It’s a new year, which means we all have the opportunity to start fresh. Why not use this opportunity to rejuvenate and revolutionize your small business’ practices to ensure the utmost efficiency in 2021? One of the top business practices you should prioritize throughout this year and beyond is bookkeeping.
What Is Bookkeeping?
Bookkeeping is the process of regularly recording a company’s financial transactions as a means of informing management’s operation, investment, and finance decisions. In maintaining this organizational awareness of the company’s financial standing, bookkeepers also help external users (e.g. investors, financial institutions, or government bodies) remain up-to-date on important financial details.
Why Is Bookkeeping Important, Particularly for Small Businesses?
There are several benefits your small business can and will reap by improving its bookkeeping operations. By mastering bookkeeping, you will be able to easily communicate to external stakeholders whether or not your business is profitable. It provides a clear picture of your small business’ financial standing, thereby giving you the information you need to make educated financial decisions.
Types of Bookkeeping Methods
There are two main approaches to bookkeeping, which are as follows:
Single-Entry Bookkeeping – The bookkeeper enters transactions one time in the appropriate section. For instance, if a customer pays your small business cash, you would enter this transaction under the asset column. This method is suitable for very simply structured small businesses, freelancers, or those who work from home.
Double-Entry Bookkeeping – The bookkeeper enters each transaction in two separate columns (debits and credits) and each transaction is therefore located in two separate accounts. Most businesses, including small businesses, use this approach for their bookkeeping needs.
Easy Tips for Modernizing Your Bookkeeping
2021 is the perfect time to refresh your small business’ accounting operations with some easy and useful tips for bookkeeping. Below are four steps you can implement to modernize your bookkeeping practices in the new year.
Keep Digital Copies of Your Receipts
You have likely heard of the importance of keeping a paper trail of all of your transactions. Well, given that we are now living in a digital age, it’s time to go paperless. Don’t throw your receipts away just yet – hang on to them long enough to scan them onto your phone or computer and create a digital copy for seamless, modern bookkeeping.
While it may sound tedious to manually scan each individual receipt, there are several systems that allow you to complete this task simply and seamlessly. Some of these tools include:
- Quickbooks Online
- Smart Receipts
- Wave Accounting
By keeping a digital record of all of your small business’ transactions, you will modernize and streamline your bookkeeping duties. This will help you reduce errors, maintain organization, and save time in the event of an audit.
Separate Business and Personal Accounts
It may be tempting to use your personal bank account for business purposes out of sheer convenience. However, in the long run, it’s best to avoid this practice. Keeping your business finances separate from your personal finances will help establish clarity and boundaries; you will be able to clearly see what money is to be used for business purposes and what money can be used for recreational purposes.
It also helps separate your personal liability from your business’s liability. If you or your business were to be investigated and a judge discovered that you commingled your own finances with those of your business, you could lose liability protection, which can be extremely costly. Keeping your accounts separate will not only protect you from adverse outcomes but will modernize your procedures.
Avoid Cash Payments Where Possible
For years, we’ve been told that “cash is king.” However, the use of cash in business transactions can actually increase the likelihood of errors and costly mistakes within the financial system. If all or most of your transactions are in cash, then it can be difficult to know exactly how much your small business is earning. By implementing a digital payment system and encouraging digital payments among customers, you will not only facilitate your finance-tracking processes, but you will greatly modernize your bookkeeping department.
A new year is a perfect time to make a change – or several changes – to your small business’ bookkeeping practices. Given that today’s business landscape is increasingly transformative and reliant on technology, it is vital to stay up to date on best practices. By reminding yourself of the importance of bookkeeping and integrating modern, innovative technologies in your company, you will start 2021 on the right foot and ideally attain great success.
Doing finances at home -DepositPhotos