How to Set Up Your Books and Accounting for a Small Business

Starting a small business is exciting, but managing finances can be overwhelming. 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:

Choose the Right Accounting Software

The foundation of your accounting tech stack is your accounting software. 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.

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. 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.

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.

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 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.

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.

Implement Financial Reporting Tools

Regular financial reporting is crucial for 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.

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

Regularly reviewing and reconciling your accounts helps ensure accuracy and detect discrepancies early. 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. 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.

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.

Ultimately, a well-organized accounting department safeguards the business’s financial health and empowers owners to focus on growth and strategic objectives.