What is bookkeeping and why is it important for small businesses?

What is bookkeeping and why is it important for small businesses?

July 14, 2023
5 minutes read

Compared to being your own boss and doing what you love, bookkeeping may not be the most fun part of small business ownership. However, it is crucial for managing your money and running your business successfully, so it’s important to get familiar with it!  

Luckily, we’re here to define what bookkeeping is and explain why bookkeeping is important for small businesses (in simple terms!) so you can get back to doing the fun stuff. We’ll also provide some best practices for getting started with bookkeeping for your business.

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What is bookkeeping?

Bookkeeping is the process of tracking your business's financial transactions—including income and expenses—on a regular basis. It shows you where and when money is going into and out of your business, giving you insight into how your business is performing. 

3 reasons why bookkeeping is important for small businesses

Why is bookkeeping important for small businesses?

Bookkeeping is important for small businesses, because it can help you: 

  • Always be ready for tax time and find ways to receive tax deductions
  • See how cash flows through your business and know exactly how your business is performing
  • Demonstrate credibility with vendors and lenders

Let’s go into a little more detail about how all of this comes together. 

1. Keeps you organized for tax time

If you’re recording every transaction your business makes on a frequent basis, it’s easier to always be prepared for tax season and avoid any last-minute scrambling. The Internal Revenue Service (IRS) may want to see documentation of your financial transactions, so keeping on top of your bookkeeping can help you keep the IRS-anxiety at bay.

Even better, tracking expenses can also help you find tax deductions and lower the amount of tax you have to pay. 🤑

2. Tracks cash flow

By staying on the pulse of your cash flow through bookkeeping, you can easily see if you’ve been a lil’ too lenient with your spending lately and quickly react (and budget!). Bookkeeping can also help you identify and prepare for slower business seasons.

Generating important financial reports—like balance sheets, income statements, and cash flow statements—can also give you insight into how your business is doing. These reports help you make better business decisions and catch mistakes before it’s too late. 

3. Shows credibility with investors

Bookkeeping also helps you generate common financial documents that investors and lenders usually want to see before they give you funding. Bookkeeping is a worthy investment! 😌

Watch the first part of our bookkeeping YouTube series below for more information on what bookkeeping is and why it’s important for small businesses, and keep reading for more juicy details on how to get started with bookkeeping!

Bookkeeping FAQs

What are the different methods of bookkeeping?

Before you start bookkeeping, you’ll need to determine the right bookkeeping method for your business: the single-entry method or the double-entry method. We’ll explain the differences below! 

Single-entry bookkeeping

Single-entry bookkeeping is the simplest method, and is often used for businesses with few or no employees, minimal plans for growth, and no need for detailed financial reporting.

All your business’s transactions, including income and expenses, are recorded as a single entry in a log. This leaves you with the “balance,” which is the amount of funds your business has on hand.

Double-entry bookkeeping

The double-entry method is a bit more complex, and is often used by businesses that want to grow and/or need more detailed reporting. Unlike the single-entry method, this option helps you generate important financial reports and makes it easier to accurately track your business’s health.

Instead of one log, each transaction is recorded twice: once on the “debit” side and once on the “credit” side. This helps you track where your money is coming from, and where it’s going. These entries show your account “balance,” as well as the total debits and credits. 

Should I do bookkeeping myself or hire a bookkeeper?

At this point, you’re probably wondering if bookkeeping is something you should do yourself, or hire a professional for help. 

There are a lot of pros and cons to consider, so take your time deciding what’s right for you. It’s worth noting, you can always switch to a bookkeeper if you’re not feeling DIY bookkeeping, or vice-versa. Let’s go into a little more detail below! 

DIY bookkeeping 

DIY bookkeeping can help save you money and ensure you stay on the pulse of your finances. Plus, you get to keep an eye on every transaction your business makes. 

But it can also take up precious time that could go toward running your business. Plus, if you’re the only one handling your books, the pressure is on you to make sure everything is accurate. (Psst—an accounting software can help you out with this, but more on that later!)

Hiring a bookkeeper 

On the other hand, hiring a bookkeeper can help you save time. Plus, they can offer expert knowledge and an objective assessment of how your business is doing. 

If you’re a Wave customer, Wave’s in-house coaches are a great option and can provide you with personalized, 1:1 bookkeeping or accounting help. 👀

On the cons side, bookkeepers are more expensive than DIYing it with free software, and finding a bookkeeper you can trust isn’t always easy.

How can I do bookkeeping for my business?

Now that we’ve gone over the “what” and the “why,” you’re probably curious about the “how.” Here are the five key steps to small business bookkeeping:

  1. Gather your financial documents: Gather your business’s “source financial documents,” which refer to the first documentation of a business transaction (so documents like invoices and receipts).
  2. Categorize your business transactions: Next, categorize each of your business’s source documents into one of five main categories: assets, liabilities, equity, revenue, or expenses.
  3. Reconcile your business transactions: Reconciliation involves comparing your business books and/or your bookkeeping software to your bank statements to make sure the information matches and that every transaction is accounted for (or hasn’t been counted twice). 
  4. Prepare your financial statements: Using this information, prepare important financial documents, including a balance sheet, a profit and loss statement, and a cash flow statement.
  5. Review your financial statements: Using the information on your financial statements, you can use the data to assess how your business is doing and make smart business decisions. 
  6. An accounting software can make all of this super easy, which we’ll explain in the next section!

What is accounting software?

Accounting software records a business’s financial transactions and automates other key bookkeeping tasks.

In our opinion, using accounting software is wayyy easier than recording your business transactions manually. Accounting software helps you: 

  • Save time 
  • Track records   
  • Simplify tax time
Accounting software helps save time; track records; simplify tax time

BTW, Wave (hello, that’s us!) offers a total money management solution so you’ll have all the money tools you need—including invoicing, online payments, payroll, and bookkeeping coaching—all in one place. This stops you from spending hours creating your own tech stack and using a bunch of different software to manage your money, which can get confusing and time-consuming.

The great thing about Wave’s accounting software is that you can connect it to your business bank account, import your transactions, and automatically generate reports. This means you skip the hassle of manually recording each source of income and expense for your business, saving major time and reducing the risk of errors. Pretty cool, right? 

With Wave and your new-found bookkeeping knowledge, you’re ready to show your books who’s boss (...you!).

By Sophia Savva

The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.

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