Small business bookkeeping: The complete guide

A business without bookkeeping is a business risking failure. Bookkeeping builds the financial records that are essential for success, provides order and structure to business performance, and gives business owners and managers clear sight of how well their business is working.

What is bookkeeping?

Bookkeeping is a vital role for the smooth functioning of a small business. It involves the day-to-day recording and reporting of an organisation’s financial information, and it is different to accounting, which is the process of using the business’ data to establish its financial position and make decisions about how the finances are managed.

Bookkeeping involves a variety of activities, including:

• Keeping sales and purchase ledgers to track income and expenses
• Monitoring cash flow
• Making payments to suppliers 
• Chasing payments from customers
• Ensuring the business pays its taxes on time and pays the correct amount due 
• Claiming tax back against business expenses
• Managing staff payroll and paying and reporting PAYE to CRA 

Why do small businesses need to do bookkeeping?

Bookkeeping is necessary for these important reasons:

• It allows the business to keep on top of money owed to suppliers and from customers,  understand its cash position and cashflow, and to measure its financial performance.
• It ensures the business does not fall foul of late charges or penalties from CRA or miss other mandatory expenses, such as business rates.
• It gives the business the records and information it will need to secure loans and credit from banks and suppliers, or grants from public sources.
• It allows the business to plan properly. If you don’t know where you stand financially, how can you make the big decisions that will determine the long-term success of your business?
• It gives your business the information it needs to hire more staff, accrue assets, acquire other businesses, even buy property.
• It provides the essential data that your business needs to grow.

How to do bookkeeping:

Many small business owners will initially conduct their own bookkeeping, but as their business expands, they may find their time is better spent elsewhere and they will hire a bookkeeper or use an external service to maintain financial records. However, no matter who does the bookkeeping, the first step is to decide what type of accounting method to use: Traditional accounting records income and expenses at the date of the sales or purchase invoice.

Cash accounting records income and expenses on the date when you actually receive or pay the money. Cash accounting reduces the risk of having to pay tax on money you haven’t received yet, but it is only available if your business revenue is CAD $30,000 or less.

Once you’ve settled on your accounting method, follow these key steps:

Record everything

Bookkeeping tracks the finances using these types of records (also known as ‘books’ or ‘ledgers’):

• Cashbook – records everything moving in and out of your account – reveals your cashflow.
• Sales ledger – records everything you’ve sold and shows paid and unpaid customer invoices. (Unpaid sales invoices are known as your ‘accounts receivable’ – because you are waiting to receive them).
• Purchase ledger – records what you’ve bought, when and how you paid for it, and what invoices from suppliers you have still to pay. (Unpaid bills are known as your ‘accounts payable’ – because you haven’t paid them yet).

Small businesses may have other records books, but these are the minimum you will need to get started. Use your books to track every sale and payment and make it clear when the transactions were made or received so you can easily find them to compile end of year statements, chase clients or suppliers, or share your finances for an audit or bank inspection.

Reconcile transactions

Transaction reconciliation means cross-referencing your business books against your bank statements to check that your transactions and bank balances match – and identifying the reasons if they don’t. 

Transaction reconciliation also means allocating expenses to projects or sales you are in the process of completing – for example, if you were carrying out a plumbing repair where you bought spare parts and piping, the cost of those materials will need to be reconciled against the job so that you charge the customer the correct amount. 

Transaction reconciliation can be carried out daily, weekly, monthly, or less often, depending on the number of transactions you make. However, you will be required to reconcile your books before submitting tax returns at the very least. 

Monitor cash flow

More small businesses go bust because of poor cashflow than any other reason. Cashflow is the measure of the money in and money out of your business. In an ideal world, you want funds coming in faster than they go out so that you always have a strong cash buffer against unexpected costs or downturns. However, for many small businesses, the difference between money in and money out is often very tight, so it is important for you or your bookkeeper to carefully monitor cashflow. Use forecasts (estimates) to project future sales and expenses, so that you can spot issues, (such as a cash shortfall), long before you get to them. (If you can see a problem with cashflow looming, you may want to consider an early application for a working capital loan to tide your business over).

Watch out for late payments

Customers who pay late can cause major problems for your business – hurting cashflow, limiting your ability to grow, eve affecting how much you can pay yourself. Part of the bookkeeper’s role is to keep track of late payers, and when necessary, chase the customer for payment. 

Paying taxes

Running a successful business means getting paid on time and paying your suppliers and CRA on time. The taxman can be harsh on businesses who do not pay their taxes when they are due, and the interest and mounting penalties they apply can sometimes tip a small business into bankruptcy. Ensuring you pay your taxes is therefore crucial to long-term growth, and it is part of the bookkeeper’s responsibility. 

(Many small businesses struggle with paying their GST/HST when it is due, and it can be especially difficult for organisations who must wait 60, 90, or more days for payment. However, smart businesses make sure they pay their GST/HST on time, regardless of their cashflow situation, by using a GST/HST to cover the payment).

Other small business bookkeeping duties

On  top of the tasks described above, and as well as issuing invoices, paying suppliers, and managing payroll, bookkeepers may also provide other services, such as helping with financial reports (profit-and-loss, balance sheet, cash flow report), and measuring business performance. 

How software can help

A small business’ books have to be recorded somewhere. They could be kept using pen and paper, but that’s not efficient in the digital age. Using software, even if it’s only basic Excel spreadsheets, can significantly improve the accuracy of your books, and also give you access to a wide array of tools, apps, and services that old school manual ledgers cannot provide.  

Use software to:

• Pull transaction data direct from point-of-sale (POS) systems, invoicing software, and banks
• Speed up transaction reconciliation
• Automatically pay bills
• Send automated invoice reminders to customers who owe you money
• Tell you when sales invoices have been paid
• Let you to check your cash flow from your phone

Small businesses that are considering investing in purpose-built accounting software should ask their accountants which programme is best for them, and if it will integrate with the systems the accountants use to generate the business’ end of year tax returns. 

Why do some small businesses outsource bookkeeping

In short, to maximise their productivity. In many cases, a small business’ books are maintained by the business owner, but, when you consider the owner’s value to the business, this may not be the most productive use of their time. Instead, it may make better financial sense to hire a bookkeeper, or outsource the bookkeeping to a dedicated service, than for the senior management to spend their time recording every transaction. In other cases, the business owners may not have the skills required to manage the books, so employing a bookkeeper or outsourcing the role is the only sound solution. 

Which option is right for me?

It depends on your situation. If your business is very small, or very new, it may make more sense for you to initially manage the books if you have the skills to do so, as this will reduce your overall expenses. However, if your business is growing and your time is too valuable to spend logging every transaction, or if you don’t have the necessary skills to manage the books, then hiring a bookkeeper or outsourcing to a service is probably a better way to go.

How Swoop can help

Managing the books of a small business can be difficult or time consuming at the best of times, doing so when finances are tight can be even worse. Swoop understands the daily financial challenges that many Canadian SMEs face, and we have the best solutions for those problems. Register with Swoop today to access our full range of funding options. From commercial mortgages and unsecured loans, to business credit cards, start-up loans, and business leases, we have the financial tools to keep your business growing.