Handling accounting for your small business can be the most important aspect of financial success. Tracking income and expenses, creating your budget, and managing your books are all crucial aspects of building your business, making sure it runs smoothly and healthily. There is just one problem.
You’re not an accountant.
Trying to wrap your head around financial statements, CPAs (Certified Public Accountants), debits and credits, accounting software, and entry systems make your head hurt. All for starting a small print-on-demand store as a side hustle.
It shouldn’t be this way. That’s why we’re here to help.
This blog post is an outline to help you get started— from no financial management plan to a simple bookkeeping system you can use as you grow your store. We’re going to go over:
- What bookkeeping and accounting are
- What accounting lets you do
- Whether you should DIY or use an external bookkeeper
- Which accounting software you should use.
- How to start your bookkeeping system
So let’s jump into it.
1. What is bookkeeping and accounting?
Most people get bookkeeping and accounting mixed up, so let’s start by separating the two.
Bookkeeping is the recording and tracking of your business’s income and expenses. It ensures that all your financial records are accurate and up to date. Think of it like writing down all your numbers and making sure they are correct.
Accounting is the process of summarizing, analyzing and communicating the financial records of the business, and then using that data to make decisions. Think of it of taking all the numbers you wrote down while bookkeeping and using them to make decisions.
2. What does accounting let you do?
As I stated before, understanding your numbers is vital for preparing your business success. Accounting and bookkeeping help you:
Make better decisions
Understanding where your money comes from and where it goes helps you decide where you want to invest in your business. Having these numbers allows you to make proper, informed decisions about the future.
Prepare for tax time
Using an efficient bookkeeping system can make tax time a breeze. If you want to get the full tax benefit from your business expenses, you need to make sure that all your expenses are properly classified and recorded, a function of effective bookkeeping.
Create financial reports
The numbers provided by bookkeeping and accounting let you make official financial statements such as a balance sheet and an income statement. These reports can be very helpful for you to understand the financial health of your business. They are also used by external parties such as banks and investors as a uniform way to understand your business.
Of course, these are just a few things you can do, but it shows the power and importance of accounting.
3. Should I do it myself or get an external bookkeeper?
A common question many small business owners ask is whether they should try the DIY method or get an external bookkeeper. Let’s go over both.
If you are strapped for cash, then you can definitely handle your bookkeeping by yourself. If you choose to do this, you will probably use software to handle the accounting for you. There are a few risks here.
The saying “garbage in, garbage out” is commonly used in computer science to suggest that poor quality inputs will result in poor quality outputs. The same concept can be used when approaching accounting software. If you don’t understand the concepts behind the software, then you will enter the wrong information and get incorrect results.
Finally, I recommend getting in touch with a CPA during tax time to go over everything and make sure your bookkeeping is working.
Using an external bookkeeper
If you are willing to spend some cash so you don’t have to worry about bookkeeping, then getting an external bookkeeper may be the best choice for you.
However, just because you have somebody handling your bookkeeping and accounting doesn’t give you the excuse to be oblivious to the process. To get the full benefits of an external bookkeeper, you should understand their process to make sure you are getting the best data to make the most informed decisions about your business.
Whatever you choose, once your small business starts generating a good chunk of revenue, I recommend getting an external or internal bookkeeper to handle your financials. Your efforts are better spent working on your business, not in your business.
4. Which accounting software should I use?
There are 3 different platforms I recommend, depending on your experience level and budget.
Wave has everything you need for small business bookkeeping. It lets you track income and expenses, store invoices, create reports, and more. It also integrates with other financial software (like PayPal) and has its own helpful guides you can read. It’s perfect for the entrepreneur just getting started with their own books.
Freshbooks is another simple and intuitive bookkeeping software you can use. It’s endorsed by many entrepreneurial influencers, such as Tim Ferriss and Pat Flynn, and it’s easy to see why. With powerful tools and a beautiful UI, Freshbooks makes any small business owner’s life easier.
Price: Plans start at $15/month and grow based on your number of clients.
My final recommendation is Quickbooks. It has the strongest accounting capabilities of the three options. Most small businesses can work with simple bookkeeping procedures, but medium-sized businesses who need a proper accounting package should use Quickbooks.
Price: Plans start from $15/month and grow based on which features you need.
5. How do I start my small business bookkeeping system?
Now that you have chosen your software, I’m going to show you exactly how to set up a simple yet effective bookkeeping system for your store.
1. Separate business and personal finances
This point cannot be stressed enough. Many first-time entrepreneurs mix their private expenses with their business expenses, rather than separating them immediately. This creates multiple issues, as then you can’t:
- See the actual cash flow of and investments into your business
- Make a properly informed decision
- Claim your full tax benefits on your tax return
I recommend you set up a separate bank account, track all the cash you invest and keep all your business receipts separate. This will make your life a bit easier.
2. Create your budget
While not necessarily bookkeeping related, a budget is a key part of any financial plan. Understanding how much you are willing to invest in your business and estimating your monthly income and expenses will put you in the right place to start tracking your finances. People don’t plan to fail, they fail to plan.
3. Choose an accounting method
There are two aspects to an accounting method: an entry system, and an accounting basis.
Your entry system will determine how you enter transactions. You can choose between:
- A single entry system, or
- A double entry system
Your accounting basis will determine when you enter transactions. You can choose between:
- A cash basis or
- An accrual basis
Let’s go over each of these:
Single entry vs. double entry system
In a single entry system, every transaction is recorded once, a simple input or output.
For example, when you make a sale, that’s an input of cash. When you buy a new theme, that’s an output of cash.
The single entry system is the easier method of the two, almost anyone can do it. For most small businesses and entrepreneurs, a single entry system will be enough to handle your bookkeeping.
A double entry system makes sure each transaction has two entries. A debit (or increase) is made in one account, and a credit (or decrease) is made in another. Using the same examples as above:
When you make a sale, that’s an increase of cash and a decrease in inventory. When you buy a new theme, that’s an increase in intangible assets and a decrease in cash.
It is used by most corporations but requires an in-depth knowledge of accounting. It makes building financial statements easier and more accurate, and significantly reduces the chance of mistakes and fraud.
As you grow, you will eventually switch from a single entry system to a double entry one.
Cash vs. accrual basis
When you use a cash basis, you record a transaction whenever money changes hands, whether it be actual cash or a bank transfer. If you are running a one-person business, this usually is sufficient.
If you decide to offer customers credit, or request credit from your suppliers, then you are better of going with an accrual basis. This means you record a transaction when the revenue is earned (such as the product is sold), even if the actual cash transfer happens at a later date.
For most beginners, I recommend using a single entry system on a cash basis and then switch to using a bookkeeper who can follow a double entry system.
4. Track your revenue and expenses, and keep the receipts
Now it’s time to start tracking everything. There are two steps here: recording expenses and keeping receipts.
Recording revenue and expenses
Any time you pay a bill, buy some inventory, pay for Facebook ads, make a sale or any transaction takes place, record it. Whether you are using pen and paper, excel spreadsheets, or one of the many accounting softwares out there, you want to record the purpose of the transaction, when the transaction occurred, how much it was for, who the transaction was with, and what accounts were involved.
Keeping your receipts ensures your recorded transactions are correct, as you can always check back. It also allows you to claim your full tax benefit at tax time, as you have proof that your expenses are actually business expenses.
The IRS accepts digital receipts as proof, so I recommend that you keep your receipts in a Google Drive, or in your accounting software if it has that feature.
5. Make a monthly report
By keeping good records, you can quickly take a monthly or yearly snapshot of your business. There are two financial statements you should create:
The income statement shows your revenue and expenses for the current period, letting you see your profit or loss. All the software we listed can make this report for you, as long as you kept good records.
You should also compare your current report with previous reports to track your growth over time.
Your balance sheet gives you a list of all your assets, liabilities, and equity.
- Assets: Everything the business owns (including cash)
- Liabilities: Everything the business owes or needs to pay
- Equity: Investments in the business and leftover value
As with the income statement, your accounting software can create this. Again, track your balance sheet over time to watch your business grow!
And that’s all you need to know to create a basic bookkeeping system!
Where to go from here?
This is just scratching the surface of accounting for small business. You can look into much more depth about topics like the accounting equation, financial report analysis, and much more.
The most important takeaway is that you need to work on your business, not just in it. Once your bookkeeping gets overwhelming, get an external bookkeeper. Your business will thank you for it.
So, did this help you jump into your business financials? Let us know in the comments below!