Bookkeeping is essential to the success of any small business. With properly managed books, an SME can get a good understanding of both the state of its finances and cash flow patterns. This enables smart financial decision making, and could put businesses in a better position to seize growth opportunities.
What is bookkeeping?
Bookkeeping is the process of recording your financial transactions on a day-to-day basis. For small businesses, this simply means tracking your cash flow in intricate detail, noting:
- The money coming into the business through, for example, sales.
- Any expenditures or outflows.
- Which parties are associated with each recorded item.
A bookkeeping system should enable you to quickly find information when looking through your financial transaction history. It should also be useful in a more immediate sense; enabling you to get a clear understanding of how much cash you currently have access to in the bank.
The different types of bookkeeping
That said, there are a few different bookkeeping models that are commonly used by businesses. These include:
Single entry bookkeeping
Single entry bookkeeping is where a business records a transaction only once. It’s an effective method for new businesses or very small businesses whereby transactions are few and uncomplicated.
If, for example, you run a local bakery and all your transactions are conducted at point-of-sale, this model may work for you. That’s because the revenue you’re generating is being paid directly into your account as debit. Where credit is involved, however, other bookkeeping methods may be better suited to your needs.
Double entry bookkeeping
In a double entry bookkeeping model, a business records two entries for each financial transaction; one for debit and one for credit.
These are both recorded as journal entries in a ledger. Why, though, is it important to store data both for credit and debit? Well, if your business has made a lot of sales recently and you’re feeling good about the state of its finances, you may be keen to spend and invest - pursuing growth opportunities as much as possible.
If the majority of those sales, however, were credit based then the reality is that you may simply not have cash available in the bank that reflects your recent success. Making investments and financial commitments based on projected income, rather than actual income, can be risky - so a double entry model could be the crucial for businesses offering credit.
Our bookkeeping tips
Here are some quick bookkeeping tips to help steer you in the right direction.
1. Keep your business and personal finances separate
This should be fairly self-explanatory, but while merging personal and business finances may seem like a short-cut to financial management in the short-term, the likelihood is that it’ll lead to complications in future - especially when you’re looking to file your accounts annually.
It could also be confusing for potential investors and lenders and may hinder your ability to secure external finance if needed.
2. Make sure you have the right tools for the job
For many smaller businesses, single-entry bookkeeping tasks often involve inputting data into a simple spreadsheet or maintaining a written journal. This system should prove fairly easy to maintain, and the only key consideration you may need to make is backing-up your data and making copies in case of emergencies.
On the other hand, double-entry bookkeeping can become much more complex for businesses with multiple revenue streams and different sales models. Sometimes businesses opt to utilise more advanced cash flow management software to automate the bookkeeping process as much as possible. While being an extra expense, this option may help free up your team day-to-day, enabling them to focus on financial strategy by cutting out a lot of the admin.
3. Be clear on who is responsible for bookkeeping
You may find it useful to allocate a credit controller within your business or outsource this service. The credit controller is responsible for ensuring that debts are collected, and as such this person may need to liaise with (or even be) the bookkeeper to ensure that they have access to up-to-date financial information.
The larger your business’ financial management processes grow, the more training may be needed to ensure that there is consistency in how your team members record and process data. Formalising these processes may also help you navigate legal challenges, such as GDPR laws or their post-Brexit equivalents.
What’s the relationship between bookkeeping and accounting?
While we’ve outlined what bookkeeping involves, there remains a grey area between accounting and bookkeeping. Exactly how these roles differ can vary from business-to-business:
- Bookkeeping tasks normally involve inputting and processing data. They may be admin-heavy, and they enable an accounting process to follow.
- Accountancy work typically involves interpreting and presenting the data stored in your books.
In small businesses, there may be a lot of overlap between these roles so it could be the case that your in-house accountant also maintains the books. However, you could look to outsource one or both of these services depending on the skills and experience in your team.
Ultimately, bookkeeping is an essential task that encourages financial strength within any SME. It’s the first part of the accounting process, and when done properly, enables businesses to see the exact state of their finances at any moment in time.
Let’s take a look at some of the most commonly asked bookkeeping questions.
What is the difference between bookkeeping and accounting?
Bookkeeping precedes accounting. It’s the 1st step in the accounting process and involves inputting and recording financial data. Accounting then helps businesses interpret that data, which in turn informs financial decision making.
Who invented double entry bookkeeping?
Luca Pasioli is renowned for inventing the double-entry bookkeeping model used by most businesses today. He is widely regarded as ‘the accountant who changed the world’, and discovered this method in Venice, 1949.
What is the best bookkeeping qualification?
If you’re looking to hire a bookkeeper, it may be worth keeping an eye out for qualifications provided by the following organisations:
- Association of Accounting Technicians.
- International Association of Bookkeepers.
If you found this article useful and you’re looking to refine your small business’ processes, you may enjoy our accounting guides and cash flow insights. Or, to learn more about our innovative method of business financing, visit our home page.
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