As a small business owner, the many hats you don and the multitude of tasks you juggle can make it hard to stay on top of everything important. But while vital back-office tasks can easily slip to the bottom of the priority pile, keeping an orderly set of financial accounts is essential to your business’s long-term success.
Timely bookkeeping provides valuable insight into your cash flow, burn rate, and profitability. It also yields key financial information for data-driven decisions that can help grow your business.
In this guide, we explain small business bookkeeping and why it’s so important to your organization.
What does a bookkeeper do?
Bookkeepers use double-entry bookkeeping (where debits always equal credits) to maintain a balanced and complete set of books, up to and including a trial balance. They also ensure every financial transaction is recorded in accordance with your company’s chart of accounts.
To keep accurate, up-to-date records, professional bookkeepers carry out several common basic bookkeeping duties, such as:
- Tracking transactional activities around customer and company charges and payments (usually through accounts receivable and accounts payable)
- Generating documents like customer invoices and financial statements like balance sheets, cash flow statements, and income (or profit and loss) statements
- Executing regular (usually monthly and annual) reconciliations of bank and credit card accounts
- Calculating and remitting sales tax amounts like PST, GST or HST
- Liaising with your company accountant or auditor when necessary - especially at year-end and during tax or audit season
Related: Key differences between an accountant and a bookkeeper
Your bookkeeper or accounting professional may use a manual or cloud-based bookkeeping system to accomplish these duties.
Manual bookkeeping
Traditionally, a company’s financial records were managed offline by making pen-and-paper entries in a ledger book or using a computer program like Microsoft Word or Excel.
However, manually entering income, expenses, and interest data is time-consuming and prone to human error. It also means physically storing and retrieving source documents like receipts, invoices, and statements.
Cloud-based bookkeeping
Today’s online bookkeeping practices use cloud accounting software to digitally record and manage financial data, ensuring it’s easily accessible from anywhere. Not only can cloud-based bookkeeping save time and money by automating your company’s accounting workflow, it’s also great for:
- Enabling collaboration across your organization
- Keeping your data more secure
- Providing real-time insight into your books for better financial clarity
Cloud accounting software is also scalable, which makes it easier to manage your books as your business grows.
Why is timely bookkeeping important for small businesses?
Here are eight reasons why timely bookkeeping is important for your small business.
1. Helps You Budget
Bookkeeping is integral to budgeting. Having reliable financial data enables small business owners to estimate revenues and expenses to create an accurate and manageable budget. Regularly comparing your budget with actual financial data is the best way to identify potential cash flow issues or cost reduction opportunities. Without proper bookkeeping practices, budgeting can be a difficult and stressful activity.
2. Cash flow visibility
According to recent research conducted by CB Insights, 29% of startup businesses fail due to cash flow issues. For business owners, having sufficient funds is critical for managing operational expenses and equipping their business for growth. When you're on top of bookkeeping, you can easily track payables and receivables and ensure you have enough money to pay your bills. Timely bookkeeping provides insight into your revenue stream and shows how well your business is performing regarding money flowing in (income) versus money flowing out (expenses).
3. Profitability tracking
As a business owner, you should be on top of your business's financial performance. Monthly bookkeeping tracks important financial statements, including balance sheets, income statements, and cash flow statements, for easy analysis of your profit or loss. This data shows how you’re tracking against targets, and when collected over time, allows you to observe trends in your business and compare results from quarter to quarter, year over year. This identifies growth opportunities and addresses potential issues that may arise. Clean and accurate books let you track your business earnings over time so you can determine the best ways to manage and improve your profitability.
4. Stress-free tax preparation
Most businesses must file a tax return and remit sales and payroll taxes during the year. Business owners often fall behind in their bookkeeping and scramble to get their books caught up to file taxes before the deadline. Leaving these tasks to your year-end accountant can also lead to expensive bills at the end of tax season. Therefore, having a set of accurate and organized books throughout the year will enable you to easily calculate how much tax you will owe, reducing the risk of late payments and penalties. Instead of scrambling at year-end, up-to-date books let you track deductions as you go, calculate amounts payable in advance, and stay on top of tax deadlines.
5. Maximizes Business Deductions
Disorganized or sloppy bookkeeping can cause your accountant to overlook legitimate business deductions; worse, the CRA may not allow you to claim deductions due to inaccuracies. Good bookkeeping minimizes the margin for error and, therefore, ensures that your business pays the least amount of taxes possible.
6. Better-informed financial planning
Keeping proper books ensures you always have the right information when reporting financial data and performance metrics to stakeholders. Bookkeeping is integral to budgeting. Having reliable financial data enables small business owners to estimate revenues and expenses to create an accurate and manageable budget. Regularly comparing your budget with actual financial data is the best way to identify potential cash flow issues or cost reduction opportunities. Without proper bookkeeping practices, budgeting can be a difficult and stressful activity. Solid bookkeeping practices lead to clear financial reports that can help you make periodic comparisons, spot trends or patterns, and plan around important events like hiring, cost-cutting, fund reallocation, and promising new business opportunities.
7. Readies Your Business for Funding
As a business owner, you may want to apply for a bank loan or raise external funding from investors, which requires accurate financials. Having the right information makes reporting to funders much easier for you and your business. By maintaining an accurate set of books, you increase the confidence of funders in your ability to lead your company and grow your business.
Related: 5 Small Business Financing Options in Canada
8. Keeps You Audit Ready
You are always on the CRA audit radar as a self-employed small business owner. Accurate books keep your business audit-ready and can lead to a faster, lower-cost experience. Good bookkeeping properly documents all your financial transactions and makes compiling accurate financial statements and tax returns easier. This compliance is crucial for meeting legal obligations and avoiding penalties, fines, or audits arising from inaccurate or incomplete records.
Small business bookkeeping tips
Now that you understand the importance of maintaining reliable books, here are our top small business bookkeeping tips to help you do just that.
Streamline your operations by going digital
Switching to cloud-based software lets you invoice customers directly, integrate digital tools (like Plooto, for example) that automate bookkeeping processes, and use apps (like HubDoc or Dext Prepare) to streamline document storage so your financial data is better organized and easier to audit.
Related: How Small Businesses Can Use Pre-Authorized Debits
Keep personal and business accounts separate
Separating your business account allows for a clear audit trail that makes reconciling bank statements, tracking expenses, managing cash flow, and filing accurate tax returns easier. Maintaining an independent company account can also help you establish professional credibility as you build your business credit score.
Carve out advance funds to pay taxes
Setting money aside monthly to cover pending payments like income and payroll taxes can ease the financial sting on your business operations.
Keep a close eye on expenses
Accurately tracking expenses will ensure you maximize tax deductions like mileage or client meetings, for example. In addition to using a dedicated business credit card to consolidate your spending, you might also opt for a tool like Expensify to automate employee expense account reimbursements.
Monitor your invoices carefully
Implementing a process to stay on top of late or unpaid customer invoices will prevent them from negatively impacting your cash flow.
Outsource your bookkeeping
Do you lack the knowledge, time, or budget to keep your books or hire a full-time bookkeeper? Outsourcing is a great way to ensure your bookkeeping stays up to date.
If you’re looking to outsource your small business bookkeeping to a team of accounting experts with customized services to meet your needs – Enkel is here to unburden your back office.
The Importance of Working Capital for Small Businesses
What Is Working Capital?
Put simply, working capital represents the assets you have available to turn into cash in order to pay short-term debts associated with running your business, like purchasing inventory and equipment and paying salaries. Cash and accounts receivable are two examples of assets that count towards a company’s working capital. For every business cycle (the time it takes to prepare your product or service, sell it, and then collect on it) the amount of working capital you have at your disposal is your current assets minus all current liabilities.
Why Is It Important?
The importance of working capital cannot be stressed enough. It is a strong indicator of a business’s ability to manage upcoming expenses. Having little working capital makes it very difficult to run a business effectively because the payment of day-to-day expenses depends on having these liquid assets available when needed.
How to Improve Your Working Capital
Get a Cash Flow Forecast
Understanding your financial situation is key to figuring out your working capital and its needs. Getting an accurate forecast of when you will run out of cash will help you determine whether—or by how much—you need to improve your working capital.
Manage Your Accounts Receivable
Converting your accounts receivables into working capital may require reforming your methods of collecting customer payments. Implementing changes such as automated reminders and simple payment methods will promote prompt payment within your client base and improve your working capital.
Manage Your Cash
Although it may seem like a good idea to pay your bills quickly and as they come, if you find yourself with minimal working capital, it is worth reconsidering how and when you pay your bills. Prompt payment is important for avoiding late fees, but if you know you need cash to pay for an immediate expense, hold off on paying the bills until your customers pay you. This way, you won’t be strapped for cash at a critical time.
Manage Your Inventory
In a similar vein, while buying inventory in bulk has its advantages, it is still important to consider whether you can afford to sacrifice valuable working capital for products that could take a long time to sell. Be sure to do the math to ensure you have adequate working capital for the remainder of the business cycle before making big purchases.
Bookkeeping Resolutions for 2024-2025
Embrace Digital Transformation
Business owners and operators must acknowledge the dynamic impact of technology in the business world. For small businesses, adapting to digital transformation is not just a leap toward efficiency; it’s a stride toward future-proofing your financial management. We will explore the indispensable role of cloud-based accounting software, the advantages of automating financial processes, and how these digital tools can revolutionize how small businesses handle their accounting. By embracing these technological advancements, small business owners can enjoy streamlined operations, improved accuracy, and real-time financial insights, setting a solid foundation for growth and adaptability in the unpredictable business environment we’re in today.
For businesses thinking about outsourcing some or all of their back office functions, one of the “perks” of those engagements is that the technology is provided as part of the service. This gives business owners all the tools without the expense and burden of learning and maintaining those solutions.
Transition to Cloud-Based Accounting Software
Regarding digital transformation for small businesses, transitioning to cloud-based accounting software is pivotal. This shift from traditional, often manual, accounting methods to cloud-based systems offers many benefits. First and foremost, it ensures real-time access to financial data from anywhere, at any time, breaking the chains of office-bound financial management. This accessibility is vital for small business owners who are constantly moving. Additionally, cloud-based solutions offer robust security features, safeguarding sensitive financial information against data breaches and loss. They also facilitate seamless integration with other business tools, creating an interconnected ecosystem that streamlines various business processes. This integration can lead to more accurate, up-to-date financial reporting, essential for making informed business decisions. By adopting cloud-based accounting software, small businesses enhance efficiency and accuracy and gain a competitive edge in a rapidly digitizing world.
For businesses that choose to outsource non-core functions like bookkeeping, payroll, AP, and AR, it’s equally important that your outsourced partner uses cloud-based software and has built processes and procedures around that technology to enable a seamless workflow between your team and theirs.
Automate Where Possible
This section underscores a critical aspect of modern accounting practices: leveraging automation to enhance efficiency and accuracy. Automating repetitive and time-consuming tasks like invoicing, payroll processing, and bookkeeping can be a game-changer for small businesses. Automation tools are designed to minimize human errors and free up valuable time, allowing business owners and their teams to focus on strategic initiatives rather than getting bogged down in mundane tasks.
These tools can automatically generate invoices, send payment reminders to clients, process payroll in compliance with tax regulations, and even reconcile bank statements. This speeds up the accounting process and ensures consistency and reliability in financial records. Embracing automation in accounting practices is more than just a convenience; it's a strategic move toward creating a more streamlined, efficient, and scalable business operation.
Good accounting partners will augment existing cloud-based technology with tools that introduce even more automation, further optimizing workflows to get maximum efficiencies. In the end, the amount of time required by business owners to stay on top of their financial operations is reduced to the absolute minimum, freeing operators to stay laser-focused on running and growing the business.
Improve Financial Literacy
Business owners must understand the financial aspects of running a business. In today’s complex economic environment, a strong grasp of financial principles is beneficial and essential for making informed decisions. This involves getting to grips with the basics of financial statements, such as balance sheets, income statements, and cash flow statements.
Each of these documents tells a different story about the financial health of a business, and understanding them can provide crucial insights into profitability, liquidity, and long-term viability. Beyond understanding these statements, the section encourages continuous learning and staying abreast of financial news, trends, and regulatory changes. This could involve participating in workshops, online courses, or webinars focused on small business finance. By enhancing their financial literacy, small business owners can make more strategic decisions, identify growth opportunities, and better manage risks.
One benefit of working with third-party service providers is that business owners almost organically level up their expertise in these areas as they work alongside accounting professionals. In addition, many of these firms offer Controllership services that help businesses strategically navigate long-term planning, budgeting, financing, audits, tax-readiness, and more.
Understanding Financial Statements
Understanding financial statements is a cornerstone of financial literacy for small business owners. These statements, which include the balance sheet, income statement, and cash flow statement, serve as a window into the financial health of a business. The balance sheet provides a snapshot of the company's assets, liabilities, and equity at a specific point in time, reflecting the business's stability and liquidity. The income statement, or profit and loss statement, outlines the company’s revenues, expenses, and profits or losses over a period, offering insights into its operational efficiency and profitability. The cash flow statement tracks the inflow and outflow of cash, highlighting how well the business manages its cash for operational needs, investing activities, and financing.
Understanding these documents is crucial as they help business owners make more informed decisions, from budgeting and forecasting to evaluating investment opportunities and securing financing. For small business owners, a solid grasp of these financial statements means a better understanding of their business’s financial story and a more informed approach to steering its future success.
Continuous Learning
For small business owners, continuous learning is not just about keeping up with changes; it's about staying ahead of them. This involves regularly updating one's knowledge of the latest in accounting practices, tax laws, and financial management strategies. Engaging in ongoing education can take many forms, from attending industry seminars and workshops to enrolling in online courses or webinars specifically designed for small business finance. Keeping abreast of the latest software and technological advancements in accounting is also crucial.
A commitment to continuous learning ensures that small business owners can make more strategic, informed decisions, adapt to new financial regulations quickly, and leverage emerging tools and techniques to streamline their accounting processes. Ultimately, this continuous pursuit of knowledge fortifies their business's financial health and fosters a culture of growth and adaptability within their teams.
For many small businesses, resources and bandwidth are extremely limited, and committing to continuous learning is not always possible at a desired level. One way to stay ahead of the curve is to partner with back-office service providers who make learning their priority so that they can better serve their clients. It’s another way to stay on top of things while staying focused on your core business.
Tighten Expense Management
Vigilant expense tracking and management are critical. Efficient expense management starts with the regular review and categorization of expenses, allowing business owners to clearly see where their money is going and identify potential areas for cost savings. This process involves scrutinizing every expenditure, from small, recurrent costs to larger, one-time investments, ensuring that every dollar spent contributes to the business's growth and sustainability.
Embracing digital tools for expense tracking is a key aspect of this resolution. The tools can automate the process of recording and categorizing expenses, making it easier to monitor spending patterns and detect any irregularities. By tightening control over expenses, small business owners can minimize unnecessary spending, improve cash flow, and allocate resources more effectively, which is essential for maintaining a healthy financial state and driving the business toward its strategic goals.
Regular Review of Expenses
A regular review of expenses is hands-down one of the most important practices for small businesses aiming to maintain a healthy financial state and achieve sustainable growth. This process involves systematically examining all business expenses on a regular, often monthly or quarterly, basis. By doing so, business owners can gain a clear and comprehensive understanding of where their funds are being allocated, identify any inefficiencies or unnecessary expenditures, and adjust their spending accordingly.
This scrutiny helps to detect patterns of overspending and uncovers potential cost-saving opportunities. It's not just about cutting costs but about optimizing the allocation of resources to areas that yield the most value for the business. Furthermore, regular expense review enables business owners to stay on top of their financial commitments and ensure they are prepared for both expected and unexpected financial demands. Ultimately, this practice is vital for ensuring that every dollar spent is an investment towards the business’s long-term success and stability.
Invest in Expense-Tracking Tools
Technology is a key component of all financial resolutions, and expense tracking is no exception. When it comes to expense tracking, it’s important to leverage modern technology to streamline and enhance the expense management process. For small businesses, investing in these tools is a strategic move towards greater financial clarity and control. Expense-tracking tools automate the tedious task of recording and categorizing expenses, reducing the likelihood of human error and ensuring a more accurate and efficient process. These tools often come with features like receipt scanning, automatic categorization, and integration with accounting software, simplifying the entire expense management workflow.
By having a centralized digital record of all expenses, business owners can easily monitor spending patterns, prepare for tax season more effectively, and make more informed budgeting decisions. Additionally, these tools can provide valuable insights through data analytics, helping to identify cost-saving opportunities and optimize financial strategies. For small businesses looking to grow and compete effectively, investing in expense-tracking tools is a step towards smarter, data-driven financial management.
As is the case with many of the tools that help to better manage and streamline back-office functions, when you outsource these non-core functions to third-party providers, you get the people, processes AND technology to optimize your financial operations.
At Enkel, we know that it's hard to prioritize your bookkeeping when you’re busy running high-ROI initiatives.
So, if you’re looking to outsource your small business bookkeeping to a team of accounting experts with customized services to meet your needs – Enkel is here to unburden your back office. Find out how we can help you get back to growing your business.
