It can be very exciting to start your own business. You may be working long hours, but that feeling of getting something off the ground and seeing it fly? There’s nothing else that feels like it.
But wait, let’s go back to Earth for a second. When you have a lot of ideas, it’s easy to forget the most important things. And getting the books right is the most important business process to set up right away. This article will tell you what bookkeeping is and give you some tips on how to do it well.
What Is Bookkeeping
Bookkeeping is the key to running a successful business. It means keeping track of all the money that comes in and goes out of your business so that you have a clear picture of your finances. It’s important because it’s the only way to do what the law says you have to do.
When it’s time to pay your online sales tax or make an annual report, you’ll need to know exactly how much money has been coming in and going out. It’s also a must-have if you want to know how well your business is doing. It’s hard to make plans for the future if you don’t know how things are going at the moment.
So, if you’re new to all this, here are some of the most important things you should know.
How to Start Keeping Books for a Small Business
When setting up a dropshipping business or any other small business, there are many things to think about. Should you use a template to make your website or hire a website developer to do it for you? How do you make AliExpress work for you? What is the best payment software? Do you need an SMB VoIP solution to help you with customer service? It can seem like a never-ending job to weigh all the options.
Luckily, it’s easy to make decisions about bookkeeping. Whether you hire someone to do it for you or start by doing it yourself, there are some things you should know.
Choose Your Bookkeeping System
You can use either a single-entry or a double-entry system to keep track of your money. With single-entry, you only write down each transaction once. This is the most basic method. This can work for small, simple businesses like those run by sole proprietors.
But if you have a business that is more complicated than that, you should think about using double-entry bookkeeping. Here, every transaction is written down twice, once as a debit and once as a credit. So, if you buy a $500 printer for your business, you would put $500 into your cash account and take $500 out of your equipment account.
Using double-entry bookkeeping makes it much easier to find mistakes. Since every amount of money taken out of one account is equal to an amount put into another account, when you add everything up, it should all be the same. This is what it means to “balance the books.”
Choose a way to keep track of money.
Inventory is only part of the picture when it comes to financial accounting. Before you start to worry about these kinds of details, you need to make a very important choice at the beginning. It will affect how your accounts are handled: will you use a cash basis or an accrual basis?
With cash basis accounting, each transaction is recorded when the cash is actually paid or received. So, when you send an invoice that will be paid in 30 days, that’s when you’d put it in the ledger. With the accrual method, on the other hand, you record transactions when they are made instead of when they are paid. When the invoice was made and sent out in this case.
Cash basis accounting is easier for most small businesses to use. For example, all of your taxes will be paid based on how much money you have made. This makes it less of a problem when clients don’t pay on time.
But it’s important to remember that the law requires some businesses to use the accrual method. The IRS makes it a requirement for businesses that make or sell things, so make sure to check your legal standing.
Make your account book.
Your general ledger is the file where you keep track of everything. It could be in a simple spreadsheet or in a program made just for bookkeeping or accounting. In the ledger, you should write down every payment you give or get.
If you use software, you’ll find that it automatically makes a ledger for you. It’s becoming more and more popular because these packages are made to work well with your bank account and other financial records. It keeps things nice and easy. It also gives you more time to work on creative tasks like making new products or spreading the word about your brand.
Start making accounts now.
In your general ledger, you’ll keep track of transactions in different accounts. Depending on the type of business you run, the exact mix of account types will vary, but it will usually include:
- Assets are things that your business owns, like tools.
- Liabilities (like loans to businesses)
- (Money coming in)
- Expenses (money out)
- Equity is the business owner’s stake in the company.
It’s a good idea to talk to a CPA before you start so that you can set up your ledger with the right accounts.
Write down every deal.
Even though it seems clear, we can’t say this enough. It’s important to not let this go. Enter all transactions as soon as possible into the ledger.
As we’ve already said, using software to do this can make it easier because the software will automatically pull your bank information and fill in your accounts. If you choose to use a spreadsheet, you’ll have to type in all the information yourself.
How to keep the books for a small business
Here are a few tips that will help you get off on the right foot.
Don’t mix your business and personal matters.
You probably wouldn’t pick the best text messaging service for business owners for your personal cell phone, and the same is true with money. Never mix up your business and personal finances.
Be ready for costs you didn’t expect.
It’s smart to have a fund for big expenses that come up quickly. You don’t want your business to run into trouble if you need to replace a key piece of equipment and don’t have the money set aside.
Keep copies of important records.
Data failures happen. If you don’t have a backup of your business information, a small problem can quickly turn into a nightmare. If you lose data, you might miss a deadline, get sued by an angry customer, or get in trouble with the IRS.
You’re looking at signing a debt settlement agreement all of a sudden, and you have no idea what went wrong. Make sure you have copies of your records in at least one place, if not more.
Make sure you know what the financial calendar looks like. Good bookkeeping is a great way to set up a business for success, but it’s not enough on its own. You need to know when big bills like tax bills are coming up so that you can plan around them.
Start Right Away
Whether you decide to hire an accounting firm or a freelancer to do your bookkeeping or do it yourself, you need to think about it carefully from the start.
You should be on the right track if you cross-check carefully and do self-audits often.
Bookkeeping can be scary at first, but once you have a system in place, it won’t take long to get used to. And that means you can focus on what you really want to do, which is to grow your business.