Business Management / Finance

Complete guide to small business bookkeeping for business owners

Jessica Mehring, Austin Miller & John Rampton

Updated: Oct 23, 2021 · 14 min read

Toolkit for download in this article

how to do small business bookkeeping

Accurate bookkeeping is an essential component of small business success. While it may sometimes feel like a chore, it's vitally important you track your revenue and expenditures. Many businesses that could have earned great success have been bogged down by their failure to properly maintain their financial records.

The IRS tells us 40 percent of small businesses incur an average penalty of $845 each year for late or inaccurate filings and payments. Whether you go at it alone or outsource bookkeeping, it is crucial to your small business.

The term "bookkeeping" has the tendency to conjure up images of backroom deals, sports betting, and horse races. In the business world, however, bookkeeping is a far cry from the shady dealings of smoky gambling hideouts.

Bookkeeping is not only a way to achieve and maintain compliance with U.S. tax laws, but it's also essential to good business practices, i.e. ensuring a good ROI. Learn how to do small business bookkeeping properly and you'll see where your money is going and ensure that you don't miss out on deductions that can save you thousands of dollars.

Here are just a few of the big reasons you should learn bookkeeping for small business:

  1. Taxes: Your business must provide information on a regular basis about its profits and losses to assess the amount of tax you owe. The information must be correct and presented in a manner that is professional and concise. Failure to stay current with your taxes can lead to severe repercussions the government can impose penalties and fines that could negatively impact your business.

  2. Expenses: Business owners can claim expenses that have been incurred as a business expense. These expenses need to be paid from the business bank account and ideally submitted on a consistent basis such as one time each month. This ensures the person responsible for bookkeeping can better see and monitor outgoing cash for tax purposes.

  3. Cash flow: Often businesses work hard at building a brand with a passion yet they fail to track cash flow. It is critical for a business to track its spending no matter its size and it is only possible with accurate financial records. Several growing, and seemingly, profitable businesses have failed because they were suddenly hit by a cash-flow crisis and they weren't prepared.

  4. Profitability and growth: Accurate bookkeeping is also essential for determining the amount of profit your business is making. It enables a business owner to better grasp how much progress they make from year to year. Small business bookkeeping gives business owners the ability to look back at years past to identify patterns and make comparisons. Through financial analysis, business owners can learn how to avoid future problems and pitfalls and ultimately improve their small business management.

Diligent bookkeeping is worth the time and effort and may help you survive the ups and downs of the economy. But if you're behind on it, or you're struggling with client invoices, don't fret. Read on for pro tips on how to handle these small business bookkeeping challenges.

Small business bookkeeping strategies

Take time to determine how you want to keep track of your small business bookkeeping. There are three main strategies that small-business owners use to handle this critical business task:

1. Traditional route: Hire an accounting firm

  • Pros: A professional small-business accountant most likely knows more than you do and can help keep you compliant and take advantage of deductions
  • Cons: Hourly fees, slow response rate, low-tech, and expensive

2. Semi-traditional DIY software, like QuickBooks

  • Pros: Incredibly robust software, great for accountants
  • Cons: Not designed for non-accountants. Although a solid tool, professional-grade software such as QuickBooks is not as effective in the hands of an amateur. Users still have to deal with the headache of entering in data and knowing tax laws like the back of their hand.

3. Fully automated Software and service companies, like Bookly

  • Pros: No contracts, no paperwork, and no hourly fees. Users get access to a personal bookkeeper and a CPA. Users don't have to deal with any of the traditional headaches i.e. navigating tax law, regulations, or data entry. Allows business owners to focus on what they care about most.
  • Cons: More expensive than DIY software (however, missing out on tax deductions and spending hundreds of hours entering data is most probably even more costly)

Common small business bookkeeping pitfalls

Execute good bookkeeping practices by avoiding these common pitfalls.

The infamous "show box"

Simply put, if your receipts are sitting in a box somewhere, then you haven't even begun to keep your books. There is really no way to easily reconcile this pitfall if it's already occurred so implement correct accounting principles from the beginning.

It's a lot easier to start documenting your transactions from the start than to go through a year of coffee-stained receipts and categorize transactions you may or may not remember.

Unreconciled transactions

Do you have unreconciled transactions on your books? Your small business bookkeeping isn't complete until all transactions are categorized correctly. Solution? Think and act chronologically. Reconcile transactions every day or at least every week so you don't lose track of the details.

Loan payments

Do you have loan payments on your books? You may not have accounted for the principal and interest portions of the payments correctly. If you have categorized the whole payment to a single expense, your books are probably incorrect. Make sure you always account for the principle, as well as interest.

Inventory count

Your books may have inaccurate values for inventory and Cost of Goods. This can be due to a miscount or, just as common, theft. This is especially important for small-business owners who sell a physical product. Always stay current on inventory and remember, December 31 is always a good date to do a thorough inventory check. This is a crucial step as you aim to properly keep your books.


Like any machine, your payroll system needs sometimes needs tuning up. Your income statement should show payroll at gross, but without a manual adjustment to the standard bank feeds, your account is probably only showing net payroll.

7 Best invoicing tips for small businesses

A small-business owner wears many hats, including the accounts receivable one. Incorporating some best practices for small business invoices can dramatically change your small business management, including how your small business is perceived by your clients or customers.

And maybe more importantly, using a smart invoice system for small business may help speed up payments and increase cash flow.

Here are seven tips for small business invoicing:

Migrate from paper invoices to online invoices

Invoices software for small business makes it extremely easy to move away from paper invoices and into email invoicing, which is time-consuming, lengthens the turnaround time on payment, and decreases the professional look and branding opportunities you could have if you just used an online invoice solution.

Invoices software typically offers templates that allow you to add a logo and create a custom look that stands out and makes an impression on the recipient. Plus, you can email the invoice to your client, which saves time and money and gets it in their hand quickly. Clients typically like the convenience of email invoices, and often pay faster this way.

Use of paper survey

Small Biz Trends

Keep the invoice layout simple and easy to read

Another advantage of invoices software for small business that the templates look professional even if you don't have a graphic design bone in your body. These templates typically follow the best design rules, which keep the layout simple and uncluttered so the invoice is easy to read.

The faster the client can find out why they're getting the invoice, how much it's for, and where and when to pay it, the quicker you will get paid. Otherwise, you might have to wait while they ask questions or figure it out on their own.

Integrate various payment methods with your small business invoices solution

Speed up your invoice payment by providing more ways to pay you. This gives your clients the options they may need for their own cash flow.

For example, only accepting a paper check as payment can really slow down payment because your client may want to hang on to their money as long as possible; plus you have to contend with snail-mail to receive it. However, if you offer a way to pay by e-check, or accept debit and credit card payments, your client will probably pay you much faster because they are in control of the payment type.

Formalize your invoices and payment policies

When clients don't have a set of rules to follow, they will tend to do whatever suits them. You can change this behavior by creating a set of formal policies, which builds a framework for how you would like to work together. These policies should be written down in the form of an agreement or contract between you and your client, so everyone is on the same page.

Think about what is important to include in your policies, including if payment is taken upfront, requested when project work is completed, or split into even payments throughout the project. Determine the payment terms, like "payment upon receipt" or "payment net 30 days." Your agreement should also list the type of payments you accept, the pace of how you deliver your work in relation to a payment, and how and when late fees will be applied.

These policies set expectations for both you and the client, so it does not become an issue each time you send an invoice. Don't forget to ensure that both you and your client have a signed copy of this agreement.

Use a numbering system on your invoices

Using a numbering system not only helps with your record keeping, but it also can be a point of reference to help your client when communicating with you about a specific invoice. When you use online invoices software, this is often done automatically for you.

Don't delay in sending your invoices

You're a busy small-business owner but your cash flow can't wait. The longer you procrastinate in sending the invoice, the more likely your client will end up with the "of sight, out of mind" mindset because the project has long been finished and they have moved on. Meanwhile, you are still waiting to get paid.

The best practice is to immediately send your invoice. It shows you value promptness and that you are professional. After all, you deserve to be paid for all that hard work.

Make your invoice a marketing tool and vehicle for data collection

Your monthly invoice can also be a way to market yourself. Without putting too much information on the invoice so it becomes overwhelming to read, consider a few brief marketing messages related to new services or products, an upcoming promotion, or a reward benefit for any referrals. The invoice could even include a link to a survey where you can gather feedback or other information that would help you improve the client experience.

Consider small business invoices as an extension of your business strategy rather than a mindless, time-consuming task. It's a very necessary tool that you can improve that delivers the cash you need to thrive and grow your business.

How to get clients to pay faster especially when they're already late

Cash flow issues from slow paying clients can be crippling for small businesses. In fact, according to a National Federation of Independent Business survey, approximately 64 percent of small businesses reported they had clients who didn't pay invoices for at least 60 days.

That's just not frustrating and potentially crippling, but the longer it takes a client to pay an invoice, the less likely that invoice will ever get paid.

Get ready to learn how to get a client to pay an invoice faster

Craft better contracts and payment options

Prior to starting any work for a client, you must both agree to a contract and payment terms for the project. Here are some of the most important elements your contract should cover:

  • The scope of the project and its deadline.
  • Pricing: Do you charge per hour or by project?
  • Payment terms, such as when and how you're going to get paid and any other provisions like advance payments.
  • Single point of contact: This limits your communication to only one individual to avoid miscommunication.
  • Kill fee in case the project is terminated by the client: This fee is up to you and can range anywhere from 25 percent to 50 percent of the project. It ensures that you're compensated for the work you've already done.
  • Revision stipulations: How will you be compensated for any revisions, alterations, or rewrites that the client requests? Most freelancers allow for one or two rounds of revisions before they start charging for out-of-scope services.
  • Copyright transfer: Depending on your work, this will vary but to protect yourself, only hand over copyright once you've received the full payment.

By agreeing to these terms in advance, everyone is on the same page, and you'll eliminate confusion as you work on the project. It also ensures that both parties are protected from suing each other.

Additionally, having a contract before you begin work will speed up the payment process since there shouldn't be any questions or concerns involving the invoice. Even so, there are a few more contract tweaks you might want make to get clients to pay their invoice faster:

  • Shorten your payment terms from 30 days to under 14 days.
  • Choose your words wisely. Don't use phrases like "net 14." Instead, use "payment due within 14 days."
  • Early payment discounts and late-payment fees: If a client pays before the due date, you can offer a small (maybe 2 percent) discount off the final amount. If the payment is late, start charging the client a late payment fee. Even a 2 percent interest fee should grab their attention.
  • Require a down payment: This is up to you, but it's normal to require a 50 percent down payment before you start work.
  • Accept multiple forms of payments: Don't limit yourself to only accepting cash, checks, or even PayPal. Offer a variety of payment options like credit cards, e-checks, and even bitcoin so that the client can pay you via their preferred method.

Ultimately when composing a contract and establishing your payment terms, keep it simple so that the client can easily understand how and when you expect to be paid for the work that they asked of you.

Go paperless

We mentioned this earlier in the article, but it bears repeating. We're rapidly moving towards a digital, paperless economy. That means that you should be embracing invoicing software for small business and payment platforms like Due, QuickBooks, Freshbooks, and PayPal. Not only does invoices software enable you to electronically send invoices to clients, it allows them to pay you instantly through a variety of global payment methods.

Most online invoices software for small business also comes with features like sending automated payment reminders and the ability to set-up recurring payments. These platforms also come equipped with mobile e-invoices so that you can send, review, and accept payments whenever and wherever you want.

Follow up on late payments

Following up on past-due invoices is probably everyone's least favorite part of the invoices cycle. However, there are going to be times when it's necessary because some clients just need a nudge here and there and some may just forget all about your invoice. That's when an automated and efficient invoice system for small business can make things a little less awkward.

  • Resend the invoice with a friendly email reminder that the invoice is past due. Many invoices software platforms can be set up to do this automatically. (And remember, if the invoice is past due and you have accounted for late-payment fees in your contract, you can include the late fee in the final amount.)
  • If the client hasn't responded to the email reminder it's perfectly acceptable to call the client to find out what the hold-up is.
  • If your client has continued to dodge your emails and phone calls, you can consider taking legal action. Ask your attorney to compose a letter or take the client straight to small claims court. If you have a signed contract, you shouldn't have any problems with the court ruling in your favor.
  • If all else fails, consider hiring a collection agency to chase the payment for you. Another option is invoice factoring where a company purchases the unpaid invoice from you. Of course, they take a cut, but if you need to improve your cash flow and don't want to chase down late-paying clients, it might be an appealing option.

The bottom line of your small business bookkeeping

Be aware of proper bookkeeping techniques as well as common pitfalls so that you can avoid losing precious time and money. A fully-automated accounting solution offers the most benefits, but regardless of which bookkeeping solution you choose, when it comes to compliance working with any type of professional solution is dollars-to-donuts better than stuffing your receipts in a shoebox.

Don't underestimate the importance of your invoices practices, either. Small business invoices is essential if you want to keep cash flowing. Encourage clients to pay their invoices on-time by establishing clear payment terms and conditions, accepting multiple forms of payments, using invoices software, and not being passive when an invoice is past due.

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