June 3, 2024

How to set up a bookkeeping system for your small business

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From Bookkeeping Software to Sales Tax: Intro to Bookkeeping System for Small Business

Founders and entrepreneurs know, that just because it's a small business, doesn't mean the responsibilities of running it ever seem that way. Keeping your business operating smoothly comes with a myriad of challenges, and managing your finances is one of the most critical ones.

A well-organized bookkeeping system is the key to your company's financial health, giving insights, clarity, and overall organization to your business's performance. Whether you're in the pre-launch phase of your company, or well on your way to enterprise-level expansion, there are always ways to improve your bookkeeping knowledge and procedures.

In this guide, we'll demonstrate how to set up an effective bookkeeping system or improve your current one. Covering everything from understanding your financial needs to choosing the right software and tools, we'll even explore the benefits of outsourcing your bookkeeping to a professional service like Precise Ledger.

1. Understand Your Business's Financial Needs

Every business is unique, and so are its needs—we're sure you've heard that one in a few sales pitches before. It's mostly true, however, especially when it comes to financial tracking requirements.

In order to implement an effective bookkeeping system, one must first get a clear picture of the specific financial information that needs to be tracked. Sorry, but there's no copy-and-pasting somebody else's system here.

This step is important for tailoring a system that serves your business effectively, making sure there's no wasted effort or areas of neglect. The industry your company participates in is significant here, as it determines what type of data you need to monitor.

For instance, retail operations require a close eye on inventory and sales metrics, whereas service-based businesses will likely focus more on time tracking and invoicing.

Also consider the size of your business: are you a sole proprietorship with minimal transactions and straightforward tracking requirements? Or are you a growing company with multiple revenue streams and a large team of employees?

Growth plans must factor in as well, too. If you anticipate scaling your business, then choose a bookkeeping setup that can grow with you, offering flexibility and features needed to support expanded operations and the more sophisticated financial tracking thus required.

Key Factors to Consider:

Industry: Influences specific financial metrics and reporting standards.
Size of the Business: Volume and complexity of transactions.
Growth Plans: Scalability needs in case of future expansion.

2. Choose a Bookkeeping Method and Small Business Accounting Software

When it comes to bookkeeping, small businesses generally have two main options: manual bookkeeping and bookkeeping software. Each has its own pros and cons, and which one is right for your business largely depends on your specific needs and resources identified in the previous step of this guide.

Manual bookkeeping involves keeping track of financial transactions by hand, typically with a ledger book. While cost-effective (especially for very small businesses with few transactions), it can be time-consuming and more prone to errors.

Many business owners are drawn to the straightforward nature of manual bookkeeping, plus the fact that it doesn't require the use of or investment in accounting software. However, with a growing business, it becomes increasingly challenging to keep accurate records and maintain consistency as employees change and your business expands.

In contrast, small business accounting software-based bookkeeping automates the majority of the routine tasks associated with financial record-keeping. This keeps the time and effort required to perform your bookkeeping to a minimum, and ensures that errors are avoided.

Bookkeeping software provides various accounting features like real-time reporting, giving easy access to up-to-date financial reports that can be used in making informed business decisions. Accounting software options like QuickBooks, Xero, and Wave are popular choices among small businesses thanks to their user-friendly design and broad scope of features.

While there is an initial cost and learning curve to adopting a system of accounting software for small businesses, the long-term benefits usually outweigh the downsides—especially for companies with growth plans.

Manual Bookkeeping:

Pros: Cost-effective and simple for small businesses.
Cons: Time-consuming, prone to errors, and not very scalable.

Bookkeeping Software:

Pros: Able to automate tasks, provide real-time financial reports, scale with growth, and integrate easily.
Cons: Learning curve and initial setup cost.

Recommended Accounting Software:

QuickBooks: With comprehensive accounting features and a user-friendly interface, QuickBooks is a good choice for small and medium-sized businesses needing robust and scalable accounting software.
Xero: Xero is a cloud-based accounting software solution with strong collaboration features. Ideal for businesses needing powerful integration capability, ease of use, and scalability.
Wave: Wave offers free accounting software for very small businesses, making it an attractive option for those without the resources to pay for typically large up-front accounting software costs. Keep in mind, its payroll services are only available in the US and Canada.
FreshBooks: FreshBooks provides small business accounting tools particularly suited for service-based businesses, including freelancers, small agencies, and consultants. Its features include invoicing, time tracking, and project management capabilities.
ZohoBooks: Part of the Zoho cloud suite of business applications, ZohoBooks is a great integrated solution for those businesses already using tools like Zoho CRM or their other products. With affordable pricing plans, it provides invoicing, expense tracking, and can automate tasks.

3. Set Up a Chart of Accounts

A chart of accounts, otherwise known as a COA, is a foundational part of any proper bookkeeping system. A comprehensive listing of all the accounts in your accounting system, it's organized into categories and maintains the structure of your financial data—which in turn ensures accurate, consistent reporting.

Common account categories in a COA include things like assets, liabilities, equity, revenue, and expenses. Assets include items of value owned by the company (like cash, accounts receivable, and inventory), while liabilities include debts and obligations the business owes (like accounts payable and loans). Equity represents the owner's interest in the business (including retained earnings), and revenue accounts track income generated by the business's activities from sales and services performed. Finally, expense accounts keep track of the costs incurred while running the business—for example, rent, payroll, and utilities.

Got all that? Good. To set up a COA that fits your business's needs, it must reflect the operational structure of your company. Customizing a chart to fit your requirements means avoiding overly complex or simplistic account categories, and regularly reviewing and updating the COA as your business evolves.

To recap:

Common Account Categories:

Assets: Cash, accounts receivable, inventory.
Liabilities: Accounts payable, loans.
Equity: Owner’s equity, retained earnings.
Revenue: Sales, service income.
Expenses: Rent, utilities, salaries.

Key Points for Setting Up Your COA:

Ensure it reflects the needs and structure of your business.
Avoid overly complex or simplistic account categories.
Regularly review and update your COA.

4. Establish Bookkeeping Processes and Procedures

Now that you've got some of the foundation in place for your bookkeeping system, it's time to establish some clear, consistent, and accurate processes to build upon. Without accurate record-keeping, small businesses are likely to encounter costly mistakes down the road—so it's crucial to ensure the reliability of your financial data.

For daily sales entries, record all the sales at the end of each day, including details like the date, amount, and nature of the sale. For expenses, immediately enter all of them with the support of receipts and invoices. When managing invoices, record when they are sent, track payments, and follow up on overdue ones.

This practice helps prevent the build-up of unrecorded business transactions, making sure you're not left with a mountain of data come crunch time. Up-to-date, accurate data not only prevents future hassle, it allows you to act on information from the cumulative record of business operations when making important financial decisions.

Consistency is a crucial element to good bookkeeping, so keep a regular schedule for updating your books—whether that's weekly, monthly, or daily, depending on the volume of transactions. Include proper documentation, too (like receipts and invoices), and periodically review your records to identify any possible errors or missed entries.

Categories of Financial Transaction Records:

Daily Sales Entries
Expense Tracking
Invoice Management

Tips for Staying Organized:

Establish a routine for updating your books.
Record receipts and invoices.
Regularly review for accuracy and completeness.

5. Reconcile Accounts Regularly

Making sure your financial records and bank statements match is a critical part of bookkeeping. With proper account reconciliation, you can avoid discrepancies, errors, and even fraud—meaning your financial statements reflect what's actually going on with your business.

To reconcile your accounts, start by comparing each transaction in your ledger to your bank statement. If any discrepancies are found, look for and explain them. Common discrepancies include bank fees, unrecorded transactions, and typos or improper entries.

Once you've found a difference between the record and the statement, make any necessary adjustments. Regularly performing account reconciliation helps catch mistakes before they add up or lead to costly consequences down the road.

Steps to Reconcile Accounts:

Compare your ledger to bank statements.
Identify and explain discrepancies.
Adjust your records to reflect discrepancies.

Reconciliation Schedule:

Perform reconciliations monthly to ensure accuracy and up-to-date financial statements.

6. Secure and Back Up Financial Records

Although we wish it weren't true, keeping your financial records secure is essential for keeping prying eyes and meddling fingers away from your precious financial data. Fraud prevention and compliance with legal requirements are two of the benefits of implementing robust security measures, and both are essential for the long-term success of any small business.

Begin by investing in encrypted digital storage solutions to protect your records from unauthorized access, and regularly back up the data to a secure, offsite location to protect against data loss. This ensures that in the case of hardware failure, cyber-attack, or other mishap, you're able to recover your records.

Implement user permissions in your accounting software, so that only authorized personnel are able to view and edit the records.

Tips for Secure Storage:

Use encrypted digital storage solutions.
Regularly back up data to a secure, offsite location.
Restrict access to financial information to authorized personnel.

7. Consider Outsourcing to a Professional Bookkeeping Service

While it's possible to maintain your bookkeeping operations in-house, outsourcing to a professional bookkeeping service can prove extremely beneficial as it puts your financial records in expert hands and allows you to focus on core business activities instead.

Outsourcing saves time, freeing you to do what you do best—delivering value to your customers and growing your business. Furthermore, professionals with specific bookkeeping experience are less likely to make errors, reducing the risk of costly inaccuracies.

Plus, as an added benefit, bookkeepers can identify avenues of optimization, providing valuable financial insights based on years of experience and expertise.

At Precise Ledger, we offer comprehensive bookkeeping services for small and medium-sized businesses (plus larger businesses upon review)—for only $140 per month. We're dedicated to maintaining accurate, up-to-date reports that help small business owners achieve success without the high overhead costs of hiring in-house staff.

Benefits of Outsourcing:

Time-Saving
Error Reduction
Expert Insights
Cost-Effectiveness ($140/month with Precise Ledger)

Conclusion

Setting up and maintaining a consistent, organized bookkeeping system can mean the difference between success and failure for a small business. By knowing your financial needs, choosing the right bookkeeping method, establishing clear processes, and considering enlisting the help of professional services, you can ensure your financial data is a benefit instead of a burden.

For many busy small business owners, doing all this can be a time-consuming and complex challenge. If you're looking for reliable, cost-effective help, consider partnering with Precise Ledger—our experienced professionals will handle all your bookkeeping needs from recording transactions to generating financial reports—starting at just $140 per month.

See what Precise Ledger can do for you

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How to set up a bookkeeping system for your small business

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