Top bookkeeping tips for small business owners

Good bookkeeping is just good business practice

Good bookkeeping starts with good business practices. Whether small business owners do the bookkeeping themselves, hire an inhouse bookkeeper or outsource bookkeeping, everything depends on how responsibly the business is operated by the owner. This sets the tone for everything else.

What is bookkeeping and why is it important?

Small business owners use bookkeeping to keep track of their business activities daily. Bookkeeping requires entering all costs and earnings of the business. Good bookkeeping helps small businesses to maintain healthy cash flows, run smoother operations, budget major expenses, pay taxes on-time and avoid penalties or as worst case avoid bankruptcy.

Can small business owners do bookkeeping themselves?

All small business owners can do bookkeeping themselves. But that is not the real question. Do the small business owners have enough time and energy to maintain and update their books daily? This is the real concern.

Many small business owners start off maintaining books on their own. However, within months of starting bookkeeping starts to interfere with the actual running and growing of the business. Small business owners should sooner than later consider getting a part-time expert to help keep bookkeeping on track and trouble free.

The smooth handing over of bookkeeping to an expert bookkeeper or an accountant at a later stage would require that the business owner has properly and promptly maintained the books. In case the business owner has mismanaged bookkeeping the professional bookkeeper may increase service charges to fix the past problems. Therefore, the sooner the small business owner engages a professional bookkeeper the better it would be.

So, if you have just started your business and are not pressed for time you may implement these tips for better bookkeeping:

1. Record all payment and receipt transactions

Whether you make a payment to buy a business asset or hire a service or pay a utility bill always enter the transaction in your books of accounts. Record the date of every transaction to trace whenever needed. Similarly, whenever your business receives a payment for the sale of a service or product it should be entered into your books of accounts. Ideally you should record all payments and receipts transactions daily. Initially a weekly record update may look convenient but soon you will notice that accumulating bookkeeping work will result into missed entries, lost transaction documents and even skipping a few weeks resulting into an even more complex bookkeeping task.

2. Avoid cash for all business transactions

Dealing in cash makes it harder to keep track of your business activities. Cash transactions tend to omit proper invoicing thus causing tracing problems later-on. As a result, you may struggle to account for all the cash transactions in the absence of invoices. You may also enter inaccurate values in the absence of an invoice. This can cost you lost business time, in hours or days, for tracing and sorting cash transactions. You may also find it cumbersome to separate personal and business expenses. Missed or undocumented cash transactions may also make it harder to make expense claims in tax returns costing your business more taxes. A simple fix is to use a business debit or credit card to keep track of all your business transactions. Use of online banking to make and receive payments is another effective way to easier bookkeeping.

3. Make all transactions through the banking channel

Small businesses have the tendency to make payments and receipts in cash. This has to do with the smaller value of transaction that takes up the majority volume of transactions. However, try to make most of the business transactions through your bank or the banking channel like debit and credit cards. This will greatly help in reconciling your ledger with your business bank account, save you time and reduce accounting errors.

4. Reconcile bank accounts monthly

Once bookkeeping entries are made daily, and majority of transactions are done through the bank it will make monthly bank account reconciliation much easier. Bookkeeping with brief description of the transaction, date of transaction and the amount of transaction will enable you to quickly trace the transaction in your bank account statement and arrive at a tally with the bank accounts withdrawals and deposits and the bottom-line. You will be able to spot discrepancies much faster and easier.

5. Keep personal and business records separate

Imagine if you had no clue whether a payment you made or a receipt in your bank statement was for business or personal purposes. How would you separate your business and personal finances? How would you even return your taxes without trouble? This is exactly why you must always keep your personal and business expenses and income separate. While this is a common mistake in small businesses it is as easily addressed. Simply keep separate bank accounts for your business and personal finances. Getting a separate credit card for your business is also helpful and will grow your business’ credit rating over time.

6. Pay yourself to meet your personal expenses

As a small business owner it helps to keep personal and business expenses separate by drawing a fixed sum. This sum or say salary, must then go into a personal account that you use to make all the personal payments. In the case of Pty Ltd firms in Australia the salary of the owner will process through the payroll system. However even for non-legal entity related work such as freelancers it is recommended to issue oneself a sum, preferably fixed or within a fixed range, and not have the business directly pay for the personal expenses. As already established, this salary must not be paid in cash and only transferred from your business bank account to your personal bank account through a cheque or an online transfer.

7. Choose between a cash basis or an accruals basis accounting method

The accounting method once chosen must be maintained for the entire income year. In a cash basis accounting method bookkeeping entries are made only on receiving the payment. Payment here means a cash receipt or a successful clearance of a cheque deposit. One advantage of cash accounting is that no tax is payable on the income earned but not received within the same income year. In Australia only the companies with a total turnover of less than $10 million can use the cash accounting method for GST.

On the other hand in an accrual accounting method the bookkeeping entries are made as soon as an income is earned and invoiced even if the income is not received within the same income year. Medium and large-scale businesses with heavy sales turnover mostly choose the accrual accounting method to track periodic sales targets, compete in market, and to achieve dividend expectations for the shareholders.

8. Follow-up with clients for timely payments

Pay on time and get paid on time. This is how your small business can ensure a healthy cash flow. This one rule will help you to pay taxes on time and avoid heavy penalties, pay back your bank loans and maintain a positive credit rating and keep your business partners motivated to work with you the next time. You may communicate and agree on clear deadlines for making payments to your partners and receiving payments from clients. Following up for payment of earned income is important to ensure that your clients do not miss out on the agreed deadline. An accounts receivable officer within the bookkeeping function ensures this.

9. Track business expenses to claim tax deduction

All business expenses must be recorded and supported with proper receipts to claim tax deduction. The ATO permits claims for tax deductions for businesses by way of reducing the taxable income. This is even more important for small businesses especially during the startup stage. Personal expense claims do not fall in tax deductions, unless, they are made for the business and the business recognizes them by entering into books and reimbursing you through a cheque or an online bank transfer. This reemphasizes the need to keep personal and business expenses separate to claim maximum possible tax deductions.

It is not compulsory to keep original expense receipts to make a tax claim from the ATO. A clear digital picture or a scan of the original receipt is accepted by the ATO (as on October 21, 2022). Digitizing the business expense receipts also saves time and space for your business. In addition, making all business expenses with the business credit card also simplifies the entire process. It would be a good idea to consult an accountant before every tax return to ensure that you are not missing out on any changes to the tax code. You may do your initial due diligence by visiting the ATO website to check for any changes to the tax code.

A common tax deduction would be the expense made on using private vehicles for business purposes. Small business owners often must use their private cars for business purposes that may range from client meetings, delivering products to attending conferences and trainings. The ATO permits the deduction of car usage expenses while making tax returns for business. You may choose either the cost per kilometer or logbook method to record and reimburse car usage expenses and deduct from taxable income of your business while making tax returns for the business. Your business must not directly pay for your personal car’s expenses but instead reimburse you through a cheque against your expense claim supported with documentation. Many online accounting software make it much easier with their function to attach digital copies of expense receipts with every transaction. Sproutstone Accounting is an expert in online bookkeeping with leading accounting software including XERO, QuickBooks and MYOB. You may contact us to get an obligation free advice on choosing a online accounting software.

10. Claim all business-related expenses made from personal funds

Small business owners often must deal with situations where they make business expenses from their personal funds, be it cash or a bank transaction. Planning can help keep such incidents to a minimum. However, in such cases small business owners must ensure that they claim the expense made from their business and get reimbursed through a cheque. Avoid clubbing expense claims with salary when making cheque payments to yourself. This will make it easier for your bookkeeper to deduct the expenses since your business had reimbursed them to you via cheque from the business account.

11. Archive bank statements, invoices, and receipts in chronological order

Make it a routine to file bank statements, invoices, and receipts in a properly categorized and dated filing folder. Even better scan the invoices and keep their digital records for greater efficiency. The use of an online accounting software makes it easier to scan and list all invoices chronologically. These invoices can then be retrieved at any time for any category of expense and date-range making the job easier for your bookkeeper. Since most bookkeepers charge by the hour, properly recorded invoices and receipts can save your business costs in bookkeeping fee in sorting and categorizing. Use of an online bookkeeping solution like XERO, MYOB and QuickBooks also helps in avoiding late tax return fine in case of missing records. For purchase invoices (i.e., money that you owe), keep separate files for paid and unpaid invoices, and file both alphabetically by supplier name. Always remember to move invoices over once you’ve paid them to the paid file. For sales invoices (i.e., money owed to you), number them sequentially in order of when they should be paid, so that you can pursue them effectively.

12. Move your bookkeeping to an online accounting software

Most small businesses may be able to manage bookkeeping with Microsoft Excel during their startup stage. However, it soon gets too complicated to manage excel sheets as business picks up the pace and managing excel becomes a time consuming and error prone affair. It makes sense with the readily available online accounting software to move business bookkeeping at the earliest possible. While most bookkeeping features are common across different online accounting software and choosing any would work just fine for your business it is best to consult an expert bookkeeper to make a choice based on what suits your unique requirements as an end user. The bookkeeping experts know about the nuances across these applications that may influence your choice of a online accounting software.

13. Selection and setup of an online accounting software

XERO, QuickBooks, MYOB – They are all great online accounting software that serve small, medium, and large businesses. It means that they are scalable. As your business grows you can simply buy more features from the same online accounting software without having to move to a different one. Even though all online accounting software are designed around the same fundamental accounting principles, they do differ in their user experience. It is always a good idea to engage an experienced accountant like Sproutstone Accounting to advise you on the selection of an online accounting software. Your expert accountant can take you through the pros and cons of each of the options. The experienced accountant can also facilitate demos of online accounting software options like XERO, QuickBooks and MYOB. This way you will be able to make an informed choice of selecting an online accounting software for your small business.

A small business owner will also need help from an online accounting software expert, like Sproutstone Accounting, to setup the accounting software. The first-time setup of an online accounting software can be complicated and error prone for most of the small business owners. The expert accountant will create your chart of accounts, list your products and services, create customer and vendor profiles and activate the invoicing policies. If you want to manage the online accounting software yourself you can also engage the accountant to train you on the frequently used features of the online accounting software. You will be able to make changes, issue invoices and publish reports on your own saving your precious commercial time. The automation feature of the online accounting software like XERO, QuickBooks and MYOB will make recurring transactions like issuing invoices and paying bills very easy for you.

14. Automate your entire business processes

In order to fully benefit from the time and cost saving features of an online accounting software like XERO, MYOB, and QuickBooks you must try to automate and integrate all aspects of your business’s financial transactions. Most of the leading online accounting software offer synchronization with your business bank account. You will always be able to view updated and accurate financial reports of your business without wasting a lot of your or your bookkeeper’s time and save hourly costs in fee to the bookkeeper because of the longer time it would take in managing manual bookkeeping records. While your physical paper-based documents are always at the risk of getting lost or torn-up or spoiled: you online records are much safer and most of the accounting software offer a data backup for your entire record that you may recover at the click of a button. Furthermore, you can access your business’s financial records virtually from anywhere around the world 24/7 without having to chase up your bookkeeper or disturbing them after workhours or over holidays.

15. Keep an expert bookkeeping advisor on payroll

As a small business owner even if you have decided to manage bookkeeping yourself for the initial phase of your business it is highly advisable to find a good bookkeeping advisor or consultant in Sydney. The role of an expert bookkeeping advisor is primarily to setup your bookkeeping processes and chart of accounts, train you on accurate bookkeeping and show you how to generate key bookkeeping reports. Going forward their role will be limited to a monthly quality check of your bookkeeping records and fixing any problems. This will keep your bookkeeping expenses lower and at the same time keep your bookkeeping free of critical errors. Small businesses can easily find expert bookkeepers in Sydney in as low as $35-$45 an hour to a fixed monthly fee starting as low as $100. View our bookkeeping packages for small businesses here and arrange an obligation free financial health check of your business with our bookkeeping experts in Sydney.

16. Invoice your customers soon after the job is done

Promptly invoice your customers the same or the next day of completing the job. The sooner you invoice the more likely are you to be paid by the customer by the deadline. Many customers plan for invoice payments in weekly, fortnightly, and monthly cycles. The sooner the customer can take your invoice into its payment planning the better the chances for receiving your payment in-time. It is best to invoice when the job is fresh in the customer’s mind. It eliminates the need for the customer to seek explanations about the completed job.

Online accounting software provide auto-invoicing features that make the process fast and error free. Online accounting software like XERO, QuickBooks, and MYOB can email your clients with the invoice and give a print for physical dispatch.

17. Keep a close eye on accounts receivable

Your business needs a healthy cash flow to keep operating smoothly. When your clients do not pay on time against your invoices this flow of cash is disrupted and can disrupt your operations or even bring them to grinding halt. It is therefore imperative to constantly keep updated on receivable invoices. This includes invoicing your clients timely, issuing reminders for payment, and promptly updating status in the books.

What if a client themselves are facing cash flow shortage? It would be a good idea to get as much part payment as possible against the invoice and re-schedule the rest of the payment. This way your cash flows will not dry up totally and you will reduce your business’s risk.

Accounts Receivable must be checked at least one a month. The sooner you pursue your client for clearing your invoice the better are the chances of getting timely payment. Remember there may be other vendors just like you are pursuing the client to release their payment first. Never delay pursuing accounts receivable.

Your diligence in pursuing accounts receivable with your clients sets the tone for how sooner the client will make you the payment. Always send an email reminder a week before the payment due date and follow it up with a reminder for overdue payment one day after the deadline has passed. You want to ensure a decent follow up with the client for accounts receivable through email and collection letters to strengthen your legal position in case of a dispute.

18. Pay your invoices in time

Clearing invoices that your business owes is just as important as receiving payment from your clients. Late or unpaid invoices not only damage your business credibility but also downrates your banking credit rating and can lose you tax benefits.

19. Plan for critical business expenses

Bookkeeping facilitates your business in planning for key expenses. These expenses are critical for the smooth running of your business such as inventory, office rent, office furnishing, office repair and maintenance, office energy bills and more. To ensure that you will have sufficient funds for business operations you must make entries on your books to set-aside money on a regular basis. This will ensure that you can distinguish between reserve cash and available cash to plan non-critical expenses like business entertainment or an unnecessary upgradation of office furniture.

20. Prepare to pay taxes in time

Tax returns are one of the recurring yearly expenses that every small business must prepare for. There are two important steps to take to avoid missing deadlines and incurring late tax penalties. One, you must set-aside some money every month to count towards your average tax amount. This will ensure that you have sufficient funds already set-aside to pay taxes and that you won’t have to take a loan to pay-off taxes. Two, setup reminders for tax return deadline on your calendar synched across your smartphone, tablet, and computer. Your accounting software also provides features to synchronize with the ATO Tax Portal to receive early tax reminders.

21. Schedule a regular financial check-up of your business

Making entries to your business books is only a part of the entire process. As a small business owner, you need to ensure that your bookkeeping is benefitting your business’s financial position. A financial check-up of your business requires you to revisit your books to settle entries. This means closing transactions such as realizing outstanding receipts and making due payments. This needs to be done weekly to ensure you follow-up timely with your clients for any bounced cheques, overdue invoices, or figures without a tally. This will ensure that you have a firm grip over the financial position of your business and will not face any unnerving surprises. Regular check of your books ensures that your taxes returns will be done timely and without hassle of tackling errors at the last minute and incurring late return penalties.

22. Produce monthly financial reports

Monthly business overview keeps you aligned to your business performance and keeps you alerted on any financial issues. A typical monthly report includes a profit-and-loss statement, and a balance sheet. These two views into your business’s financial health. The profit-and-loss statement tells you if you have a positive or negative cash flow. The balance sheet tells you if your business value has grown or shrunk. A balance sheet contains your business’s assets, liabilities, and owner’s equity. These monthly financial reports on your small business do the big job of helping you to sustain and grow your business and avoid losses and even bankruptcy.

23. Outsource your bookkeeping before it starts taking you away from growing your business

As a small business owner your main aim is to grow your business and make profits. That requires your personal time, attention, and work to focus on core operations of your business like servicing your customers, networking and making sales. While bookkeeping is essential for the financial health management of your business it can become a distraction as the business picks up. The right time to outsource your bookkeeping is when the value of your time invested in bookkeeping starts competing with the value of time you spend generating more business. Therefore, keep track of the number of hours you spend on bookkeeping every month and assessing how much more business you could generate with that many hours. Look at the hours spent on bookkeeping as a cost to your business. The moment this cost starts matching or exceeding the value of lost business it is time to outsource bookkeeping at a lower cost than your high-value personal time. Work out the monetary value of your own time (e.g., how much you generate for the business per hour) and compare this with the cost of a bookkeeper.

24. Consider outsourcing part of bookkeeping

It will serve your business better if you outsource only a part of your bookkeeping if you have three or more employees. Payroll and taxes are two of the key aspects of bookkeeping that requires professional expertise. Payroll requires a lot more than only making salary cheques; It includes withholding employee taxes, returning withholding taxes to the ATO on behalf of the employees, superannuation calculation and deposits, employee loans management, employee medical insurance and more. Since Payroll has to do with ATO returns there is a constant need to stay updated on related ATO regulations and any changes therein. Therefore it becomes evident that this function better be outsourced to a payroll specialist at a fraction of the cost that you would incur trying to invest your commercially valuable time. While outsourcing payroll it would be productive to setup a separate business bank account only for payroll. This way your payroll service provider will not have access to the rest of your business’s financial data. Further if you use online accounting software your outsourced payroll service provider can directly make payroll related entries to your books making the entire process even more time saving and hassle-free. Another benefit of maintaining a separate business bank account for payroll is that you can allocate enough funds to the account to ensure your employee’s salary cheques never bounce. A dedicated payroll account will give you a one figure update of the payroll funds and if you need to deposit more before issuing salary cheques.

Conclusion

Bookkeeping is all about caring for your business and to guide you to make improvements and avoid problems. Good bookkeeping helps you to avail tax benefits from the ATO and pay only the taxes that you need to pay.

If you have decided to outsource bookkeeping, in part or in full, check our bookkeeping packages especially designed for small businesses.