Starting a small business and being a creative entrepreneur can be rewarding both personally and financially. However, there is more to running a business besides selecting your customer base and acquiring a legal structure. Small businesses have their unique challenges, and if you have managed a small business before, then you probably have a blueprint of the dos and don’ts in a business.
To run a successful small business, you need to understand how to manage challenges when it comes to financing, selling, and delivery and finally growing it based on the interest of your customers and other stakeholders. Running a business, therefore, requires diligence and you need to know and understand its rudiments.
Many people always fail when it comes to addressing their fiduciary situations. They experience challenges with generating money for the business, determining how much it would cost them then for their produce and service and finally, how to pay for their operational costs. Growing your product capabilities requires that your plan and keep records of your sales and services. Bookkeeping, accounting and invoicing, therefore, play a significant role in a business and the model you choose to use depends on the amount of time you have and how fast and convenient you want or run your business.
With the advent of technology, the means and technique of bookkeeping, invoicing and accounting are also changing. Although a number of entrepreneurs still apply traditional methods in the processes, some use accounting software to manage their business information and data.
Understanding basic terms: Bookkeeping, Accounting, and Invoicing
Before diving into how the whole process of bookkeeping, accounting and invoicing works in businesses, it is significant to understand what the terms entail and how they are different.
Bookkeeping is more of transactional and administrative and involves keeping records of financial affairs of a business such as the purchases, receipts, sales, and payouts to individuals and organizations, posting debit cards, maintaining balancing subsidiaries and producing invoices – All which play a significant role in building the success of a business. The complexity of bookkeeping techniques depends on the size of a business that one runs.
Accounting, on the other hand, is subjective and it involves the recording of comprehensive financial transactions pertaining to a business for use by oversight agencies and regulator and tax collection agencies. Moreover, accounting gives a business an oversight on the bookkeeping information that the business collects. Business owners can use accounting in analyzing the cost of production as well as understanding the importance of financial transactions pertaining to a business.
Using accounting to determine financial indicators together can also help an entrepreneur in understanding the business’s profitability and creating awareness in the cost of entrepreneurship. Business owners can, therefore, use accounting information to understand the path of progress of the business and forecast their financial needs.
Invoices are documents sent by a product or service provider to a purchaser. It establishes obligations on the side of the purchaser to make payments and is usually prepared and sent after the completion of services or delivery of products. An invoice should, therefore, provide all the information that is required by a purchaser
and include details such as the date of purchase and delivery, the service or products and tax information.
How does bookkeeping work?
Every business makes and spends money on a daily basis and therefore requires paperwork processing of the businesses transactions which is essential for keeping track of the business financial situation at a particular time. Bookkeeping is, therefore, more than just dropping numbers into a spreadsheet – It can be a powerful tool for a business surviving an audit provided that the records are accurate.
A bookkeeper records all transactions within a general ledger either manually or through cost-effective software such as FreshBooks and QuickBooks. Bookkeepers can also include adjustments of entries to generate income statistics.
Role of bookkeeping
Bookkeeping involves some tasks and requires someone who is not only efficient and accurate but also someone who has strong mathematical and accounting skills. Bookkeeping consists of a number of processes which include:
i. Preparing income statements
Income statements, also known as profits loss statements, are the financial recording of a business which covers the revenues, expenses, gains, and losses in a particular business. It is, therefore, one of three important financial statements used to reports a businesses’ financial performance over a specific period and does not include receipts
Preparing income statements requires one to start with computing the details of sales or services which includes the expenses losses and gains and finally coming up with a net income. A business may have both primary and secondary sources of income. The primary sources of income include the direct provision of products and services by the business while secondary sources of income may consist of things that are not directly linked to providing services or selling products like letting out a space that the business does not use. You need to reflect all these data in the income statement.
ii. Preparing a balance sheet
A balance sheet is another key financial statement that comprises of a statement of assets, liabilities, and investment on stakeholders at a particular period. It also shows how the business’s assets are financed whether through debts or equity, detailing what the business owns and owes.
iii. Preparing cash flow statements
Cash flow statements indicate the inflows and outflows of cash and cash-like equivalents in a business. It acts as a bridge between a balance sheet and income statement indicating the money that comes in and out of business over a period of time – usually in a month or a quarter of a year. The analysis of a cash flow statement is further broken down into investing, operating and financing activities of the business.
Bookkeeping also involves the recording of changes in equity which shows how changes have occurred in capital share, reserves and retention over a specific period. Bookkeeping can be involving especially when you do it manually, but the decision to go manual or apply software is solely on the business owner and the size of the business.
Manual versus automatic bookkeeping
The decision to use manual or automatic bookkeeping depends on the owner of the business and the convenience that the methods come with. The decision may, however, be affected by the financial situation of the business, but this seems not to be a problem anymore as companies provide bookkeeping software even for small businesses. Either way, both have advantages and limitations.
Electronic or automatic bookkeeping proves to be efficient because it simplifies records and enhances the generation of invoices, reports, and statements. Moreover, automatic bookkeeping software is designed in a way it can keep up to date with the latest tax return rates. However, choosing the wrong software can result in loss of data or even duplicate copies of reports, invoices, and statements.
Software such as FreshBooks and QuickBooks, however, provide business owners with a tool for cloud computing which is significant in case of data loss but this also requires that the user ensures that data has been backed up in the cloud after entering it into the software. Also, when choosing automatic bookkeeping software, you need to ensure that it can interface with other computer systems such as online payment. Customer support is also another area that one needs to consider when selecting bookkeeping software. No one wants to all be stuck in the middle of generating information to file returns, and the software fails.
Manual or free bookkeeping services like Microsoft Excel or Microsoft Word can also be a great means of bookkeeping. First, they are cost-efficient, and one can easily correct entries and prevent instances of duplicating records unlike in automatic computing. However, you need to avoid data loss if your device becomes corrupt by backing up your data by printing or saving them in other devices.
How accounting works
In any business, whether small or big, accounting plays a significant role. It is more than just crunching numbers – It is the backbone of a business. Accounting helps business owners plan and put specific measures into achieving their goals. In a business setting, an accountant is responsible for preparing and examining financial records and ensuring that all payments are made in due time.
An accountant is also responsible for creating a plan for action to ensure that the business is operating in a manner that leads to the attainment of its goals as well as complying with specific set laws and regulations within a particular Business setting. Accounting applies to all stages of business including start-up, regular operations and in the employment of business growth strategies.
Accounting during the business start-up process
Starting a business involves taking actions to ensure that you have a successful foundation. During this stage, you will need to determine the best business structure for you, come up with a business plan, select accounting software to use and seek advice on opening a business bank account. Moreover, you need to make sure that your accounting procedures comply with those set out by the government. With the right accounting techniques, you will need to understand the significance of keeping your business and personal expenses separate.
Accounting during regular business operations
Accounting also plays a significant role once you have set up your business. Accounting information can be used to understand the ins and out of business as well as financial statements which you will rely on when filing taxes and making other business-related decisions. Moreover, accounting enhances the oversight of company payment and payroll processes and determining the amount that a business needs to pay in taxes drawing from its revenue. Lastly, you also need accounting information to create the financial reports at the end of the year and when closing out your books.
Accounting during the business growth stage
Accounting information is integral in managing and consequently growing your business. Through accounting information, a business owner will understand the specific areas of growth. Accounting can also prevent auditing by IRS, and in case your business is selected for auditing, it can guide you through the entire auditing process. Lastly, accounting information can help you’re in financial forecasting and making decisions that align with your business goals.
A business that does not have the right accounting personnel and procedures is doomed to fail. You need accurate business records to make decisions and pay your taxes. Computing wrong accounting information will not only lead to the filing of wrong taxes but may also mean the end of your business during auditing. An accountant can act as an auditor and determine the financial strengths and weaknesses of a business.
Manual versus automatic accounting
Both manual and automatic accounting systems have the same goals – To provide a business owner with detailed records of incomes and expenses and which are required to make critical decisions pertaining to the business. Whether you settle on manual accounting mechanisms such as the use of spreadsheets, general journals and ledger books or opt for online accounting software like FreshBooks, it depends on the amount of data you want to record.
Just like in bookkeeping, manual accounting systems have some advantages over automatic accounting systems. For instance, you can easily trace and correct errors in your accounting reports. Moreover, you can also save on the costs of investing in automatic accounting software and direct the money into other parts of the business.
Automatic accounting is known to be speedy especially when you have a lot of data to compute. Automatic accounting software makes tallying and generation of data easy. However, if you are not keen, you might end up making an error which might not be easily traceable as in the case of manual accounting. This is because automatic computing software employs a program that uses back-end calculations making it difficult to trace errors. Also, automatic computing software is vulnerable to glitches and bugs, and this might lead to system failure and slow computing.
When choosing software to use, you should, therefore, ensure that you not only go through the reviews but also make sure that they have a fast and responsive customer care system in place. It would be difficult and irritating trying to troubleshoot a problem in a system when you don’t even know where to start from. Lastly, you should consider cloud data back up as well as backing up your data in other devices to prevent data loss.
How invoicing works
In a business setting invoices are culturally accepted means of asking for money. If you won business and provided either services or products to a customer, it would be rude to write to the customer and state, “You owe me $100.” In most cases, you would even lose the customer. Invoices tackle this issue by not only stating that the customer owes you money but also providing a breakdown of the dues owed and the specific details that are comprehensible.
Invoices vary on the expected dates of payments depending on the types of businesses. Large companies may give customer up to about 30 days to make payments. Small businesses, however, need the money to run their daily operations and therefore give lesser time compared to large businesses. A small business can, for instance, give a customer up to seven days to make payments. However, the dates of making payments usually depend on the agreements between customer and business owners.
When preparing an invoice, there are a number of details that you have to include and these include:
i. The dates
This includes the dates when the service or product was processed, the date when it was delivered, the dates of preparation of the invoice and finally, the date of expected payment. The date of scheduled payments should correspond to your terms and conditions of payments. This will help the customer understand when you expect payments and what requirements apply when the customer does not make payment in time.
ii. Names and addresses
You should also include your business name and address as well as that of your customer. The names address when using accounting software is not necessary. In this case, you will only require the customer’s email address. You can still, however, include the physical address of the customer should you need to send the invoice through the post.
iii. Contact names
You will also need to include your contact information as well as that of your customer. You can include your personal contacts in case the customer finds it difficult in reaching you through your business contacts.
iv. Description of items purchased or services provided
It is significant to provide a breakdown of the services or products reasonably supplied to the customer. This should include the prices, quantities of products. In case there are any applicable taxes, you should also include them in the description. The description should be as detailed as possible to avoid confusion on the side of the customer.
v. Terms of payment
With invoices, you determine how your customer pays you either on pre-agreed terms or terms set out in your regulations. For instance, you can agree that the customer pays you in installments where you will have to send multiple invoices until you get all your payments. This may be effective for small businesses as they require the money to run.
When making invoice terms, you should take into account the nature of your business. If your business needs to constant money flow to run, then you need to reduce the time under which your invoices are paid. You should also have a continuous flow of money so that you do not solely rely on invoices. This can prevent halting your business in case some of your customers delay or decline to make payments. At no particular time should you stop your business from operating just because you are not able to claim your invoices.
Manual versus automatic invoicing
Again, the sole decision to apply either manual or automatic invoicing depends on the business owner. Manual invoices apply when you have an inventory management solution disconnected from accounting solution. In this case, you will manually compute your billing information after receiving purchase orders; you will use the accounting solution you to generate invoices with all the necessary information in it. This process is time-consuming and can result in double data entry which might also result in errors in invoices and consequently severe legal problems with your customers.
Automatic invoicing software, on the other hand, allow for the integration of inventory and accounting solutions together, making it easy to handle purchase orders. It works in a way that the incoming purchase orders only trigger the accounting solution to create invoices for particular customers. In this case, you do not have to record the data twice as in the case of manually invoicing. However, if you do not settle for
software that is efficient, your business might be vulnerable to bugs.
Bottom-line
Accounting, bookkeeping and invoicing play a significant role in a business. It is therefore vital for a business owner to determine the right solution depending on the accounting needs. When choosing an accounting and invoicing software, you have to do your research beyond the prices and reviews.
First, you need to ascertain that the accounting and invoicing software satisfies your needs. Secondly, you need to make sure that it is both user-friendly and can be accessed using multiple devices. Fast and efficient customer support is also another consideration that you have to keep in mind when selecting software for your business.
The protection of your customers’ information should be at the core of your business. The breach of customer information will not only mean that you lose the customers, but it also implies that you will have a lot of lawsuits against you. Lastly, your software should be able to accept multiple currencies and perform all tasks such as invoicing, bookkeeping and accounting without having to use other software. Accounting software such as Freshbooks has been designed for small businesses can handle multiple solutions and keep the businesses’ data safe at the same time.