Bookkeeping Basics For The Small Business Owner

Bookkeeping is the process of recording financial transactions to prepare reports that show how much money has been spent and how much profit has been made. It helps you understand where your money comes from and where it goes.

Set up your books.

There are two main ways to set up your books: manually and with software. If you're starting, manual bookkeeping is probably easier. However, as your business grows, it's more efficient to use software like QuickBooks Online or Xero. Software is much easier, but it’s most important to track your different types of income and expenses.

Create a budget.

A budget helps you plan your financial future by setting aside money for expenses and saving for goals. It also helps you stay organized and avoid spending too much money at one time. We always suggest starting by looking up your average profit margin in your industry and setting aside that percentage amount from revenue each month in its account. We follow the full Profit First method by Mike Michaelowitz using these processes.

Manage cash flow.

If you're running a small business, managing cash flow is essential. Cash flow management means knowing when to spend money and when to save it. This will help you make smart decisions about your business's future. If your business was a car, the cash would be the gas, and without it, you can’t accelerate your business.

Interpret financial reports.

Financial statements are often confusing, especially if you're not familiar with them. However, interpreting financial reports is easy once you understand what each line item represents. Here's an overview of some common terms used in financial reports:
Revenue - Money received from customers.
Cost of Goods Sold (COGS) - Costs associated with producing goods or services sold. These costs include materials, labor, overhead expenses, and any other costs directly related to producing your product.
Gross Profit - Revenue minus COGS.
Net Profit - Gross profit less any operating expenses.
Operating Expenses - All expenses other than COGS and interest income.
Interest Income - Interest earned on loans.

EBITDA – Earnings Before Interest, Taxes, Depreciation, and Appreciation.