What Is Small Business Bookkeeping?
Bookkeeping is the process of recording and organizing the financial activity of your business.
Every time a customer pays you, you purchase software, you pay a contractor, or money otherwise moves in or out of your business, that activity needs to be reflected in your books.
Good bookkeeping creates a reliable financial record that can help you answer questions like:
How much revenue did my business earn?
What am I spending money on?
Is my business profitable?
Which customers still owe me money?
What bills do I still need to pay?
How much cash does the business have available?
Are my records ready for tax time?
Bookkeeping is not simply something you do for your tax return. Your books can be one of the most useful tools you have for understanding your business.
Step 1: Separate Your Business and Personal Finances
If you are going to do one thing to make bookkeeping easier, start here.
Use dedicated business bank and credit card accounts for business activity whenever possible.
When personal and business transactions are mixed together, you have to determine which transactions belong to the business before you can even begin categorizing them. That adds unnecessary work and makes mistakes easier.
Separating your finances also creates a much cleaner record of what is actually happening in the business.
If your finances are currently mixed, you do not need to panic. Start separating them going forward and work through the existing transactions as you bring your books up to date.
Step 2: Choose How You Will Keep Your Books
Your bookkeeping system needs somewhere to live.
For a very small or new business with relatively simple activity, a bookkeeping spreadsheet may be enough to get started.
As your business grows, accounting software such as QuickBooks Online or Xero can automate parts of the process and provide more sophisticated bookkeeping features.
The best system is not necessarily the one with the longest feature list. It is the one that accurately handles your business activity and that you will actually maintain.
If you are just starting out and want a simple way to organize your finances, Mainstay's free bookkeeping template for small businesses can help you build that foundation before you are ready for a more robust system.
Step 3: Record and Categorize Your Transactions
Every business transaction needs to be recorded and assigned to the appropriate category.
Revenue might include categories such as:
Service income
Consulting income
Product sales
Other business income
Expenses might include:
Advertising
Software subscriptions
Insurance
Office expenses
Professional fees
Contractor costs
Bank fees
Education
Your categories should reflect what actually happens in your business.
The goal is not to create dozens of hyper specific categories for every purchase. It is to organize your financial activity in a way that produces useful, accurate financial statements.
Consistency matters too. If you categorize the same type of expense differently every month, your reports become less useful for comparing periods.
Step 4: Keep Your Receipts and Documentation Organized
Your bookkeeping tells you what happened. Your documentation helps support it.
Create a simple system for storing things like:
Receipts
Vendor invoices
Customer invoices
Contracts
Loan documents
Major purchase documentation
Tax records
Digital storage usually makes this much easier.
Instead of letting receipts accumulate in your inbox, car, purse, or an increasingly intimidating desk drawer, create one consistent place for financial documentation.
The less effort it takes to save something correctly, the more likely you are to actually do it.
Step 5: Stay on Top of Invoices and Bills
Bookkeeping also helps you keep track of money that has not moved yet.
If you invoice customers, review outstanding invoices regularly. Revenue does not do much for your cash flow when the invoice has been sitting unpaid for 90 days.
Likewise, keep track of bills your business owes so payments do not surprise you.
Depending on your business, this might mean reviewing accounts receivable and accounts payable once a week.
Step 6: Reconcile Your Accounts
Reconciliation is one of the most important parts of accurate bookkeeping.
When you reconcile an account, you compare the activity recorded in your bookkeeping system with the activity reported by the financial institution.
For example, if your bank statement says your ending balance was $8,427.16, your bookkeeping records should ultimately support that balance after accounting for legitimate outstanding activity.
Reconciliation can help uncover:
Missing transactions
Duplicate transactions
Incorrect amounts
Transactions recorded in the wrong account
Other bookkeeping errors
Simply connecting your bank account to accounting software does not replace reconciliation.
Bank feeds can import transactions. They do not automatically guarantee that your books are correct.
Step 7: Close Your Books Every Month
One of the easiest ways for bookkeeping to become overwhelming is to let it accumulate.
Instead, establish a monthly bookkeeping routine.
At the end of each month, make sure transactions have been recorded and categorized, reconcile your accounts, resolve outstanding questions, and review your financial statements.
A consistent monthly bookkeeping checklist can turn bookkeeping from an unpredictable project into a repeatable process.
You do not have to wait until tax season to discover whether your books are accurate.
Step 8: Review Your Financial Statements
Once the bookkeeping is complete, you get to use it.
Two of the most important reports for small business owners are the profit and loss statement and balance sheet.
Profit and Loss Statement
Your profit and loss statement, often called a P&L or income statement, shows your revenue and expenses over a period of time.
It helps answer the question:
Did my business actually make money?
You can also compare periods to identify trends.
Maybe revenue increased but software expenses doubled. Maybe one service has become a larger portion of your revenue. Maybe the business is generating more revenue but producing less profit.
Those are things your financial statements can help you see.
Balance Sheet
Your balance sheet shows what your business owns, what it owes, and the owner's equity in the business at a specific point in time.
For many new business owners, the balance sheet feels less intuitive than the P&L, but it contains important information about the overall financial position of your business.
You do not need to become an accountant to use your financial statements.
You just need to start looking at them.
Step 9: Create a Routine You Can Actually Maintain
You do not need to overhaul your entire financial life every Saturday.
A sustainable bookkeeping routine might involve a short weekly check in and a more thorough monthly close.
During the week, you might:
Review transactions that need attention
Upload documentation
Send invoices
Follow up on overdue invoices
Review upcoming bills
Then once a month, you can finish categorizing transactions, reconcile accounts, review reports, and close the month.
The goal is consistency, not perfection.
Twenty minutes spent keeping things organized now can prevent hours of detective work later.
When Should You Stop Doing Your Own Bookkeeping?
DIY bookkeeping can make perfect sense when your business is new and relatively simple.
But the fact that you can do your own bookkeeping does not mean you have to do it forever.
As your business grows, you may find yourself spending more time categorizing transactions, reconciling accounts, chasing documentation, and troubleshooting bookkeeping problems.
Eventually, the question changes from:
Can I do my own bookkeeping?
to:
Is doing my own bookkeeping still the best use of my time?
If you are not sure where that line is, read 10 Signs It's Time to Stop Doing Your Own Bookkeeping.
Start Small and Keep Going
You do not need a perfect bookkeeping system before you can start building better financial habits.
Separate your finances. Create a place for your records. Establish a weekly routine. Close one month.
Then keep going.
The payoff is not simply cleaner records at tax time. Reliable bookkeeping gives you better information about the business you are building.
Not Ready to Hire a Bookkeeper?
That's okay.
Mainstay created a free bookkeeping resource for small business owners who are still managing their own books. You'll get 7 Bookkeeping Habits That Buy Back Your Time plus a free bookkeeping template you can use to start organizing your business finances.