Keeping clean financial records is crucial when it comes to maintaining healthy cash flow, satisfying your tax requirements and tracking the success of your small business.
Unfortunately, the process of bookkeeping as a small business owner can be overwhelming and difficult to understand, especially if you have no background in accounting.
Whilst we always recommend that you do, if you’re not ready to hire an accountant or bookkeeper, you’ll need a solid bookkeeping process in place to ensure continued profitability and success.
In this guide, we’ll explain why bookkeeping is essential and outline the fundamental processes that are necessary to perform it.
What is bookkeeping and why is it important?
In its most basic form, bookkeeping is the process of recording your daily business transactions. It essentially keeps track of the money that goes in and out of your business.
Putting in place a proper bookkeeping process from day one helps manage these transactions and arranges the records into organised accounts. As a small business owner, you will rely on this information to make your company's operating, financing, and investment decisions.
Here are four reasons why an effective bookkeeping process is so important:
- It provides the business with a reliable measure of performance. Maintaining accurate records for your small business will help you make accurate comparisons and determine the business's performance and growth. This will once again provide you with insights to help you make important business decisions.
- It provides accurate references about your business to third parties, such as potential investors or buyers. If you’re needing to prove your credibility to external parties, having proven records can be a huge asset to your small business. This is especially relevant if you plan to expand in the future, as bookkeeping records will become a critical reference point for demonstrating the value of your company to lenders or potential investors.
- Bookkeeping simplifies your ability to plan for your business. Analysing your financial records can help you determine where you stand when making the best decision for your company. Having access to these records means you have proper financial data to analyse and customise your business plan to grow, sustain, or meet whatever target you have in mind for your small business.
- Accurate financial recording can protect you from an ATO audit. As a small business, you must follow current government regulations and keep records of your activity to show when necessary. This process validates your company's legitimacy and will help you prepare for taxes at the end of the financial year.
As cost management is a top priority for a small business owner, investing in a systemised bookkeeping method is often initially regarded as a non-essential cost. In reality, this could pose a significant problem for the company as it grows.
If you want to explore more strategies that will help small business manage costs, we recommend reading our blog on five ways to tackle rising costs in your small business.
What are the essential bookkeeping functions I need to perform?
- Keep records of every payment. This involves keeping track of all sales data, invoices, and bills, as well as records of every transaction in which your company is involved. This is the most important task to complete in bookkeeping because it serves as the foundation for all subsequent steps.
- Bank reconciliation. This involves ensuring that your business accounts are cross-referenced with your bank statements to ensure that all your transactions are balanced and accurate. This is one of the reasons why using online accounting software is essential for a small business, as platforms like Xero will be automatically sent your transaction details straight from your bank via a “bank feed”.
- Payroll management. Payroll management involves making sure you pay your employees the right amount at the right time while complying with government standards such as tax deductions and superannuation.
- Account payables and receivables. Simply put, accounts payable refers to bills you should pay (ie: supplies, loan repayments) and accounts receivable refers to the money should receive (ie: sales, debtors). Both of these processes should be documented by making notes on your invoices and bills.
- Generating financial reports. The end result of bookkeeping should be the creation of financial reports such as balance sheets, profit & loss statements, cash flow statements and more. These reports will assist you with business forecasting and developing accurate budgeting strategies to sustain and grow the business.
What’s our biggest bookkeeping tip?
Use online accounting software.
Whilst accounting and bookkeeping once required millions of documents and filing cabinets, the online tools available today have vastly simplified the process.
Affordable platforms such as Xero and Quickbooks Online can now do much of the heavy lifting for you, including the storing and consolidation of all of your financial records.
Because of its ease-of-use, we use and recommend Xero to all small business owners getting started with their business’ accounting. This will also expedite the transferal process once your business is ready to hire an accountant. For more help on accounting software, you can check out our comparison of Xero and Quickbooks Online here.
If you're after further assistance with your bookkeeping needs, get in touch with Elephant Advisory's accounting team. We provide bookkeeping and a variety of other consultation services to assist you in setting up your bookkeeping process from start to finish.