Bookkeeping Tips for Small Businesses

Bookkeeping Tips for Small Businesses

Running a small business takes a lot of work and a lot of time. Marketing, sales, purchasing materials, networking, and developing new product lines are only a few of the tasks that make up a business owner’s seven-days-a-week schedule. All of these things add value for customers and create revenue for the business.

Another task that every small business owner has to tackle at some point is bookkeeping – recording and summarizing the revenues and expenses of the business. The vast majority of people I talk to dislike doing it and generally don’t have time to do it. Taking care of a business’ books will not add value for customers or clients and it doesn’t add sales. However, it’s necessary for every business, no matter how small, to keep its books and records in order. Here are my top bookkeeping tips for every small business.

Stay organized

This is the big one. It’s easier said than done, I know, but without a basic system of organization of your business’ records, the other tips and general bookkeeping steps are virtually useless. This relates mainly to receipts and documents – items such as customer invoices, purchase orders, cash register receipts, deposit slips, vendor invoices, and bank statements.

There are no hard and fast rules for the system you need to keep these items organized. Just use a system that works for you. Keep each document/receipt type piled together, ideally by date or alphabetically (possibly for vendor invoices and receipts) or numerically (for customer invoices). If necessary, use an accordion file or, for larger stacks of paper, use file folders to keep things organized.

Keep up with the bookkeeping regularly

Set aside time on a regular basis, ideally once a week or once a month at the very least, to sit down and focus solely on your bookkeeping tasks. Turn off your phone and close your email, if possible, to avoid distractions and mistakes, especially if bookkeeping is not one of your strengths.

Keeping up with your bookkeeping will avoid the biggest bookkeeping mistake I see outside of not doing it at all – business owners rushing to do a year’s worth of bookkeeping right before a tax return is due. This can lead to many problems and end up costing a lot more money compared to weekly or monthly bookkeeping. Trying to reconcile twelve months of bank activity all at one time, a few weeks prior to a tax return deadline, is no one’s idea of fun – not even your friendly neighbourhood CPA.

As an added bonus, keeping books up-to-date throughout the year will give a business owner the proper information needed to make the best business decisions in real time. Small businesses live and die with cash inflows and outflows. How can you make decisions or evaluate your business during the year without knowing how much you are owed, and how much you owe, at any point in time?

Separate personal and business

The second most common issue I see with small businesses is owners mixing business and personal items. This generally applies to expenses and cash outflows, but it can also apply to revenues and cash inflows. Every business needs to have its own bank account, separate from the owner’s personal accounts – no exceptions. Good luck convincing CRA that cash deposit was birthday money from grandma when it is going into the same bank account as actual business revenue.

For expenses, try to pay all business costs out of the business account. In an ideal world, a separate business credit card would also be used when items are paid with a card, such as online purchases.  If you are going to pay for business expenses with personal funds, note the type of expense on the receipt and make sure you record the amount properly in the books. If the business is incorporated, the payment will go through the shareholder account.

Track receivables and revise collection policies if necessary

As noted earlier, keeping up with bookkeeping on a regular basis can work to improve cashflow for any business. This is especially true for receivables. Record sales made on account (i.e. sales that are not collected in full at the time of the sale) right away. At least once a month, a summary of accounts receivable should be reviewed to see what is owing to the company. If bookkeeping software is used, this summary can be sorted to show how long each amount has been outstanding.

Customers that have amounts outstanding for longer than a certain amount of time (usually 60 or 90 days) should be followed up with. Don’t be shy to call the customer and remind them that the amount is still owing. Also consider introducing a policy of adding interest charges once an amount is outstanding past the 60- or 90-day mark. Ensure this policy is explicitly written on your invoices to customers. This has proven to be an extremely effective method in ensuring amounts are collected faster. Remember that any amount left outstanding without interest charges is the same as giving these customers an interest-free loan.

File sales tax returns and payroll remittances on time

This goes hand-in-hand with staying organized and keeping up-to-date with bookkeeping on a regular basis. Know your deadlines. Payroll remittances are generally due either monthly or quarterly, depending on the type of business and size of remittances. HST returns are also generally due either monthly or quarterly (sometimes annually) depending on the size of the company. Make sure you set aside time to complete your bookkeeping prior to these deadlines. Being late with these government returns and remittances will cost you interest and penalty charges, which can be very punitive, especially as a repeat offender.

Make use of available software

There are a number of options available when it comes to using electronic processing programs to keep track of your records. Cloud-based options are increasingly popular and there is no shortage of options in this category. There are plenty of apps you can download on your phone that can track your customer invoices as well as expenses. These are very convenient because you can do your bookkeeping on the go, in real-time essentially. However, make sure you use a reputable program that has a history and solid number of positive user reviews. Quickbooks online is also the market leader in cloud-based options, which can be used on your laptop/desktop (online login) and paired with a tablet or phone app.

Traditional desktop software is still very popular and is a must-have for larger businesses as well as corporations. These programs include a full suite of options and features, including reporting options that are not available in cloud-based programs. Quickbooks and Sage remain the industry standards for off-the-shelf software solutions. One downside to these desktop options would appear to be the cost, but most businesses do not require a new version every year. The program may only need to be purchased once every two or three years (ensure payroll updates are done regularly), whereas cloud-based solutions usually require monthly charges to retain access.

For smaller sole proprietorships, consider using a well-designed Excel spreadsheet to keep track of revenues and expenses. If you are comfortable with spreadsheets, there are plenty of good templates that can be downloaded and tailored to fit your needs.

Additional considerations for corporations

If your business is incorporated, there are additional bookkeeping issues to consider. A full chart of accounts is necessary for all corporations, including balance sheet accounts (assets, liabilities, equity accounts) to go along with revenues and expenses. One of the accounts that should be created for a corporation is a shareholder account (often labelled Due to/from Shareholder) which is for tracking deposits and withdrawals made by shareholders, as well as business expenses paid personally and personal expenses paid by the corporation. The account balance will represent the amount owing from the corporation to the shareholder at any point in time (or an amount owing from the shareholder).

Also keep in mind that a corporation’s income statement accounts will “close” at the end of every fiscal year. The net difference – net income if revenues are greater than expenses, or a net loss if expenses are more than revenue – is “closed” into a Retained Earnings account as of the first day of the next fiscal period. Accounting software will automatically make these closing entries once a fiscal year-end date is set and a year-end close is done.

Don’t wait until the end of the year to ask your accountant

If you are not sure how to record something or which account to use, just ask your accountant. If you have several questions, compile and list and email it so that your accountant can take the time to go through each question and form a thorough response. This is going to save you time and likely save your accountant time at the end of the year, keeping everyone happy.

When in doubt, hire an external bookkeeper

Good bookkeepers are worth significantly more than what you will pay them, I guarantee it. Finding a good one is not always easy, but once you have found one, hold onto them tight!

If you’re comfortable with using accounting software and have a good grasp on debits and credits and tax filings, an external bookkeeper may not be necessary. But, even if you can handle the bookkeeping on your own, consider the opportunity cost of the time you spend on the books. Is that time better spent with family or at the gym? Or could those hours be spent doing what you do best, generating more revenue for the business? You may be able to put that time to better use, growing your business.

*The blogs posted on this website provide information of a general nature and should not be considered specific advice. Please contact a professional accountant prior to acting upon or implementing any of the information included in the blogs.