A step-by-step guide to SME bookkeeping

As a small business owner, managing your finances might seem overwhelming, especially if you don’t have a financial background. It may be easy to leave it on the back burner to attend to at a later date but those records will snowball before you know it. Consistent bookkeeping is essential to keep track of your business’s financial health and ensure the long-term success of your business. Too often, clients reach out to us for assistance when it is too late and SARS or other financiers come knocking. Rectifying past mistakes is a costly exercise that could have been avoided. We have put together this step-by-step guide which will help you understand the basics of SME bookkeeping. We’ll also touch on why using accounting software and/or hiring an accounting company would be beneficial for your business.

1. Understand the basics of bookkeeping

Let’s first touch on what bookkeeping actually is. In a nutshell, bookkeeping is the process of recording all the financial transactions of your business. It involves tracking sales, expenses, payments, and receipts. Accurate bookkeeping ensures that you have a clear picture of your business’s financial health. 

This is important because it provides financial clarity, identifies areas of concern, tracks outstanding customer payments, and helps plan for supplier payments. It also helps with compliance, ensuring you meet legal and tax obligations. Additionally, bookkeeping provides data to help you make informed financial decisions and is essential for securing loans or attracting investors. Check out our previous post on the importance of financial planning.

2. How to set up a bookkeeping system

The first step in setting up a bookkeeping system is to choose your method. You can opt for: 

• Manual bookkeeping using ledgers and journals (which is not ideal as this can easily lead to errors and take up a lot of time), or 
• Digital bookkeeping, using spreadsheets or accounting software. Accounting software can simplify the bookkeeping process significantly. Popular options which we recommend to our clients are Sage and Xero. Sage offers comprehensive accounting solutions for SMEs, including invoicing, expense tracking, and financial reporting. Xero is known for its user-friendly interface and provides the same features as Sage. In addition, Xero incorporates intelligent AI to further automate the data capturing process This will save you time, and as we know, time is money.
• Outsourcing your bookkeeping to an accounting firm will save you time and probably cost you less than you expect. You are welcome to reach out to us for a quote.

3. Recording financial transactions

As we mentioned earlier, it is crucial to record your financial transactions regularly. Make sure to record all sales made, whether in cash or on credit, and track all expenses, including supplies, utilities, and rent. You should reconcile bank statements monthly by matching your records to your bank statements to ensure accuracy. 

Also, review invoices and receipts to ensure they are properly recorded. It is very easy to swap numbers around or leave digits out completely when you’re in a rush. Using software like Xero can limit manual errors by automating a big part of the process. Other monthly tasks include generating statements like income statements, balance sheets, and cash flow statements. Additionally, review accounts payable and receivable to ensure timely payments and collections.

4. Categorise and organise records

Organising your transactions into categories such as sales, expenses, assets, and liabilities will make it easier to analyse your financial data. Accounting software offers categorisation features that help automate this process, saving you time and reducing errors. 

Consistency is key to maintaining accurate records. Make it a habit to record transactions regularly. Inconsistent bookkeeping can lead to errors and financial mismanagement. Also, ensure that your financial data is backed up regularly. If you use Xero or Sage, backups are not required as all information is internet-based. 

5. Monitor cash flow and review accounting records

Regularly monitoring your cash flow is crucial to understanding how money moves in and out of your business. This helps you manage expenses and plan for future growth. Cash flow statements help you get a clear view of your business’s financial health. We recently put together a blog post on the difference between profit and cash flow that you should have a look at. Reviewing accounting records monthly will assist in identifying areas of concern for example:

• The business is reaching sales targets but is still cash strapped, what could be the cause?
• Higher than normal expenses could mean a mismanagement in assets for example high fuel expenses could indicate a mismanagement of delivery vehicles.
• Petty cash not reconciling could indicate possible fraud.

6. Prepare for the tax season

Staying compliant with tax regulations is essential. Keeping accurate records of all financial transactions and storing the source documents in a safe place ensures this compliance. It is also your responsibility to stay up to date on tax deadlines as well as changes in regulations. One way to do this is by signing up to our newsletter. We remind you of the important deadlines.

7. Hire an accounting firm

While bookkeeping software can simplify the process, having an expert on your side can provide additional benefits. Professional accountants bring specialised knowledge and can handle complex financial situations. 

Hiring an accounting firm allows you to focus on running your business while ensuring accuracy and compliance with financial regulations. Accountants can offer personalised advice and help you make informed financial decisions, further enhancing your business’s financial management.

Bookkeeping is a crucial aspect of managing your SME’s finances. By following these steps and leveraging accounting software like Sage and Xero, you can maintain accurate records, stay compliant, and make informed decisions. Remember, hiring an accounting firm can further enhance your business’s financial management, allowing you to focus on what you do best; growing your business.