When you’re starting out as a small business, you may find yourself confused by your finances and what you need to keep a record of.
One area of confusion is the difference between accounting and bookkeeping. Because these terms are often used interchangeably, many business owners believe them to be the same thing. However, they are different.
- Bookkeeping is the recording and reporting of financial information
- Accounting is the analysis of financial information to create a financial strategy for the business
Once you’ve wrapped your head around this difference, you should start finding it easier to keep track of your finances within your business.
What’s involved in bookkeeping?
Bookkeeping can be seen as anything involved in the day-to-day finances of a business. In other words, the money that flows in and out of your business daily. It includes, but is not limited to:
- Paying bills
- Ensuring customers pay on time
- Managing payroll for any employees
- Ensuring the business has paid the correct amount of tax
To this end, there are three financial records you need to be aware of:
- The cashbook is where you keep a record of the money that moves in and out of your business.
- Sales invoices are the records of what you’ve sold and to who, including paid and unpaid invoices.
- Purchase invoices record what you bought, from whom, and how much you paid.
Now that you understand the basics of bookkeeping let’s examine how you can simplify your day-to-day bookkeeping as a small business.
Bookkeeping tips to simplify your day-to-day
If you’re new to bookkeeping, or you’re not sure if you’re doing it right, these tips should help you get on track when managing your finances.
1. Keep personal and business finances separate
As a small business, it can be tempting to keep your personal current account and have all business payments moving through there. However, when it comes time to file your taxes, you then need to separate your personal transactions from your business ones.
Setting up a dedicated business bank account can make this process easier, as transactions between the two should not cross over.
2. Record every payment
Whether you use physical books or accounting/bookkeeping software, you need to track every payment.
You need to note when the payment was made/received, what it was for and how much it was for - this way, you can find and refer to it at a later date.
3. Pay bills and collect money on time
If all of the invoices have been recorded correctly, they should contain the due date for the payment. This way, you know what money should be paid and when.
Some businesses like to pay their bills as soon as they’re invoiced, whereas others dedicate a set time every week to work through them. The method you choose is up to you, just remember to pay them by the time they are due; otherwise, you could be charged interest on any late payments.
At the same time, all of your customers should be paying you on time, although you might need to chase them if they are late paying.
4. Keep an audit trail
If your business was audited tomorrow, would you be able to say what every payment in your bank account relates to?
A well-documented audit trail can also help you track down any errors that creep into your bookkeeping. You’ll be able to retrace your steps quickly and effectively.