Figuring out where your money is coming from and going to — and how much you have — is a crucial part of building and maintaining a healthy small business. But the process can also be complex, and overwhelming.
This post breaks down the world of accounting and bookkeeping to help you get a solid understanding of both, as well as differences and similarities.
We also share some tips on how to make the management of your small business finances easier.
- Why is Accounting & Bookkeeping Important to Your Small Business?
- Small Business Bookkeeping vs Accounting
- The Best Way To Organize Your Small Business Bookkeeping & Accounting
- 3 Popular All-In-One Accounting and Bookkeeping Software
- Important Factors to Keep In Mind
Why is Accounting & Bookkeeping Important to Your Small Business?
Bookkeeping and accounting are processes that help you understand the financial health of your business.
How much money is coming in and going out? Where is that money going and coming from? What is the minimum profit you need each month to make your commercial lease payments and small business loan payments?
Recording sales, tracking payments, saving receipts, and tracking income are some of the financial metrics worth tracking. Over time, they provide valuable insight into the long-term success of a business. It can also be incredibly frustrating.
If you record your sales at the end of each day or balance your business checkbook, you are already doing some bookkeeping tasks, but there are cost-effective solutions to make it easier.
Thanks to the rise in SaaS (service as a software) and automation, even business owners who hate numbers handle their own books, pain-free.
Small Business Bookkeeping vs Accounting
The main objective of accounting and bookkeeping is to help small business owners stay on top of their finances. While these two terms are often used interchangeably, there are stark differences you need to understand.
Bookkeeping is the task of recording and tracking financial transactions, including purchases, receipts, sales, and payments.
For example, how much did you pay your vendors this month? It may also include generating reports for managers, accountants, and executives in a company.
Accountancy is the process of taking the reports created by a bookkeeper (and sometimes requesting additional reports) to determine if the company is running effectively. They analyze financial data, look at budgets, and may be responsible for filing tax forms.
While bookkeeping and accountancy are both essential to running a successful small business, they do differ in several key areas. Let’s take a look at what that means for your business.
Accounting for Small Businesses 101
In most cases, small business accounting includes tracking of sales, expenses, incoming and outgoing payments, bank and credit card statements, and proof of payments.
The accounting will also consider the previous year’s tax returns, W2, 1099 forms, and any other documents that prove that money has moved in or out of the business. A CPA may also help with tasks such as lease negotiations and cash reporting.
What Did Accounting Look like Before Accounting Software Came Along?
Before accountancy software became the norm, accountancy was done on paper. This often required hours of work to maintain a ledger, and then a “double ledger,” which kept resources separate from debts and credits. This was more complex, but also more accurate, as it gave a clearer picture of the overall health of the business.
Depending on the size of your business, its income, and your own technological know-how, you may choose to:
- outsource to a CPA,
- hire an internal accountant, or
- DIY with the help of accountancy software.
Do You Really Need an Accountant for Your Business in 2019?
No, in most cases you can handle accountancy yourself with the help of software programs such as QuickBooks, Wave, or Xero. These programs track sales, help send invoices and provide the financial reports you may need to file your taxes.
But, self-management isn’t for everyone. If you are overwhelmed by other tasks in your business, you can look for an accountant in your state.
5 Accounting Tips for Small Businesses
- Keep income separate from borrowed funds so you have an accurate view of what is profit and what needs to be paid back.
- Detail expenses weekly to avoid missing expenses or being overwhelmed at tax time.
- Ensure clients pay on time to protect your cash flow.
- Consider the money spent on a CPA or accountancy software as an investment; it can save you time and money.
- Keep administrative processes simple to avoid mistakes.
Bookkeeping for Small Businesses 101
Bookkeeping is the act of recording and classifying financial transactions, including sales, liabilities, payments, and equity. It differs from accountancy in that a bookkeeper measures, while an accountant interprets the data recorded by a bookkeeper.
In a small business, a bookkeeper may be responsible for more than just recording financial transactions. For example, they may create reports and prepare financial statements. These tasks are considered accountancy.
Bookkeeping is primarily data entry, which means most small business owners can handle this themselves or with the help of a trusted staff member.
Alternatively, you can choose one of the several online accountancy programs, many of which automate the bookkeeping process by linking invoicing, bank statements, and even POS systems.
5 Bookkeeping Tips for Small Businesses
- Update records daily; this improves accuracy and prevents administrative overload.
- Don’t use paper– at minimum, use a program such as Excel or Google Docs.
- Keep records organized to make auditing easier.
- Audit regularly so you catch mistakes early.
- Use a software tool like Expensify to track expenses on the go.
The Best Way To Organize Your Small Business Bookkeeping & Accounting
Now that you understand the difference between bookkeeping and accounting, it is time to get your business finances organized.
This means understanding the differences as well as the pros and cons of the different accounting organization methods.
There are two main methods for arranging your business finances: cash and accrual.
What is the Difference Between Cash and Accrual Accounting?
Cash-basis accounting views and reports income and expenses as payments are made. This means, for example, you may delay taxable income by pushing a vendor’s due date to the following year.
Accrual basis accounting recognizes income and expenses at the time of invoice, whether or not cash exchanges hands at that moment. This means income is reported when a vendor is invoiced, not when they pay.
At the end of the day, both methods accurately record expenses and invoices, however, there are benefits and drawbacks to both.
Cash Basis Accounting Overview
The cash method of accounting is simpler, which is appealing to many small business owners.
However, it can separate income from the resources used to earn it which can make planning more difficult.
For example, a lawn care company that bills for a large project in August will pay their employees that month, but might not record the sale until October, when the payment rolls in.
Accrual Basis Accounting Overview
The accrual method, on the other hand, reports both the labor and sale in the same month. This can provide a more accurate view of your business’ financial health.
However, it may also mean your business pays sales taxes on a product before you receive payment.
What is the most practical way to organize your small business finances?
In most cases, businesses that sell physical products or handle inventory must use the accrual method due to the Generally Accepted Accounting Principles (commonly known as GAAP).
Pros and Cons of Hiring a Third-Party Accountant & Bookkeeper
Hiring a third-party or external accountant or bookkeeper can help save time, however, there are pros and cons.
For example, the average accountant may charge between $150 and $400 an hour. You may be able to reduce these costs by handling the tracking (bookkeeping) yourself, and relying on an accountant for more complex financial needs.
- Reduces your workload
- May be more accurate
- May be cheaper than hiring an internal bookkeeper
- They may not fully understand the intricacies of your business
- You may have less active control over your books
- May still take up a great deal of your time (if you handle the bookkeeping yourself)
Pros and Cons of Accounting & Bookkeeping Software
Using an accounting and bookkeeping software can keep your business organized and save on the costs.
However, it is not for everyone. Accounting software can cost between $10 and $500 a month, depending on your sales volume and the platform you choose.
- Automation makes handling finances simpler
- Apps let you record sales and expenses on the go
- Keeps you up to date on the financial health of your business
- Most charge monthly, which can add up over time
- The software may have a high learning curve
- Mistakes can be extremely costly
3 Popular All-In-One Accounting and Bookkeeping Software
In today’s digital age, you no longer need to hire a bookkeeper or an accountant to manage your finances; in fact, there are a number of affordable software options.
Many even offer apps, so you can easily track expenses on the go and automate portions of the process.
Let’s take a quick look at three of the most popular all-in-one accounting and bookkeeping software options for small businesses and sole-proprietors.
or 1000+ (via Zapier)
|Wave||1000+ (via Zapier)||Unlimited||It's free!|
or 1000+ (via Zapier)
QuickBooks is a popular cloud-based accounting software that handles accounting and bookkeeping processes for all size businesses.
Features include invoicing, expense tracking, life bank feeds, a variety of reports, and the ability to integrate with more than 200 apps including PayPal, Shopify, Square, TSheets time tracking, and American Express.
They also offer a free 30-day trial.
- Integrations make it easy to manage all aspects of accounting
- Grows with your business
- Limited support options.
- Can be expensive for small businesses
- Does not offer industry-specific features, such as barcode scanning
Wave is a simple small business accounting tool designed to help you manage invoicing, payments, expenses, and payroll. It easily displays monthly cash flow, bank account balances, and profit and losses in a visual format. Other features include transaction importing, online payments, and reoccurring billing.
The free version is limited but may work well for sole-proprietors and very small businesses.
- Cloud-based, on the go access
- More affordable than Quick Books (there is a free version and pay as you use plan)
- No offline version
- Reporting capabilities are limited
Xero is a powerful account platform that can be easily customized to meet the needs of your business.
Features include invoice processing, recurring invoicing, inventory management, customizable purchase orders, and the ability to customize with add-on tools for time tracking, workflow management, payments, HR, and POS.
They offer a free 30-day trial for new customers.
- Easy setup and easy to use interface
- More affordable than Quick books (plans start at $9 a month)
- Integrations and add-ons make the tool extremely customizable
- Suggested categories for expenses are often inaccurate
- Many features require add-ons, which can add to the cost
Important Factors to Keep In Mind
Streamlining your small business’ bookkeeping and accounting can lift a huge burden. You may be tempted to sign up for the first program that looks good, however, it is important to carefully weigh your needs, budget, and the practicalities of each option.
Here are three important points to keep in mind when choosing an accountancy software for your small business:
- Will it grow with you? Once you have your software set up, moving can be a huge hassle. Ensure the platform you choose has the features you need for the next 1-3 years at a minimum.
- Take a deep look at pricing: Some platforms require costly add-ons to provide the services you need or may charge a percentage of payments. Make sure to consider the true cost of each platform before choosing — the cheaper option may not be cheaper in the long run.
- Do they offer reliable support and a knowledgebase? If you need help, you might not have half an hour to wait on hold or 24 hours for an agent to respond. Make sure their support resources and tutorials will meet your needs.