Bookkeeping is one of the most fundamental activities of a business. It’s the job of recording all financial transactions within your business. Without bookkeeping you won’t be aware of your financial position.
It’s essential to build a consistent bookkeeping practice so that you can avoid monetary issues and use your financial reserves efficiently to grow your company. With that being said, do you know how to build basic bookkeeping practices? If you don’t, we’re here to help. In this article, we list out seven essential bookkeeping best practices every business should implement.
1. Separate personal and business finances
The first bookkeeping practice is related to business finance management. Co-mingling expenses for personal and business purposes leads to many issues in the future for a business. Therefore, for your business’s sake, you should establish a clear distinction between your personal and corporate accounts.
The simplest approach would be to get a business debit card or a credit card. Both make it easy to track your business transactions. Details of any transaction are stored on the e-banking app which you can access anywhere at any time.
Now that you know how separating finances helps you manage your business better, it’s time to inform other people involved in your business too. Ensure your employees aren’t buying things for personal use with business funds. If funds aren’t accurately allocated it will lead to cash flow issues as well as tax filing and auditing complications.
2. Determine which accounting method to use
Another bookkeeping practice is to choose which accounting method your company will use to record transactions. There are two standard systems of accounting: cash accounting and accrual accounting.
Cash accounting is relatively simple and broadly utilized by small firms. Cash accounting records transactions only when money is spent or gained. Due to its simplicity, the cash accounting method is also used by many people to manage their personal finances.
On the other hand, under the accrual method, transactions are recorded when they are incurred rather than awaiting payment. This means a purchase or expense is recorded as a transaction even though the funds haven’t been received or bills haven’t been paid immediately.
3. Establish cash controls
Cash controls refer to all cash management policies and procedures within your organization. Many of the financial hazards associated with running a business (such as inaccurate payments, theft, and fraud), can be mitigated by implementing procedures that maintain control over cash flow.
There are many examples of best bookkeeping practices which you can adopt to enhance the management of a company’s funds, including reconciling cash receipts to deposits and the general ledger, following up on collections of returned checks, or preparing cash flow forecasts.
4. Keep track of sales
Bookkeeping is the recording of all financial transactions involving your business, and it goes without saying that sales receipts are the most important of all financial documents because they allow businesses to gain visibility into their performance, to identify whether they’re doing well and whether you have to adjust any strategies.
It’s essential to keep track of sales receipts because you’ll need them to calculate your business’s income. Your income reveals the profits or losses you make while operating your business. This data helps you make better business decisions, ranging from day-to-day purchases to long-term expansion.
5. Keep track of expenses
Bookkeeping isn’t only about the recording of sales, but also expenses. Expenses are a necessary part of any business. If you don’t keep track of your expenses, chances are you’re likely to run out of funds, or worse, you may get deep in debt.
Expenses turn out to be more tricky than one might think. People often assume expenses only include payments for office rent, utilities, loan repayments, or such. But business expenses are much broader than that. They could be anything that costs to run your business and are categorized into three groups: fixed, variable, and periodic expenses. Knowing which category each of your expenses falls into will help you manage them better.
Read also: 5 Tips to Control Your Business’ Expenses
6. Review financial data monthly
It’s critical to close the books on all financial transactions for the current month before moving on to the next. When you review transactions on a monthly basis, you’ll catch issues early and fix them quickly before they leak over into the next month.
Other than that, reviewing financial data monthly helps a lot for your decision-making. By looking at the financial data you can determine whether your goals were achieved. Goals are an important part of running a successful business.
For example, if your last month’s goal for sales revenue was $200,000 and you successfully achieved it, your business seems to be on the right track. On the other hand, if you fail to achieve your goals, you can quickly adjust your strategies to get everything back on track.
7. Make a choice: professional bookkeeper or bookkeeping software?
Many small business owners and managers take on the businesses’ bookkeeping management to save costs. As a result, the success of this task lies in their experience. But most of the time, their knowledge and experience are insufficient to handle this intricate job.
If you ever find yourself in this awkward situation, there are two options: turn to a professional bookkeeper or adopt a bookkeeping software. Each of these solutions has its own advantages and disadvantages. Depending on your business size, model, and finance, you can determine which option fits best with you.
How can a professional bookkeeper help?
Bookkeepers are more experienced in handling records which could prevent errors that result in penalties on filing documents in the future. A bookkeeper provides you with a fresh perspective on your business, such as suggestions on managing your budget better and running your company.
However, the price of hiring a professional bookkeeper can break your bank. The average salary of a bookkeeper is $45,088, which means you have to pay them more than $3,000 per month. Unless you’re a big firm, whether to hire a bookkeeper should involve serious consideration.
How can bookkeeping software help?
Bookkeeping management software are a better solution for small businesses, as they can do the same job as a bookkeeper and cost only a fraction of a bookkeeper’s salary. There are many names that you’ve always heard of such as QuickBooks, Xero, or Shoeboxed. Bookkeeping management software developed by Shoeboxed is an ideal tool for small business owners.
With Shoeboxed, you can turn your receipts into data, organize them, make reports and analyze your current financial position at any time and anywhere. And Shoeboxed only costs from $18 to $54, depending on your business size. To get the most out of your bookkeeping management, get started with Shoeboxed for free!
The bottom line
Proper bookkeeping practice drives your company to success. It allows you to stay on top of your business transactions. What’s more, it streamlines your financial data management; hence, you can stay focused on growing your business.