If you’re a new business owner, you’re probably focused on hiring your first employee, setting up a website, or creating a marketing plan. However, one thing you might be forgetting about is your bookkeeping.
While you may recognize the term, you might not be all that sure what bookkeeping is, how it differs from accounting, and why you need it in the first place. If you’re full of questions that need answers, here’s your beginner’s guide to bookkeeping for small businesses.
What is bookkeeping?
Let’s start with the basics. Put simply, bookkeeping is the process of tracking a company’s financial documents so that business owners can see where money is being spent, where revenue is coming in, and which tax deductions can be claimed. The collection and organization of these financial documents can include tasks such as:
- Creating and sending invoices
- Entering and processing payments
- Tracking receipts and reimbursements
- Reconciling accounts
- Processing payroll
- Preparing initial financial reports
Of all these responsibilities, perhaps the most important is maintaining the general ledger. A general ledger is a document that bookkeepers use to record the amounts from sale and expense receipts.
Of course, bookkeeping for small businesses is about more than just sorting through receipts and plugging numbers into a spreadsheet. Bookkeeping requires meticulous analysis and even some legal expertise. After all, it’s your bookkeeper who will make sure your records are in order and your business is compliant—something you’ll be grateful for if you ever find yourself in the midst of an audit.
How is bookkeeping different than accounting?
Though bookkeeping and accounting are both essential to running a business, they differ in a number of ways. The simplest way to understand the difference between the two is that bookkeepers show you where you currently stand financially, while accountants help you see the bigger picture. Of course, they are both dependant on one another. Without the meticulous records kept by bookkeepers, accountants could not produce the analytical evaluations and interpretations needed to help you make key financial decisions.
Do I need to hire a bookkeeper?
Any small business owner knows that expenses should be kept to a minimum, which is why some opt to DIY their own bookkeeping. The problem? TD Bank has found that more than half of small business owners say that bookkeeping is their least favorite task. This is largely because:
- It can be hard for anyone without knowledge of at least basic accounting practices
- It’s time-consuming—especially if you’re new to it
- It’s very easy to make mistakes (and very difficult to correct those mistakes)
- While DIY bookkeeping for small businesses can be done, it takes time, patience, and knowledge that many entrepreneurs don’t have. Consequently, hiring a bookkeeper—or an accounting firm that handles bookkeeping—can save you time that would be better spent running your business.
The Importance of Bookkeeping for Small Businesses
As you’ve probably gathered by now, clean books are good books. They not only help you diagnose your business’ financial health, but they also help your accountant make predictions about your business’ future. Beyond keeping your accountant happy, here are the top seven reasons why hiring a bookkeeper is the right move for your small business.
Know Where Your Money is Going
You may think you know where all of your money is going, but without good bookkeeping, you’re really just guessing. Having your books in order helps to tell the full story of your business (beyond your bank balance), showing you exactly where your money is going and where you can cut back on unnecessary spending. On the other hand, it will also show you when your business starts to turn a profit.
Believe it or not, getting in hot water with the Canada Revenue Agency (CRA) could be the downfall of your business. To keep you in the CRAs good books, you’ll need the help of a bookkeeper who can keep you compliant with the ever-changing rules and regulations. Not only can this save you from expensive fines and penalties, but it can also help prevent an audit, which could impede the growth of your business.
Catch Bank Errors Quickly
Sometimes banks make mistakes. But, if you wait until the end of the year to reconcile your financial transactions, it might be too late. Bookkeeping makes reconciling your bank accounts easy and helps you to catch banking errors before they cause any financial problems.
Don’t Miss Out on Deductions
You probably don’t know the tax code inside and out, but if you have a bookkeeper, you don’t have to. When you have a bookkeeper categorizing each financial transaction, you’ll have more information and supporting documents to share with your accountant. And the more information your accountant has, the more deductions you can legitimately claim at tax time (and the bigger your tax return will be).
Support Key Decisions
You can’t be an expert at everything, and when you’re a business owner you’re already wearing enough hats. Instead of trying to be your own bookkeeper, leave the job to a professional. A bookkeeper has a firm grasp on the health of your business and can provide valuable input and perspective when it comes to making major decisions, such as bringing on a new hire or purchasing new equipment.
Pay Your Employees (Correctly!)
For the most part, payroll sounds straightforward. But things get complicated when dealing with holiday pay, overtime hours, and seasonal employees. A small business bookkeeper properly classifies employees, pays them the correct amount, and accurately calculates deductions.
Prepare for Tax Season
Tax time should never be a mad scramble. A bookkeeper helps to ensure you have the proper records to show exactly how much you made and spent. This information makes filing your taxes properly a breeze (instead of a headache).
If you’re ready to get your books in order, contact CloudCPA to find out more about bookkeeping for small businesses.