Bookkeeping Best Practices for Small Businesses

If we were to guess, we’d say bookkeeping is probably not why you got into business, but it is a necessary evil. Without up-to-date and accurate accounting records, it becomes impossible to make informed business decisions or know precisely where you stand regarding the cash flow of the business. 

Even if your business is successful, without basic bookkeeping knowledge, it can be challenging to grow. But you know all that, don’t you? That’s why you’re here. 

The truth is that building a consistent bookkeeping practice can feel daunting, mainly if this is your first shot at running a business. However, if you build healthy habits into your routine from the get-go, your bookkeeping can lay the foundations to help you grow.  

What are the basic small business bookkeeping principles?

For some small business owners, bookkeeping is the stuff of nightmares. But it doesn’t have to be, especially if Decimal is helping. 

A common mistake is to mix up accounting and bookkeeping. Bookkeeping is relatively simple and involves recording and monitoring all your transactions in an organized way. Accounting, on the other hand, is at a much higher level. It’s the process of making sense of that information and presenting it to stakeholders. As a company grows, the complexity of the operations tends to grow as well. At that point, it might make more sense to lean on accountants to drive the necessary learnings about company performance to further guide strategy. 

Most small businesses use a method called single-entry bookkeeping. This approach, recording all transactions once and categorizing them as a cost or income, works well for most startup businesses. The good news is you can do it yourself. However, if you don’t have the time, you can also get someone else (like us!) to take care of your bookkeeping for you. 

What are the best practices in small business bookkeeping?

Separate your personal and business finances

The first step to take after incorporating your business is to separate your personal and business finances completely. To do this in practice, open a separate business bank account and credit card and use that account and card for any purchases or income related to the business. Setting up a business email address is also a good idea, just to help you keep business and personal matters separate. 

Separating your finances makes it easier to track your business expenses come tax time and helps you build up the business’s credit profile. It will also help you clear the potential legal implications that could arise if you use the business’s money for personal expenses.

Put internal controls in place

In the early days of running your business, you might be the only person making payments and accessing funds. However, as you grow, it’s worth putting a few internal controls in place to reduce the risk of insider fraud from employees, partners, and other people within the business. 

As a simple example, assigning the roles of writing the checks, reconciling the bank account, and authorizing payments to three separate employees can provide some degree of protection. Without those controls, bad practices quickly build up which makes staying compliant much more difficult. Outsourcing bill-pay operations is a preferred alternative if there are not enough employees to handle activities in a compliant manner. 

Schedule regular bookkeeping times 

With everything else going on around you, it can be very tempting to postpone your bookkeeping for a few days, a week, or a month - and before you know it, you’re in a big mess with delayed financials. 

The best way to keep up with your bookkeeping is to schedule consistent times and stick to them. Granted, it won’t be the most fun you have all week, but it will help you manage your finances and grow your business. 

It’s common for business owners to do their bookkeeping when their credit card statement arrives. And if you find yourself dreading the process for days or weeks in advance, there are plenty of solutions out there - like Decimal - that can help. 

The key is to stay on top of this activity. Whether it’s finding the time yourself or leaning on a team like Decimal, if this falls behind, so do the insights around business performance. 

Keep a close eye on your accounts receivable

Getting invoices sent out quickly after work is completed and keeping a close eye on when the payments are due is a crucial part of your bookkeeping process. If customers don’t pay you on time or you’re late sending out invoices, your cash flow can quickly become a trickle, making it difficult to pay your bills, buy inventory, and grow your business.

As with your other bookkeeping tasks, we suggest scheduling a consistent time to write up and send out invoices every week. A few invoicing best practices include:

• Always make sure the invoice is clear and complete
• Check who to send the invoice to - is it the accounts department or the person who made the purchase?
• Ask for confirmation that your invoice has been received
• Give clear payment terms and a due date
• Provide details of the fees you’ll add to late payments
• Track the age of each invoice and create reminders to follow up at certain intervals like 30, 60, and 90 days out

You should also include any information required by the customer to process the payment, such as a PO, job number, or proof of delivery.

Stay on top of accounts payable

When you’re running a small business, the last thing you need is late payment charges or the added stress of dealing with calls from suppliers chasing their payments. It’s no way to run a business, and it’ll erode any trust and goodwill.

A good accounts payable system - paying your bills on time and even early - ensures you don’t have liabilities on your books for too long and boosts confidence in your business. It also gives you a clearer view of your cash flow and allows you to take advantage of any early repayment discounts, which can give a nice little boost to your profit margins. 

Bookkeeping best practices for different business types

Different types of small businesses face different bookkeeping challenges. Here is a quick look at some of the challenges they face and how you can overcome them.

Bookkeeping best practices for startups 

Starting a business is hard, particularly if you’ve never done it before. Keeping track of your accounts receivable, accounts payable, and payroll all eat into your time, which is why many startups choose to automate as much of it as possible.

Although you’ll understandably want to keep your costs down, paying for a cloud-hosted bookkeeping service like QuickBooks Online is an expense you won’t regret. It lets you manage your finances from anywhere, which can be invaluable if you spend a lot of your time on the move. It also stores all your important bookkeeping information safely in the cloud, so you don’t have to worry about losing key data if your local systems fail. 

In the very early stages of your business, you won’t have a previous tax return to guide you on how much you’re likely to owe. To counter this, we suggest putting around 30% of each customer payment aside to build a financial buffer for when it’s time to pay your bill.

You also need to think about how you’ll evaluate the performance of the business and gain the visibility of your finances to make important growth decisions. Building reports around key metrics, such as cash on hand, monthly cash burn, revenue growth, and customer churn, can help you highlight problems and capitalize on opportunities.  

Bookkeeping best practices for nonprofits

Nonprofits face a unique set of challenges as it’s the mission rather than generating a profit that’s most important. However, there are still plenty of bookkeeping requirements and strict rules. 

The IRS has different tax regulations for nonprofits, so you need to understand the specific filing requirements. If you don’t, you could be on the receiving end of damaging IRS penalties. If you decide to seek outside help, it’s worth finding a provider with specific experience working with nonprofits to keep your bookkeeping and back office in safe hands.

From government grants to tax reliefs, grants come in all shapes and sizes and have different bookkeeping requirements. Most grants are for a specific purpose, for example, buying new equipment or improving your marketing. You’ll have to record a grant appropriately in your books, depending on what it’s for. You’ll also need to handle the money correctly to keep everything in order. 

Growing a nonprofit also requires significant planning. You can’t just sell more products or services as you would in a for-profit business. You have to raise more money and make smart financial decisions, and to do that, you need accurate financial records.  

Bookkeeping best practices for SaaS providers

We know how hard it is to balance running a business with building software and raising money. There are also key differences between SaaS bookkeeping and regular bookkeeping that businesses need to be aware of. 

The subscription model many SaaS providers use changes the cash flow dynamics and can lead to many repetitive tasks. You’ll also need an accurate and well-organized set of books if you’re planning to fundraise or tap into government tax credit programs.

Knowing how to handle deferred revenue for SaaS providers is a must. Deferred revenue is money you’ve already billed that can’t be recognized as revenue because you haven’t provided the service yet. If you don’t handle it properly, deferred revenue can skew your growth numbers, as you can’t invest unearned cash in future projects until it’s earned. 

Other SaaS bookkeeping considerations include the way this type of business is taxed. Sales tax is applied differently to physical goods, with taxes applying where your company has a physical presence AND where your customers are based.  

Streamline your small business bookkeeping with Decimal

Wave goodbye to piles of paper, exporting spreadsheets, and manually entering data. Decimal does all that leg work for you, simplifying your back office and giving you more time to run your business. 

Our automated, cloud-based system takes care of your bookkeeping, payroll, invoicing, accounts payable, and more. And you can check in with your dedicated Decimal team whenever you like if you have any questions or more tasks. 

And at Decimal, we give you an Actually Fixed Price, so you always know how much you’re paying in advance, and you’ll never be charged a dollar more.

What’s next?

Want to find out how Decimal can streamline your bookkeeping so you can focus on the things that matter the most? Book a free consultation with one of our experts or get in touch so we can answer your questions.