How to Keep Books for a Small Business: 13 Tips to Follow

If you dread bookkeeping but feel it’s not worth outsourcing, you’re not alone. Many entrepreneurs successfully handle their own financial books.

The good news is that when you learn how to keep books for small business, it makes important decisions easier and minimizes preventable financial mistakes.

Good bookkeeping—that is, the record keeping of your business’s financial information—organizes your data, files, routines, and workspaces (which, depending on what you do, can take you anywhere). The benefits are major:

Sound like things you want? Then you’re ready to learn how to keep books for small business. Start by implementing these 13 bookkeeping and accounting fundamentals.

1. Learn basic bookkeeping concepts

The first step is to familiarize yourself with some essential bookkeeping concepts.

First, you’ll have to expand your definition of the word “accounts.” In bookkeeping, accounts are categories like income, expenses, assets, liabilities, or equity. Accounts also are called journals. In this article, we’ll continue to use the term accounts for simplicity.

Another concept to familiarize yourself with is the idea of double-entry bookkeeping. Double-entry bookkeeping is the discipline of recording every transaction twice—once for where the value came from and again for where it went. (We cover double-entry bookkeeping in more detail further down in this article, so hang tight.)

Most businesses use double-entry bookkeeping because it provides a second layer of verification and documentation. This gives you a second trail to follow when eyeballing discrepancies, looking for trends, and thwarting fraud.

Of the other important bookkeeping terms you should learn, there are two to memorize from the get go.

• Accrual-basis accounting: It’s when you record transactions when they’re made instead of when the cash, products, or services are actually handed over. The practice gives you a better picture of how revenue, expenses, assets, and liabilities can work together.
• Cash-basis accounting: In contrast to accrual-basis accounting, it’s when you record transactions when cash is exchanged instead of when products or services are handed over.

For even more helpful context, read our spiffy glossary of bookkeeping and accounting terms, which goes more in depth about common words and processes that you may use as you start to dive into the financial side of running your business.

2. Open a separate business bank account

Experts at the U.S. Small Business Administration (SBA) say that using a business bank account gives your company personal liability protection, some seriously next-level professionalism, preparedness in the form of credit, and purchasing power. It’s also important to keep your personal expenses separate from your business expenses for reporting and liability reasons.

To find the best bank account for your business, look for more benefits than just low fees (as tempting as that may be, because who likes fees?). Find an account that gives you relevant, immediately applicable perks that map straight to your goals. For example, monthly minimum fees may be best for businesses with high volumes of transactions but not those in a retainer-based business with few clients.

3. Develop a bookkeeping database that works for you

Next up? Deciding how you’ll organize your records, the way you’ll keep track of new daily transactions, and a routine (on a cadence that you can realistically stick to) to help you stay on top of your business’s money.

In terms of tools, there are two viable options that make keeping track of expenses, income, and cash flow simple:

So…you may notice spreadsheets aren’t listed as a viable choice. Spreadsheets are simple, free, and seem like a reasonable choice for a new business or adventure into the gig economy, right?

Well, not quite. Spreadsheets may be an okay choice as a temporary fix for having absolutely nothing (if that’s you, we see you—you can use the templates that we created for your invoices, income statement, and balance sheet), however:

1. They’re simply not sustainable to keep up to date in the mid to long term and
2. Are likely to leave you overwhelmed amid the other management tasks that you have to do without a true high-level understanding of what’s important or trending in your business over time.

If you’re still using Google Sheets or Excel and are feeling like you don’t know what the heck is going on with your business’s finances, it may be time to upgrade to software that gives you relevant, actionable information.

Whatever bookkeeping software you choose, it’s super important that it automates repetitive, soul-sucking bookkeeping tasks like data entry and transaction-record matching (because starting or running a business is hard enough—you’re gonna want time to recuperate doing something fun).

Automation, ultimately, is linked with business growth. Salesforce research reveals that “…growing SMBs [small and medium-sized businesses] are 1.6x as likely as their stagnant/declining counterparts to say they’re using technology to automate business processes.”

Source: Salesforce Small & Medium Business Trends Report

For example, Neat, our own bookkeeping app for small businesses, automates bookkeeping tasks and stores transaction data in a tidy, secure, cloud-based system that you can access on your laptop or phone.

With today’s mobile, intuitive tools, you don’t need to have an accountant’s knowledge—or hire a professional bookkeeper—to log, categorize, and match transactions. Apps like Neat free up time that you can dedicate to other tasks (like selling more of your products/services or finally watching that gerbil video your friend texted you four days ago).

4. Chart your accounts

As payments start coming in and expenditures begin adding up, you’ll see you need to do more than just record them—you’ll have to sort them into their own categories. If you categorize your transactions, then at the end of a month or year, you’ll be able to see how much money each category added to your income or costs.

Remember that these categories are called journals or accounts. If you organize those categories into a table, you have a (title cased) Chart of Accounts.

Common accounts represented in the Chart of Accounts include:

When you’ve created these buckets, you’ve positioned yourself to begin dropping transactions in those buckets regularly. Over time, you’ll see how much has gone into or out of each one, how the accounts relate to and impact one another, and even how to nurture one or two for a while to serve a specific business goal (like growth, operational efficiency, funding, or customer retention).

As you grow, depending on your business, you may want to get more specific to gather even more insightful data at the end of any time period. So each of the above categories can be—and usually is—broken out into explicitly descriptive classes like:

Add descriptors (like account number and account name) as shown in the example below, and voilà! You have a robust Chart of Accounts, something that would impress any accountant. You can sort your Chart of Accounts by any header you choose. The typical view, however, is to group records by category (sometimes called “codes”).

Source: RestaurantAccounting.net

One of the main reasons you need a Chart of Accounts is because, without it, your accounting books will easily get disorganized. How? Say you categorize an equipment expense as a “fixed asset—office equipment” while a well-meaning employee or bookkeeper categorizes an identical expense as a “current asset” based on its book value. Immediately, you lose the ability to rely on your reports.

5. Register expenses to track them

Now that you’ve chosen and set up your system, it’s time to create processes.

Start by planning a routine to record your expenses. All costs need to be logged in your new bookkeeping tool in the expenses account. Depending on the size and maturity of your business (or even if you work from home versus working in a brick-and-mortar location), you may be spending on things like:

Each type gets its own bookkeeping category, a.k.a. a “code.” (Sound familiar?)

Depending on which software solution you choose (see step 3), you’ll do this manually, or you’ll automate it.

In Neat, for example, you can upload a picture of any bill, receipt, invoice, or other source document from your phone. When you get back to your car, office, or couch, you’ll find that the data on that file has been automatically extracted, parsed, categorized, matched, and stored for future recall.

6. Record and monitor receivables

When you’re learning how to keep books for small business, income is your top priority (naturally). But you can’t improve what you don’t measure. Meaning, to monitor income long term, you need to watch your receivables closely.

Your bookkeeping system should make logging your income as simple as recording expenses. As data goes in, you’ll see your accounts receivable (AR) category grow. This account is simply the total amount of funds owed to your business.

What, exactly, are you regularly scanning your AR for? Two specifics:

Accruals

Here’s the deal: When customers ask you for changes, extras, and add-ons, you’re allowed to celebrate. After all, that’s revenue.

But if the client’s bill skyrockets without a healthy deposit, regular retainer agreement, or strong personal history, beware: They could bolt, leaving you in a lurch. Overall, a trend of swollen AR accounts signifies a problem with payment terms and communication.

Aging accounts

Some customers allow their old, unpaid bills to linger. Your job is to nip this in the bud before it becomes an issue.

In the short term, unpaid invoices debilitate your cash flow. In the long run, they hurt your vital customer relationships by putting you in the awkward position of nagging customers for payment. No, thanks.

Aging accounts receivables don’t indicate an administrative problem. They signify a failure to qualify or clarify the initial sales relationship in the first place. Set reminders for yourself on your calendar or use the invoice reminders feature in Neat to follow up with customers who are close to their invoice due date and past due.

7. Log both invoices and receipts—but handle them differently

Let’s get this right from the start: invoices are not the same as receipts and vice versa. Too often, business owners confuse the two file types for one or the other or treat them as synonyms.

Invoices are a request for payment. They come to your business from vendors, service providers, manufacturers, and other partners. These files include details like:

When you receive an invoice, log it as an open vendor invoice and as a credit in your accounts payable account.

Then, when you pay that bill, you’ll get a receipt from the business associated with the bill.

Receipts are a record of payment, also called proof of purchase (if you’ve been to a grocery store, you’re familiar with this). They can come from the same entities as invoices do. Receipts show: