Starting a small business is exciting, but managing finances can be overwhelming. Your financial records or your books are everything for your small business accounting. Tracking business expenses is crucial for effective bookkeeping and tax preparation.

Small business accountants play a vital role in managing finances and ensuring accuracy. Books and accounting for a small business are the cornerstone of your financial management. Ensuring you have the right software for your books, processes for accounting, and financial reporting tools is critical to measuring your success each month and year.

As a Fractional CFO firm, we understand the importance of setting up your books and accounting tech stack correctly from the outset. Here are some steps to help you get started:

Open a Business Bank Account

Opening a business bank account is a crucial step in setting up your small business’s financial foundation. This account will help you keep your personal and business finances separate, making it easier to manage your business’s financial transactions and maintain accurate records.

Here are some key benefits of opening a business bank account:

• Separates Personal and Business Finances: Reducing the risk of commingling funds, which can complicate your bookkeeping tasks and tax filings.

• Clear Record of Business Transactions: Making it easier to track expenses and income, which is essential for accurate financial reporting.

• Establish Business Credit: Helping to build a credit history for your business, which can be essential for securing loans or credit in the future.

• Range of Financial Services: Offering services such as online banking, mobile banking, and integration with accounting software, which can streamline your financial management.

When choosing a business bank account, consider the following factors:

• Fees: Look for accounts with low or no monthly fees, as well as minimal transaction fees to keep your costs down.

• Services: Consider the types of financial services you need, such as online banking, mobile banking, and accounting software integration, to ensure the account meets your business needs.

• Customer Support: Choose a bank with a reputation for excellent customer support and a user-friendly online platform to make managing your finances easier.

• Security: Ensure the bank has robust security measures in place to protect your business’s financial data, giving you peace of mind.

Choose the Right Accounting Software

The foundation of your accounting tech stack is your accounting software. Accurate recording transactions is crucial for maintaining organized financial records and facilitating effective business management.

Look for software that is user-friendly, scalable, and compatible with other tools you may use. Popular options for small businesses include QuickBooks, Xero, and FreshBooks. Consider factors such as:

• Ease of use: You want intuitive and easy-to-navigate software.

• Features: Include invoicing, expense tracking, and financial reporting.

• Integration: Choose software that integrates with other tools you use, such as payroll services or CRM systems.

• Scalability: Make sure the software can grow with your business.

Bonus: Leverage AI technology’s capabilities and efficiency gains. Find ways to automate processes and eliminate errors anywhere along the order-to-case or accounting cycles.

Choose an Accounting Method

Choosing the right accounting method is essential for accurately tracking your business’s financial transactions and preparing financial statements. There are two main accounting methods: cash basis and accrual basis.

• Cash Basis Accounting: This method records transactions when cash is received or paid. It’s simple and easy to use, making it a popular choice for small businesses. However, it may not provide an accurate picture of your business’s financial health, as it doesn’t account for outstanding invoices or bills.

• Accrual Basis Accounting: This method records transactions when they occur, regardless of when cash is received or paid. It provides a more accurate picture of your business’s financial health, as it includes all income and expenses. However, it can be more complex to use and may require more sophisticated accounting software.

Consider the following factors when choosing an accounting method:

• Business Size and Complexity: Smaller businesses with straightforward transactions may prefer cash basis accounting, while larger businesses with more complex transactions may benefit from accrual basis accounting.

• Industry: Certain industries, such as construction or manufacturing, may require accrual basis accounting due to the nature of their financial transactions.

• Financial Reporting: Consider the type of financial statements you need to prepare and the level of detail required. Accrual basis accounting provides a more comprehensive view of your business’s financial health, which can be important for investors and lenders.

Learn more in our previous article, “Cash Accounting vs Accrual Accounting.”

Set Up Your Chart of Accounts

Your chart of accounts (COA) lists all the accounts used to categorize your business transactions. It will map to your financial statements for reporting. Setting up your COA correctly is crucial for accurate financial reporting and analysis. Keeping your books and small business accounting organized can save time and money when working with banks and investors.

A well-structured COA significantly contributes to your business’s financial health by providing clear insights into financial performance. Work with an accountant or CFO to ensure your COA is tailored to your business needs.

Steps to create your chart of accounts:

1. Identify Main Categories: Start by defining the main categories for your chart of accounts, which typically include assets, liabilities, equity, revenue, and expenses. These categories will form the backbone of your financial reporting.

2. Create Sub-Accounts: Under each main category, create sub-accounts specific to your business operations. For example, you might have sub-accounts like cash, accounts receivable, and inventory under assets. Be sure to keep the sub-accounts relevant and concise.

3. Assign Account Numbers: Assign a unique number to each account in your chart of accounts. This will help you organize your accounts systematically and make data entry and financial reporting more efficient. A common practice is to use a numbering system that aligns with the main categories (e.g., 1000 series for assets, 2000 series for liabilities).

4. Review and Refine: Once you have set up your initial chart of accounts, review it with your CFO advisor or accountant to ensure it aligns with industry standards and operations. Be prepared to refine and update your chart of accounts as your business grows and evolves.

Learn more in our previous article, “Bookkeeping as a Service.”

Implement a Cloud-Based Document Management System

Keeping your financial documents organized is essential for efficient bookkeeping. Use a cloud-based document management system like Google Drive, Dropbox, or Hubdoc to store and manage receipts, invoices, and other financial documents.

This helps with organization and ensures your documents are accessible from anywhere and backed up securely. With digital books and small business accounting, entrepreneurs can see their current performance from anywhere in the world. 

Critical company documents to store:

• Articles of Incorporation

• Operating Agreements

• EIN or Federal Tax ID

• Local Tax ID(s) and business licenses

• Annual reports

• Certificate of Insurance

• Audits (CPA, Worker’s Compensation, IRS)

• Financial statements

• Banking Relations: personal finance statements for owners, last two years of personal and business taxes, and debt obligations/schedules

• Asset listing and schedules (fleet, inventory, property, equipment)

Set Up a Payroll System

If you have employees, setting up a payroll system is a must. Choose a payroll service that integrates with your accounting software to streamline the process. Services like Gusto, ADP, and Paychex offer payroll solutions that handle tax calculations, payments, and filings.

Advantages of Streamlined Payroll:

• Enables self-service options for employees to review pay stubs, tax docs, and update personal information

• Reduces errors caused by manual journal entries into the accounting system

• Creates a better experience for employees

• Eliminates administrative costs and burdens with automation and efficiency gains

• Removes the complexity of taxes and deductions

Automate Expense Tracking

Tracking business expenses manually can be time-consuming and prone to errors. Use expense tracking tools like Expensify or Receipt Bank to automate the process. These tools allow you to scan receipts, categorize expenses, and integrate them directly into your accounting software.

By creating technology-driven processes, your books and small business accounting can reduce administrative costs and salaries.

The benefits of automating bill pay and Accounts Payable (A/P):

• Time Savings: reduces the time spent on manual data entry and reconciliation, freeing up time for more strategic activities.

• Improved Accuracy: minimizes human error, ensuring that expenses are tracked and bills are paid correctly.

• Enhanced Cash Flow Management: provides real-time visibility into expenses and upcoming bills, helping better manage cash.

• Scalability: Automated expense tracking and bill pay systems can quickly scale with the growth of the business, accommodating more transactions and users without a significant increase in effort.

Record and Organize Financial Transactions

Recording and organizing financial transactions is a critical task in small business accounting. Here are some key steps to follow:

• Set Up a Chart of Accounts: This is a list of all your business’s accounts, including assets, liabilities, equity, revenue, and expenses. It helps categorize your financial transactions and provides a clear structure for your financial reporting.

• Record Transactions: Use your accounting software or a spreadsheet to record all financial transactions, including income, expenses, and payments. Ensure that every transaction is accurately recorded to maintain the integrity of your financial data.

• Categorize Transactions: Use your chart of accounts to categorize transactions and ensure they’re recorded in the correct account. This helps in generating accurate financial statements and provides insights into your business’s financial health.

• Reconcile Accounts: Regularly reconcile your business bank account and credit card statements to ensure accuracy and detect any errors. This involves comparing your recorded transactions with your bank statements to identify and correct any discrepancies.

Consider the following tips for recording and organizing financial transactions:

• Use Accounting Software: This can help automate many tasks and reduce errors, making your bookkeeping more efficient and accurate.

• Set Up a Schedule: Regularly record and reconcile transactions to ensure accuracy and stay on top of your business’s financial health. Consistent bookkeeping helps prevent errors and provides a clear picture of your financial position.

• Use a Chart of Accounts: This will help you categorize transactions and ensure they’re recorded in the correct account, making it easier to generate accurate financial reports and analyze your business’s performance.

By following these steps and tips, you can maintain accurate and organized financial records, which are essential for managing your small business’s finances effectively. Learn more in our previous article, “Top Small Business Bookkeeping Practices for Success.”

Implement Financial Reporting Tools

Regular financial reporting is crucial for monitoring a business’s financial health and making informed business decisions. Many accounting software packages come with built-in reporting tools, but you may also consider additional tools like Fathom or Spotlight Reporting for more advanced analysis and reporting capabilities.

Robust financial reports take your books and small business accounting to the next level, guiding management decisions.

What financial reports does your small business need?

• Income Statement (Profit and Loss Statement): The P&L statement shows revenues, expenses, and profits or losses over a specific period. It helps business owners understand how profitable their business is and where they spend money.

• Balance Sheet: This report provides a snapshot of the company’s financial position at a specific time. It lists assets, liabilities, and equity, helping business owners assess their company’s liquidity, solvency, and overall economic health.

• Cash Flow Statement: This report tracks the cash flow in and out of the business over a specific period. It helps business owners understand how well the company manages its cash and whether it can meet its short-term financial obligations.

• Budget vs. Actual Report: This report compares the business’s budgeted or projected financial performance with its actual performance. It helps business owners identify variances, understand why they occurred, and make necessary adjustments.

Regularly Review and Reconcile Your Accounts

Recording transactions is crucial for accurate reconciliations, as it helps ensure accuracy and detect discrepancies early. Without consistent reconciliations, your books and small business accounting will lack accuracy. Set aside time monthly to review your financial statements and reconcile your bank and credit card accounts.

Benefits of regular reconciliation:

• Detects Discrepancies Early: By reconciling accounts monthly, you can identify and address any discrepancies, such as unauthorized transactions or bank errors, before they become more significant.

• Maintains Financial Control: Regular reviews of your financial statements and account reconciliations provide a clearer understanding of your business’s financial position, enabling more informed decision-making and better financial control.

• Maintain trust throughout the organization with transparency around the financial statements.

Setting Up Your Small Business Accounting

Setting up an efficient accounting department is crucial for any small business owner aiming to achieve financial clarity and long-term success. It is also essential to establish sales tax procedures due to varying regulations, especially when selling to customers across different states and countries.

Small businesses can streamline their financial processes by carefully selecting the right accounting software, establishing a well-structured chart of accounts, and implementing cloud-based document management systems. With a simple program for your books and small business accounting, business owners can focus their time on higher priorities.

Additionally, setting up a reliable payroll system, automating expense tracking, and utilizing financial reporting tools are essential for maintaining accurate records and making informed decisions. Regular review and reconciliation of accounts, combined with professional advice, further ensure the integrity and effectiveness of the accounting function.

A well-organized accounting department ultimately safeguards the business’s financial health and empowers small business owners to focus on growth and strategic objectives.