Keeping a record of financial transactions is very important in building a solid foundation of financial health in small businesses. However, some entrepreneurs find the bookkeeping process exhausting and time-consuming. This dilemma, however, can be avoided by creating a good bookkeeping system. We all know that maintaining accurate records helps ensure tax compliance, gauges cash flow, and allows the business to achieve sustainable growth.
What is a Bookkeeping System?
A bookkeeping system is used to record the financial information and transactions of a business. This can be manual or digital. It includes maintaining a general ledger, managing bank reconciliations, and staying on top of accounts payable and receivable. Creating a bookkeeping system gives your business a solid foundation for more complex financial statements and forecasts.
How to Create a Good Bookkeeping System
1. Decide How Financial Transactions will be Recorded
The first step is deciding how to manage and record your financial transactions for your kind of business. You can record by keeping manual entries use Excel or professional accounting software. You can also opt to do this on your own or hire a bookkeeper or an accountant to do this for you. An in house bookkeeper, however, can be expensive. Many small businesses are now outsourcing bookkeeping services so they can focus on growing their business while having someone record transactions for them at a cost that gives them good value for their money.
2. Learn the Basics of Double Entry Bookkeeping
Double Entry Bookkeeping System is the method most usually used by most businesses, bookkeepers and accountants, but this type of bookkeeping is detailed and complex. It includes the concept of credit and debit in recording transactions. The process of double entry bookkeeping ensures an accurate and complete recording of financial transactions. Hence, with this method, you can be assured of a fair valuation of the condition and performance of your business.
3. Choose an Accounting Software
Recording transactions and balancing accounts manually is time-consuming and puts you at risk of human error. When it comes to numbers, even the smallest error can lead to massive losses. It is also difficult to spot mistakes on paper. Leveraging on a customized accounting software saves you time, ensures the accuracy of data, and gives you a more organized and easily accessible records.
There are plenty of accounting software to choose from in the market. It is best to choose an accounting system that allows you to access your data in real time, provides added security to your data, gives room for automation on the recording of transactions and one that is ready to grow with your business. You won’t need expensive upgrades. Cloud accounting software like XERO and MYOB offer you these benefits at an affordable price.
4. Prepare a Chart of Accounts
A chart of accounts refers to an accounting system designed for your company. You need a chart of accounts regardless of the type of bookkeeping system you use. Your chart of account records the income and expenses of the company, thus aligning your financial structure. This chart also shows the classifications of the lists of accounts; so from here you can organize transactions and make sure that you have balanced books.
The accounts you will use depend on the type of bookkeeping system you want. You can choose between cash and accrual accounting.
5. Open a Business Bank Account
Having a separate business bank account will help you separate business funds from personal funds, thus preventing you from using money from your business for personal purposes. This also makes tracking business expenses easier during tax filing season. Having separate accounts will remove any confusion about business related and personal income.
6. Decide on Payment Terms
You also need to decide how you want to accept payments from your clients or customers. This is an important part of setting up a bookkeeping system. Is your business only cash basis or do you accept credit card payments? Payment terms affect your cash flow in the long run, so don’t overlook effective invoice terms and keep records of all receipts and invoices. This will help you during tax season and help you track your profits.
7. Upgrade and Analyze Your Bookkeeping System
Technology is always upgrading, and so should your bookkeeping system. Analyze and assess the efficiency of your system and make the necessary advancements so your software is up to date and efficiently running. Some small business owners loathe accounting system updates, because sometimes it means purchasing an expensive license.
If you are outsourcing your bookkeeper and doing your accounting in Cloud, you won’t need to spend so much money on system upgrade. With online software, there is nothing to install. Your data is backed up automatically.
8. Re-evaluate Your Bookkeeping System
If you’re a first time business owner, you may start with a simple spreadsheet to manage your books. However, as you earn more and your company grows, you’d need to re-evaluate your bookkeeping system. You’d need to assess the amount of time you or your bookkeeper is spending on managing your books and how much this is costing your business.
As you continue to re-evaluate, you may see at one point that your business needs advanced methods. You may also realize that you need a better system to handle your increasing needs. The right bookkeeping solution would help you invest more time in the business than the bookkeeping.
9. Make Sure Everything is on File
Managing business records is one of the most important part of running a business. Your business documents- transactions, receipts, invoices and other records must all be on file and in order. Appropriate record keeping helps you make sure the records are correct, even when you need to track it down to a couple of years back.
Follow this 9 step process and you’ll have a smooth bookkeeping system. Most small business owners prefer putting their focus on managing and growing their business instead of managing their books. If you need professional help, ACT Bookkeeping Group can assist you in your bookkeeping needs. We specialize in different types of bookkeeping for both small and large businesses. With our years of experience, we can help you with all your bookkeeping needs- from payroll and invoices to BAS lodgements and tax filing. We even do rescue bookkeeping. Call us and book a free consultation today.