you to avoid hiring a professional. That removes one entry in the expense column.

You Maintain Control

As an entrepreneur, you take a hands-on approach to your business. Bookkeeping provides one method to maintain that control. You remain intimately engaged in the day-to-day operations of your business.

You Gain Insight into Your Business

Keeping the books means you constantly review your business. The rote process of recording transactions gives you an ongoing glimpse into your operations. This can lead to valuable real-time insights.

Your Company's Finances Become Second Nature

Want to make decisions quickly? Want to know your financial situation off the top of your head?

Self-directed bookkeeping can give you these advantages. Whether it's making snap decisions or streamlining the process of applying for a loan, a first-hand understanding of your real-time financial position can help you make the most of your opportunities.

It Helps at Tax Time

By doing your bookkeeping, you lighten the load at tax time. You already have a detailed understanding of the ebb and flow of your finances, allowing you to fast-track your tax computations.

How to do your own bookkeeping

If you've decided to take care of bookkeeping yourself, it's crucial to learn the basics. To start, you have to make a few fundamental decisions that will guide the rest of the process:

  • Select a bookkeeping system (single-entry or double-entry)
  • Select an accounting method (cash or accrual)
  • Learn how to categorize transactions
  • Familiarize yourself with basic concepts, things like assets, liabilities, equity, income, and expenses

You'll also need to familiarize yourself with the basic bookkeeping tools:

  • General ledger: This provides your basic tool for taking down your financial data. It consists of debit and credit account records.
  • Profit and loss statement: This details your revenue, expenses, and (ultimately) your bottom line.
  • Balance sheet: This provides a list of your assets and liabilities.

Those are big-picture concepts. Once you've mastered these foundational items, it's time to prepare for the monthly process of keeping your books. As part of this, you'll have to record transactions like:

  • Accounts receivable
  • Accounts payable
  • Payroll

At the same time, you should double-check your work through reconciliation. Compare your bookkeeping entries with your credit card statements, your bank records, and your payroll details.

Tips to improve your bookkeeping

Luckily, bookkeeping no longer resembles the task Bob Cratchit performed in Scrooge's counting house, with dusty ledgers and feathered quills. Now, there are plenty of ways to make the process more efficient. Here are a few to keep in mind:

Find the Right Tools

Even if you're doing your own bookkeeping, that doesn't mean you're alone. You can choose from a myriad of software options to ease your burden. Find the right tools for you and leverage their features to optimize the process.

Be Diligent about Record Keeping

In your hectic day-to-day rush, you'll get busy. But don't skimp on writing down transactions. This process is the heart of bookkeeping. Remember: it can be difficult (and time-consuming) to reconstruct activity later.

Don't skimp on writing down transactions. This process is the heart of bookkeeping. Remember: it can be difficult (and time-consuming) to reconstruct activity later.

Make it Routine

Don't wait until bookkeeping duties back up and try to do it all in one big rush. Rather, record transactions as they happen or on a regular, frequent schedule.

Bookkeeping mistakes to avoid

The wrong approach to bookkeeping can lead to errors. Don’t create financial knots you have to untangle later. Here are some common mistakes to avoid:

Not conducting enough research

You might not be a bookkeeping or accounting expert when you launch your new business. Few entrepreneurs are. As such, you have to expect a learning curve. Take the time to master the bookkeeping basics, so you don't create unnecessary problems later.

Not saving receipts

A paper trail will help you keep accurate records. Save all receipts and invoices. At the same time, make it mandatory for your employees to do the same.

Not having a clear set of bookkeeping procedures

As an entrepreneur, you have to move fast. That often means making policy on the fly. However, this can create confusion within your staff about how to handle certain activities, which can lead to problems at bookkeeping time.

Have a clear, consistent set of policies for your employees to follow. Have a paper trail for all activities and a centralized place where these documents (like receipts, invoices, or expense reports) are submitted and stored.

Holding onto the bookkeeping job too long

Running your own bookkeeping gives you a lot of advantages. However, you only gain these benefits if you can do the task effectively. At a certain point, you might be too pressed for time or your business might grow beyond the point where you can handle the chore on an ongoing basis.

At that point, consider whether a professional bookkeeper might offer a better choice for your burgeoning startup.

Stay in touch with your business by doing your own bookkeeping

Keeping the books is the first step to doing your own accounting. It lets you save money and stay in touch with every aspect of your business. It provides an excellent component of managing your startup.

Still, the process requires learning and tenacity. It's crucial to do it right. Use the information here to master your own bookkeeping process and keep detailed financial records of your small business's performance.