Top 10 Bookkeeping and Accounting Tips for Small Business Owners

1. Keep Business and Personal Finances Separate

This is a restatement of the Golden Rule given above. Unfortunately, it’s one of the most violated rules. Even if you are self-employed or a freelancer, I highly recommend you have separate bank and credit card accounts that are used exclusively for business.

By eliminating all personal transactions from your business accounts, you’ll greatly reduce the number of transactions your bookkeeper must categorize and reconcile. I’ve personally done the bookkeeping for several small businesses where more than half of the transactions in their “business” accounts were personal. Sorting through your personal transactions is time-consuming, expensive, and can lead to mistakes.

2. Pay Yourself a Salary

Owners of C corporations (C-corps) and S corporations (S-corps) must pay themselves a reasonable salary and run it through the payroll system like any other employee. However, I suggest that self-employed owners, freelancers, and partners also pay themselves a “salary” although, technically, it’ll be an owner’s draw and not included in payroll.

Paying yourself a salary reinforces the notion that your business is a separate entity and reduces the need for you to violate the Golden Rule by having your business pay your personal expenses directly. Instead of numerous transactions during the month where the business pays an expense on your behalf, have the business write you one check per month that you deposit into a separate account used to pay your personal expenses.

3. Reimburse Yourself for Business Expenses

Despite your best efforts, there’ll be times when you pay for a business expense with personal funds. Remember, the Golden Rule says these business expenses should appear in your business bank account. To do so, have the company write you a check to reimburse the expense you paid with personal funds. This should be a separate check from your monthly salary.

The process for reimbursing yourself should be the same as for employees. List the expenses along with the date, vendor, and purpose on a spreadsheet and attach the receipts. Your business then writes you a check for the exact amount. While this is a bit of a hassle, it’ll guarantee your bookkeeper deducts the expenses since they were paid with a check from the business account.

4. Track and Reimburse Business Mileage

Your business can deduct a standard rate per mile (56 cents for 2021) for any business mileage you drive using your personal vehicle. Track the date, miles, and purpose of each business trip and submit it for reimbursement with your monthly expenses as explained in tip three above. QuickBooks Online can track your mileage automatically using the GPS in your smartphone, which is much easier than trying to do so manually.

The business shouldn’t directly pay any expenses of your personal vehicle, even for fuel that’ll be used entirely for business. You should use the 56 cents per mile received from the company to pay for your fuel and maintenance.

5. Keep Your Receipts

While bookkeeping systems don’t rely on receipts to identify transactions, the IRS does require receipts for all tax deductions. An old-fashioned method of keeping receipts is to have a file folder for each vendor where you place paper receipts. A newer method is to scan receipts and attach an electronic copy of the receipt to the transaction within your bookkeeping software. This is a nice function that many accounting programs include for free.

6. Outsource Payroll

According to a study by Wasp Barcode Technologies, 50% of small businesses outsource their payroll accounting. I highly recommend you do the same. Issuing paychecks, withholding employee taxes, and filing payroll tax returns is a cumbersome process that can be outsourced easily for a reasonable price. Many payroll providers even integrate with your accounting software so that the necessary accounting entries are loaded automatically.

If you do outsource payroll, I recommend opening a separate business checking account dedicated solely to payroll so that your payroll provider doesn’t have access to your primary account. In addition, when times are tough, you can ensure there is money in the payroll account, even if your primary account is overdrawn. There are few things worse for employee morale than bouncing payroll checks.

7. Hire a Pro to Set Up Your Accounting Software

There are many great choices for small business accounting software, but setting up accounting software properly is complicated. The better the software is tailored to your business, the easier and more beneficial it’ll be to use. Approximately 82% of experts surveyed believe that the initial setup of a computer accounting system for small businesses should be done by a professional.

Hire a pro to customize your chart of accounts, products and services, customers, vendors, and invoices. Be sure to have them show you how to make changes to these lists as necessary. Once these lists are complete, everyday transactions like issuing invoices and paying bills are very easy.

8. Assign Bookkeeping Tasks

The first seven bookkeeping and accounting tips above apply to all small business owners whether they do the bookkeeping themselves or outsource the bookkeeping to a professional. Now, it’s time to decide how much of the work you’ll do yourself.

Many of the bookkeeping tasks are an integral part of your business like issuing invoices and paying bills. These tasks are hard to outsource. However, other tasks like closing the books, reconciling accounts, and producing financial statements are outside your normal business operations and might be best left to a professional.

I recommend that a new owner personally perform, at least initially, the weekly tasks to become familiar with the software. If you’re using QuickBooks Online, we have some great free QuickBooks Online tutorials to get you started. As your company grows, these weekly tasks should be transferred to an office employee to become possible daily tasks.

9. Analyze Your Accounting Reports

Don’t rely on your bookkeeper to analyze your accounting reports. Their job is to input data into the software. It’s the manager’s job to examine the output of the accounting system to help manage the business. Small businesses often struggle with cash flow, and there are a few simple accounting reports that can help you:

Aged accounts receivable (A/R): This report shows you how much each customer owes you and whether the debt is current or overdue. In addition to indicating when you should contact the customer concerning payment, the report will give you a pretty good idea of how much cash you should collect in the near future.
Aged accounts payable (A/P): Here, you can see how much you owe each of your vendors and when it’s due. This helps you see future cash flow needs and anticipate cash flow shortages that should be addressed immediately.
Cash flow statement: The cash flow statement separates your cash flow by operating, investing, and financing activities. Negative cash flow from operations is potentially a serious problem that needs to be addressed.
About 82% of experts say that small business owners should know how to produce and understand financial statements from their computer accounting software. It’s important that you know how to generate these statements yourself so that you can review them at least weekly.

10. Prepare a Budget at Least Quarterly

Now that you’ve reviewed your accounting reports, you should have good information to project your cash flow for the next few months. The first step in preparing a good budget is to forecast sales. Reviewing the sales shown on your profit and loss (P&L) report over the prior few months should provide some information on what sales should be next month. You may also want to consider what sales looked like for the same period last year to take into account any seasonality in your business.

The next step in a good budget is to examine the expenses on a recent P&L report. Try to predict what each major expense will be in your forecasted period based on your forecasted sales. Some questions to consider are:

Which expenses will increase or decrease with a change in sales? These are your variable expenses and are the most difficult to predict. For instance, direct labor costs and direct materials cost might be best predicted as a percentage of sales.
Which expenses will remain the same regardless of sales? These fixed expenses are usually easy to predict, such as monthly rent.
Are there any major changes to my operations? Be sure to consider any changes that may not show up on your prior financial statements. For instance, if you hire new office employees your payroll expense will probably increase.
Be sure to compare your actual results to your forecasted cash flows. It might be difficult to make good predictions at first, but after a few times through the cycle, you’ll see dramatic improvements. Once you’re able to make accurate projections of expenses, you can quickly identify and resolve problems. Without a budget, many business owners don’t recognize a problem until they have a cash flow crisis.