Small business owners are amazing people, courageously setting off on their own to pursue their dreams. Years of sweat and tears are behind most successful small businesses, but unfortunately so is a ton of paperwork. Read on for recurring accounting & bookkeeping best practices for small businesses, from reviewing A/R aging reports to maintaining proper record retention practices.
What Is Bookkeeping?
Bookkeeping is the art of recording every financial transaction in your small business. Everything that happens can be broken down into a debit and a credit, and these accumulated debits and credits show how you went from a beginning balance to an ending balance on your financial statements.
Bookkeeping tells the story of your business. How much did you sell? How much inventory do you have left? What was your profit last month? These questions can only be answered with proper bookkeeping recording every financial transaction.
Completeness and accuracy are vital. Failing to record everything, or recording things incorrectly, makes your financial statements worthless, and could lead to legal issues if used to obtain outside financing or other agreements.
Record Daily Activity As Necessary
Transactions that can’t be gathered at a later date must be recorded as they occur. Waiting any period of time can lead to inaccuracies.
These situations are largely dictated by the use, or lack thereof, of technology. Take sales for example. If you have a point of sale system in place, you can probably get a report for various time periods in different forms, which can then be recorded in your accounting software. However, if you don’t have such a system, you likely need to record those daily sales as they occur. Failing to do so could lead to forgotten sales, understated income, underpaid taxes, and fraud.
Physical evidence, such as invoices, purchase orders, and receipts, must be maintained for a set period of time. The best way to do this is to establish a record retention system that conforms with the IRS record retention rules. Check out our helpful guidelines to learn what you must keep forever, and what can be shredded after 2, 3, or 7 years.
Check Bank Balances
Hackers and fraudsters are everywhere, and your small business is a target. While tedious, it doesn’t hurt to check your bank balances daily to verify nothing unusual occurred while you were sleeping. Banks are getting better at warning you and stopping unusual transactions, but often times the fraudster is the person you trust most in your company.
To be efficient, a best practice is to organize your accounts payable and bill-pay functions so that your review, authorization, and payment of bills occur in chunks at specified periods. While you could pay bills every day, this may be more tedious than it needs to be. Most bills allow payment terms of 30 days or more, giving you time to strategize and coordinate with your cash flow.
Additionally, daily bill-pay may become so routine that fraud becomes harder to spot. An employee authorized to pay bills may be able to sneak false vendors or duplicate invoices past you. The vendors will likely be different every day, making it harder to spot patterns.
Tip: Establish Internal Controls & Segregation of Duties
- Limit check signing authority to the owner
- Match cleared checks to an approved vendor list
- Use pre-numbered checks and retain all voided checks
Payroll (If Applicable)
Don’t forget about payroll (Don’t worry, your employees won’t let you). If your business has weekly or bi-weekly payroll you’ll need to gather the information, compute the payroll, cut the checks, and remit the taxes. It can take days from start to finish, rolling right into the next period, making payroll feel like a never ending job.
We won’t get into all of your payroll headaches here, but if you’re looking to relieve that stress check out our post on the benefits of combining accounting and payroll services.
Reconcile Bank and Credit Card Accounts
As we said at the beginning, bookkeeping requires completeness and accuracy. The best way to ensure this is to perform bank and credit card reconciliations each month. These reconciliations compare everything you’ve recorded for the month against everything the bank or credit card company has recorded, ensuring nothing slips through the cracks or gets entered incorrectly.
Tie Out Balance Sheet
The balance sheet shows balances at a point in time. Therefore, the accounts can be tied out to 3rd party statements to ensure accuracy. For example, does your loan liability agree to the Bank’s loan balance at the end of the month? If not, you likely misclassified a payment, or perhaps didn’t split the interest and principal correctly.
Certain numbers cannot be felt or seen, but they are just as important to record. Depreciation and amortization are great examples. They are accounting concepts that express the degradation of fixed assets and intangibles. They allow the taxpayer a tax deduction in the form of depreciation expense and amortization expense according to a fixed asset listing following IRS-accepted methods.
Unless you have an accounting background, you’ll likely need to work with a professional accountant to help you. You’ll have questions such as:
- Do I classify this as a 5 or 7 year asset?
- Do I use MACRS or Straight-Line?
- Do any of these assets qualify for special depreciation?
These questions and others are the kinds of details that a qualified professional accounting firm can help you to tackle.
Compile & Review Financial Statements
Every small business should have monthly financial statements that includes a balance sheet and profit & loss statement. Most should also have a cash flow statement. These statements are vital to understanding what occurred, comparing current numbers to prior periods, forecasting the future, and obtaining outside financing when necessary.
Without financial statements, you’re flying blind. Even with financial statements, you need to treat them as a tool to garner performance insights and review them. Don’t simply treat them as a check-the-box activity and stuff them in a drawer.
Compare Budget to Actual
Another best practice is establishing a budget for your business. Financial statements are perfect for structuring your budget and then comparing budget to actual at the end of the month to see where you need to improve next month.
Working with Haworth & Company, Ltd.
We love bookkeeping. We’ve done it for small businesses for over 30 years and we’re great at it. Our proven systems mean you get timely, accurate financial statements for a fraction of the cost of hiring your own in-house bookkeeper. With four convenient locations in the Twin Cities and one in Rochester, we’re here to support your local small business and take the work off your plate. Give us a call or shoot us a message and see how we can help your small business succeed!