This is the first article in a two-part series on bookkeeping. Be sure to read Part II, Turning Financial Data into Growth.
If you’re just getting started with your bookkeeping system or want to improve your business’s current system, it can be hard to know where to start. The good news? Setting up a simple recordkeeping system is easier than you think! The following steps will help you get started with the bookkeeping basics and get your financial recordkeeping on track for your small business growth.
Step 1: Choosing an accounting software
The first step in establishing good financial records is selecting the right accounting software. You’ll want to make sure it has:
- Bank and credit card sync capability: It’s essential that your accounting software can connect to your bank and credit card accounts. This allows it to capture new transactions in real-time from these accounts, allowing you to categorize them within the software. Without this feature, you’ll need to manually enter all these transactions, which can lead to errors and create a significant amount of work.
It’s also a good idea to check if it can support your payment apps. If your Venmo, PayPal, or Cash App account carries a balance that is used for making payments and receiving deposits, then this should be synced just like your bank account. - Accountant accessibility: Your accounting software needs to be accessible and familiar to the professionals you’ll work with. For most small businesses, it’s best to use an online (not desktop-based) accounting software that you can easily share with remote access. There may be many “free” accounting platforms available, but your accountant won’t know how to use them and won’t be able to help you fix errors or make complex accounting entries.
- Full accounting capabilities: Some low-cost or free accounting software only handle records of revenues or expenses, which are only a fraction of the true activity that a business has. A proper accounting software tracks assets, liabilities, equity, income, and expenses.
Most accounting software will take the basic forms you fill out, like invoices, expense entries, and deposits, and convert them into the right accounting entries to affect all five of those pieces of your financial picture. The result is that you’ll not only know your profitability, but your cash flow, and your net worth. - Suitable for your business model: This is especially important if you have a construction or manufacturing business because they require more advanced accounting. Manufacturing businesses need software to track the progression of raw materials into finished goods inventory. Construction businesses need software that can track work in progress job costs to job billings matching.
These may sound complex, but a good-quality software designed for these industries can take simple recordkeeping, such as recording when you receive a bill from a vendor or performing an inventory account, and generate the right accounting entries. Without the tools to do this, you’re simply not seeing an accurate profit and loss (P&L) statement – which means you don’t know if you’re actually earning or losing with every sale.
Step 2: Organizing your financial records
Once you’ve selected an accounting platform, your next step is to establish a proper chart of accounts. This is simply the list of categories your transactions will be sorted in your accounting platform. Start with the simplest chart of accounts that makes sense for your business. You may want to have detailed reports by department, showing margins by product or revenue channel, and the ability to get into more detail in various areas, but this is expensive and time-consuming.
Instead, your chart of accounts should include:
- Revenue: For new or small businesses, revenue should be tracked in one account, unless your business has different point-of-sale systems for each line of your business. This makes it easy to quickly classify deposits into each of these categories.
- Expenses: You’ll want to keep your expense accounts to a minimum. For example, have one or two accounts related to occupancy costs, cost of sales, labor, promotion, and general administration.
- Balance sheet: Most good accounting software will set you up with the basic accounts needed for your balance sheet. You’ll want to make sure those include an account for distributions and capital contributions.
Step 3: Regularly reviewing your financials
Now that you’ve set up great systems, use them! For new small businesses, it’s a good idea to review your financials monthly. This means ensuring that everything is organized up to the end of the most recent month.
Pay close attention to the margins on your P&L report – this is what sets your accounting reports apart from your spreadsheets and bank statements. Check whether your margins are aligning with what you originally planned, and if they’re increasing or decreasing over time. Then, take a look at the total equity on your balance sheet. This number cuts through all your transactions to determine if your business is retaining or is outspending its earnings.
Pursuit is here to help
Sound bookkeeping practices are the foundation of every successful business. Knowing how to manage your financials helps you spot opportunities or address problems and ensures that your books are always up-to-date for tax preparation, loan reviews, and other business needs. And if insufficient funds could hold you back, Pursuit can help.
We’re a leading small business lender in New York, New Jersey, Pennsylvania, Connecticut, Illinois, and Delaware. We have a line of credit and loan options that can help you finance your plans and thrive.
Apply today and see how Pursuit can support your business!