Bookkeeping may have not been at the top of your list of reasons as to why you became a small business owner. Perhaps you hated your accounting class in college, or you really never thought of yourself as a “math person”. Regardless of the reason, bookkeeping is a crucial skill that needs to be learned in order to succeed as a business owner.
So, What is Bookkeeping?
Bookkeeping is the process of recording and organizing a business’s financial transactions. These transactions can include purchases, sales, receipts, and payments made by an individual person or organization/corporation. Bookkeeping is the number one way business owners can determine whether or not their business is profitable. It is critical to keep track of your numbers to help you identify financial challenges early on.
Now that you have a basic understanding of what bookkeeping is and its role within your business, let’s explore a few actionable things you can do now to harness the basics of bookkeeping.
Be Vigilant With Your Chart Of Accounts
A chart of accounts is a created list of accounts used by an organization to classify each item for which money or its equivalent was spent or received. For any type of business you operate, you will always have to keep track of a few accounts such as cash flow, expenses, accounts receivable, wages/salary, etc.
A chart of accounts makes budgeting and tracking specific business expenditures a lot easier. Best of all, it ensures that your business remains fiscally compliant. Your chart of account should also reflect your business’s budget for each allocated expense.
Choose The Best Accounting Method For Your Business
You have a choice between going with a single or a double-entry accounting system. A double-entry accounting system is a better fit for more complex businesses. Whereas a single-entry accounting system could be perfect for a simple bookkeeping system in a low-volume small business.
You also have to select either a cash-based accounting system or an accrual-based accounting system. In a cash-based accounting system, a transaction is recorded when cash changes hands. Whereas an accrual-based accounting system, the transaction is recorded when the sale actually occurs. One example is when you invoice a client (even if they don’t pay right away). To start, you can begin with a cash-based system and adapt it to a different model as you grow.
Brace Yourself For Unexpected Expenses
During the life cycle of every business, it will be inevitable that you will have to face a shortage or interruption of cash flow. You must have a strategy in place to ride out the cash flow disruption.
One solution is opening up a credit card or a business line of credit. A business line of credit is a type of business loan that offers more flexibility than a regular business loan. You can borrow up to a certain limit and pay interest only on the portion of the money you borrow. You have the option of drawing and repaying the funds as you wish, as long as you don’t go over your credit limit. It basically works like a credit card.
Whether you decide to take bookkeeping and its complexities head-on or decide to enlist the help of an accountant, just knowing the rudimentary basics of bookkeeping will empower you to become an expert on the financial health of your business.Get Started Now