Many small businesses have poor record-keeping, and often poor record-keeping leads to failure in the first couple of years. If you ask your average small business owner what system they have in place, you will find that a lot of owners don't have a system in place at all!
This leads to bad financial planning, scrambling to file your taxes, or even accidental fraud. It is essential to start right and keep it up.
The government audits on average 54% of small businesses. It is essential that you have a clear record of accurate transactions when filing for taxes. Keeping a basic record of your transactions is a legal requirement in Canada.
Not only does a small business owner need to worry about audits and taxes, but it is also healthy for you to have a clear view of the assets and liabilities in the business.
When you have a clear paper trail of where you are losing and making money through income statements, balance sheets, and cash flow, it is easy to see where you can save money, make the proper investments, and grow your business.
What Is Bookkeeping?
Bookkeeping is the process of recording transactions, assets, and liabilities of a company. Once this is done, an accountant analyzes this process to prepare for tax filing, future investment, and putting together any financial statements.
The recorded transactions include product purchases, sales, expenses, receipts, invoices, and payments made.
What Is the Best Way to Keep Records for a Small Business?
Depending on how large your business is, there are several ways. The most traditional form is pen and paper while manually linking the record to a receipt or invoice number. This is not ideal and may cause confusion when you are ready to file your taxes.
If your business is too small or is not making enough revenue for outsourcing, a good option is to work in Google Docs or Excel. In this case, you can link transactions virtually by scanning your papers and keep your records in the cloud.
The least time-consuming option is outsourcing, more on that below!
Cash Accounting System vs Accrual Accounting System
There are several different methods of bookkeeping. There is the cash accounting system, which is more suitable for a one-person business. With this system, transactions are recorded when you receive your payment as well as when you pay your expenses.
For example, if you send out an invoice for the work done or product received in May, but you receive payment in June, you would record it under June.
However, the CRA requires the accrual accounting system, where the transaction is recorded in the month the work is done.
Single-Entry vs Double-Entry
Single-entry bookkeeping is a simple method that is ideal for sole proprietors. It keeps track of your incoming and outcoming cash flow and works best for companies that are starting out or have a straightforward income.
A single-entry method records the companies' basic transactions and does not allow for data collection and error detection.
Double-entry methods are used for tracking assets, expenses, liabilities and are much more reliable than single-entry. With this method, you can detect fraud and errors and collect data for future financial investments.
Why Bookkeeping Is Different than Accounting
There is a vast difference between bookkeeping and accounting. While an accountant prepares your books for tax filing, financial statements and interprets financial data, the bookkeeper collects and records the daily transactions of your company. This includes categorizing, paying suppliers, processing payroll, and managing invoices.
While both are needed for a company to be successful, it is essential to note the differences. It is financially sound to hire a bookkeeper for your daily needs, who works together with your accountant on the quarterly and yearly reports.
How Do I Determine My Bookkeeping Needs?
As a simple start-up company that has a few transactions, it might be wise to do the bookkeeping yourself. When you find yourself spending more time balancing your books and not growing your business, it is time to hire a bookkeeper.
You may want to start with simple bookkeeping methods, such as single-entry bookkeeping, and switch to double-entry when your company grows and becomes more complex.
When Sales Start to Increase
When your sales start to increase, you will be spending more time managing your company. If you find that your books are always outdated, and there is no longer time for you to do the bookkeeping yourself, you have to start looking at different options.
There are several options you can look at. You can hire a bookkeeper, even if it just part-time, or instead of using Google Docs or Excel, you can look into software that automates some of your transactions.
When You Have to Hire More People
A natural response to a growing business is hiring more staff. With more staff comes more responsibilities, which takes up more of your time.
Not only are you responsible for your employee's training, well-being, and overall performance, you are also responsible for payroll. Navigating the payroll system can be a ton of work that you could easily outsource to a professional or look for an alternative solution.
When You Find Yourself Ordering More Stock
It goes without saying that when your business is booming, you are required to order more products. With more products comes more invoices from suppliers, perhaps even multiple suppliers as your brand expands, and with that, more paperwork.
Keeping a record of the incoming and outcoming product requires a database. At this point, you may want to look into an automated system that updates your inventory.
With the inventory from your own database or software, you or a bookkeeper can manage your products in a timely manner.
How Much Time Does Bookkeeping for a Small Business Require?
Bookkeeping for a small business can easily be an owner's least favourite task. Most small business owners spend about 8-10 hours a month recording their transactions. This can quickly increase as the business expands.
Here are some tips on how to reduce the time you spend on bookkeeping:
- Separate your personal and business account
- Stay up-to-date
- Keep it simple
- Use cash as little as possible
- Organize your expense account
- Dedicate a time slot each week
- Learn the basics of accounting
It goes without saying that keeping up-to-date with your books is crucial. Yet, time and time again, we see that the bookkeeping for small businesses is lacking.
Organization may not be everyone's forte, and if it is taking up too much of your time, to the detriment of your health, your company, and your social life, please give the responsibility to someone else. Pinching a few pennies when so much is at stake is not worth it.
If books are not appropriately kept, filing your taxes will become an even more cumbersome job than anticipated. Depending on the size of your company, it can take upwards to four weeks of full-time work to get your business records back on track.
Time to look for help!
Finding the Right Bookkeeper or Software
Perhaps you have been keeping your books yourself for years, and you are doing a great job. But now you have come to the point that it is taking up more of your time than you wish, it makes sense to hire some help.
Another reason why you should seek out professional help because you are not skilled in bookkeeping, and that is ok. If you feel overwhelmed and dread looking at your finances, outsource! Sound finances are the basis of a successful business, and it is worth splurging on.
Hiring a Bookkeeper
You have come to the point in your business when hiring a bookkeeper is beneficial in saving time and money. It makes sense for you to leave this in someone else's hands, but now you need to find the right bookkeeper for your business.
Be cautious in vetting your bookkeeper; it is crucial that you hire someone you trust and check in with them regularly. They are professionals and experts in accounting systems; however, they may not be an expert in your business.
Hiring an Accountant
Depending on your expertise and comfort level, you could file your taxes yourself. However, if you feel like you do not have the patience or the time, let a professional file your taxes, especially if you get audited.
When hiring an accountant, you will want to make sure that they understand your business and are familiar with your bookkeeping system. Whether you are using software or your own system in Google Docs or Excel, you are in trouble if they can't navigate it.
If you are not ready to hire a bookkeeper or accountant, using accounting software can be a good option. There are several user-friendly companies that are specialized in different areas.
Know Your Books
Starting a new business can be extremely stressful; it is essential that keeping track of your records is done right from the beginning. At Insurdinary, we can help with finding the right benefits for you and your employees, get a quote today!