Small Business Bookkeeping

Contributed by Gene Holland, Business Resiliency Counselor @ NC State University

In my role as a Business Resiliency Counselor with the SBTDC, I am frequently called upon to help clients put together a package as part of a small business loan application. Often, unless the client has already been assisted by a CPA in financial reporting and tax return preparation, the financial records provided are sloppy at best and sometimes essentially nonexistent.

While it is unrealistic to expect a small business owner to have skills that approach those of a trained accountant, it is crucial that they understand the basic principles of financial accounting and adopt a scalable bookkeeping platform. Otherwise, the owner will never fully understand the company’s financial well-being, nor will they be able to communicate this information effectively and efficiently to other parties of interest.

Larger corporations devote entire departments to accounting and finance, in addition to outside CPA firms to assist with audits and tax preparation. While it is understandable that a small company or sole proprietor lacks the resources to dedicate a person or department to these roles, it becomes even more crucial that the owner understand the fundamentals.

As a former founder and owner of a successful small business, I cannot imagine attempting to operate daily and make strategic decisions without the ability and means to understand my company’s financial position. Obviously, I am convinced that this lack of knowledge or awareness is a widespread problem, so what are some solutions?

One way for the owner to understand the financial management processes is to dedicate some time to training on accounting fundamentals. This can be achieved through formal classes at a nearby community college or online training modules. In fact, there are some free modules through Corporate Finance Institute.

The business owner should have at least some level of understanding of the following accounting concepts:

  • Debits/Credits and Double Entry Methodology
  • Accrual vs. Cash Methods
  • Purpose & Structure of the Income Statement/Profit & Loss Statement
  • Purpose & Structure of the Balance Sheet
  • Purpose & Structure of the Statement of Cash Flows
  • The Relationships Between the Income Statement and the Balance Sheet
  • What Each Financial Statement Tells the Audience

A cursory understanding of the above principles not only arms the owner with the tools to assess the company’s financial position, but it also provides them with the ability to communicate effectively with financial partners.

In addition to developing a basic understanding of financial accounting, the business owner would be wise to adopt a simple, affordable, and scalable bookkeeping platform at or soon after launching. Examples of such platforms include Quickbooks, Xero, Wave, and Freshbook, but there are others. Many of the budget platforms don’t offer the ability to track inventory or run reports, so make sure to do your homework before purchasing.

Most are web-based platforms. However, Quickbooks still offers a desktop version, which may be preferable if there is no need to run the books on more than one machine in one location. Another attractive attribute of such a platform is that most are easily scalable. As your business grows in volume and complexity, most of these software modules allow some expansion. When the company outgrows the platform, these providers offer more robust platforms to which one can easily migrate.

The point is that although the “cigar box and legal pad” method of bookkeeping might suffice for your child’s lemonade stand, a serious small business owner should care enough about the venture to invest in a functional accounting platform. You will thank yourself later, as will your CPA, banker, or SBTDC counselor.

It is understandable that many small business entrepreneurs view the daily accounting function as a necessary evil and a rather boring task. It is very easy to put off those unpleasant items on your long to-do list. However, it is a rather painless undertaking to invest some time in developing your own skills in that area and some capital in implementing a scalable accounting platform. After all, you, as the heart and soul of your small business, should want to be able to understand the financial strength of your company so that you are equipped to react to market influences and make sound strategic decisions.

Think of this as the financial foundation of your business upon which you can build using sales, marketing, and operations skills. The accounting function is just one of the tools in the box of the small business owner, and he/she should have some proficiency in its use.