Small business bookkeeping: 8 simple steps to follow

How to do bookkeeping for small businesses

Running a successful business means staying organised with your finances. In no time, you’ll be an expert at bookkeeping, freeing up your time to focus on your business.

Step 1: Establish a bookkeeping system

First things first, choose a system that works for you. Consider any of the options explained above.

For bookkeeping software, look for an ATO-compliant tool for reporting. Some features to look out for include:

• Payroll management
• Single-touch payroll (STP) reporting
• Goods and services tax (GST) reporting
• Integration with ATO systems for lodging tax returns and Business Activity Statements (BAS)

Step 2: Categorise your transactions

A chart of accounts lists all the categories you use to track your money. These include income, expenses, assets, and debts. You can add subcategories, like rent and utilities under expenses for more detail.

The chart should reflect the specifics of your business. Cafes might have categories such as coffee beans and pastries. In the same way, a plumber might keep track of tools and repairs.

Step 3: Choose between cash or accrual accounting methods

So, how do you want to track your money flow and performance? You have two main options:

Cash Accounting: Record income when you receive money and expenses when you pay them. This method is simple and popular. Businesses with an annual turnover of less than $10 million can use this method for GST reporting.

Accrual Accounting: Record income when earned (even if not paid) and expenses when incurred (even if not paid yet). This better represents your financial performance over a specific period, however it is more complicated.

Step 4: Record financial transactions

Keep all your financial documents handy. This includes invoices, receipts, bank statements, and purchase orders. These are your proof of what happened with your money. Review them regularly, noting who you dealt with, how much you paid, and when.

Every transaction affects two accounts. Imagine a seesaw: one side goes up (debited), the other goes down (credited) by the same amount. This is called double-entry accounting, and it keeps your books balanced.

Step 5: Manage accounts receivable and accounts payable

Keep track of money owed to your business (accounts receivable or AR) and money your business owes to others (accounts payable or AP). Keeping your cash flow healthy and financially sustainable is crucial.

To manage AR: Set up a process to issue invoices upon delivering goods or completing services. Scheduled follow-ups can help encourage customers and clients to pay on time. Other strategies include discounts for early payments and customer screening for customer creditworthiness.

To manage AP: Keep enough cash, especially to pay bills and avoid fees. Negotiate good payment terms with suppliers and take advantage of long payment terms. Leverage electronic systems to make paying bills faster and clearer.

Step 6: Conduct a bank reconciliation

Bank reconciliation makes sure your business’s financial records match what your bank says. Here’s how you do it: 

1. Gather your bank statement and records.
2. Compare each transaction to see if they match up.
3.  Mark all the transactions for your business finances and record them.
4. Adjust the records to reflect the correct balances (outstanding items, bank fees, etc.).
5. Reconcile the ending balances to ensure they match the bank statement and records. 

Review everything and make sure your records match your bank’s statement. It helps keep your finances accurate and helps you catch mistakes early on.

Step 7: Create financial statements and reports

Your reconciled records are now ready to shine! Use them to generate reports like profit & loss statements and balance sheets. These paint a picture of your business’s health. You’ll also need to prepare reports according to ATO regulations.

Track aged receivables and payables to control cash flow. Use the data to manage relationships with customers and suppliers.

Step 8: Follow regular tax requirements 

The best way to prepare for tax season is to keep clean bookkeeping records! You can easily report income, expenses, and more following ATO standards. This includes payroll tax, GST, and Pay As You Go (PAYG) for employees and contractors.

If you can, bring a tax professional on board. They can update you on tax regulations and ensure smooth compliance. This convenience can save you time and money in the long run.