How To Do Bookkeeping for Small Business: Best Tips and Tools

Sep 24

Business meeting with bookkeeper showing how to do bookkeeping for small business

Most small business owners I know would rather do just about anything other than deal with their bookkeeping. But avoiding your books doesn’t make them go away… it just makes them more expensive to fix later.

Messy bookkeeping means you'll pay more in accounting fees, miss out on legitimate tax deductions, and potentially face IRS headaches you’d rather avoid. But bookkeeping doesn’t have to be a soul-crushing nightmare. With the right approach and tools, you can get your financial house in order without wanting to burn down your business.

This guide will walk you through everything you need to know, showing you the essential daily and monthly tasks you need to handle to keep everything running smoothly. Most importantly, I'll help you figure out when you can handle things yourself and when to call in professional backup.

Bookkeeping Basics: What You Actually Need to Know

You probably didn’t start your business because you were dying to learn the ins and outs of QuickBooks or whatever other tool you’ve chosen to manage your finances. But understanding some key bookkeeping basics is crucial to making better financial decisions and avoiding tax season stress.

First, let's clear up the bookkeeping vs. accounting confusion.

Bookkeeping is the day-to-day stuff, like recording transactions, organizing receipts, and keeping track of what's coming in and going out.
Accounting takes those records and turns them into reports and insights that actually help you make business decisions.

Businesses need to get both elements right to succeed, but knowing the difference is still helpful.

One of the most essential parts of bookkeeping is tracking invoices and expenses. You may have heard of either single-entry bookkeeping or double-entry bookkeeping. Single-entry is similar to how you manage your personal checkbook. Money comes in, you write it down. Money goes out, you write it down. Easy to manage, but pretty limited.

Double-entry is what businesses use, and it’s where things get real (and where QuickBooks lives). Every transaction hits TWO accounts because money doesn't just disappear into thin air. Let’s say you spend $100 on office supplies:

Your Office Supplies account goes UP $100
Your Cash account goes DOWN $100

The whole thing has to balance out to zero. Double-entry bookkeeping can be a little more complicated, but it shows you the full story of what’s happening with your money.

Then there's the timing question: cash vs. accrual accounting.

Cash basis records money when it actually moves (e.g., you get paid, you record income; You pay a bill, you record the expense). Accrual basis records things when they happen, even if the money hasn't moved yet. Most small businesses start with a cash basis because it's simpler and shows you exactly what's in your bank account.

Feeling overwhelmed? Don’t worry, we’re just getting started, it’ll all make sense in the end.

Essential Bookkeeping Setup

First and foremost, you need to get your financial foundation set up. When you get the fundamentals right, everything else becomes way less painful. You can follow a simple four-step process to get started on the right foot.

Step 1: Separate Your Business and Personal Finances

Let's start with the big one. You might think you’ll remember which expenses are business and which are personal, but trust me, you'll be staring at a $73 charge three months from now, wondering if it was a client lunch or a lunch with that friend from out of town.

Start by setting up a dedicated business bank account. Separating your finances makes bookkeeping much easier, and it protects your personal finances in the event of IRS audits or penalties on the business side later on.

Get a business credit card too. It makes expense tracking automatic and gives you another layer of separation between your personal spending and business costs.

Step 2: Choose Your Record-Keeping System

Next, choose your system of record-keeping. You have a few options, but whatever you choose… don’t choose physical printed receipts. You’ll lose some, they’ll fade with time, and it’s so much harder to see patterns and opportunities when your data is in a shoebox or your desk drawer.

Instead, go digital from day one. You also don’t want just to store your data in an Excel sheet. Look for a cloud-based solution so you can access your books from anywhere, and your data is always backed up. Most cloud-based software, like QuickBooks Online, can sync with your bank accounts and credit cards, which means less manual data entry for you.

Step 3: Establish Your Filing and Organization System

Create a simple folder structure: one main folder for the business year, then subfolders for receipts, invoices, bank statements, and tax documents. When you take a photo of a receipt, name it something useful like "2024-03-15_office_supplies_staples" instead of just leaving it as "IMG_4729."

For document retention, keep everything for at least seven years. The IRS can audit you up to three years back for most things, but it's six years if they think you've underreported income by 25% or more, so it’s better to be safe than sorry.

Step 4: Set Up Your Books Correctly

When you're setting up your accounting software, start with the date you opened your business bank account. You should also make sure to connect all your business accounts and credit cards right away.

Take time to categorize your first few transactions correctly. Most software learns from your choices and can auto-categorize similar transactions going forward, so spending this upfront time will save you in the long run. You can also set up rules for recurring expenses like software subscriptions or rent.

Michigan-Specific Considerations

If you're based in Michigan like me, you'll need to register for state taxes if you make over $20,000 annually. Sales tax kicks in if you're selling physical products, so keep that in mind.

You’ll also want to keep track of any local business licenses. Some cities require annual renewals that are easy to forget about until you get that stressful letter in the mail saying you’re overdue.

Daily and Weekly Bookkeeping Tasks

Once you’ve set up your foundation, the worst thing you can do is clap your hands together and say, all done until tax season!

Small, consistent efforts beat marathon catch-up-and-fix-it sessions every time. A few minutes each day or week can save you time, stress, and money chasing down old expenses months after you’ve forgotten what they were for.

Daily Habits

The best bookkeeping habit you can develop is to record transactions the same day they happen.

When you buy office supplies or grab coffee with a client, snap a photo of that receipt before it disappears into your wallet. Send invoices as soon as your work is complete. Check your bank accounts daily to scan for unexpected charges or fraud.

These simple habits can help you stay on top of things and catch small things before they become big problems.

Weekly Bookkeeping Routine

Each week, you’ll want to get into a rhythm of checking in on your finances. Here’s a sample schedule you might use to keep an eye on your books throughout the week:

Monday morning: Review weekend transactions and automated payments. If you worked over the weekend or had payments go through, make sure everything looks right.

Wednesday check-in: This is your categorization catch-up time. Log into your accounting software and clean up any transactions that got auto-imported but aren't categorized yet.

Friday wrap-up: Send gentle reminders to clients with overdue invoices, and do a quick reconciliation of your main business accounts.

Transaction Categorization Best Practices

The best way to keep track of expenses is to keep your expense categories simple and consistent. Some of the most common categories for most small businesses:

Office supplies
Software subscriptions
Professional services
Travel
Client meals
Equipment

The key is not to create new categories for every little thing. Pens and printer paper both go under “office supplies,” for example.

If you accidentally used your business card for something personal, don't just pretend it didn't happen. Track it properly as an “owner’s draw” and reimburse the business.

Monthly Bookkeeping Tasks

Next, let’s discuss the bookkeeping tasks you should perform monthly. Your weekly check-ins might take 30 minutes or so (once you get used to them), but your monthly check-ins will take a bit longer, and the insights are worth it.

Bank Reconciliation

Bank reconciliation is just making sure your books match your bank statement. Pull up both for the same period and compare every transaction. If something's missing or different, figure out why.

During a reconciliation, some common issues businesses tend to identify are timing differences, forgotten bank fees, and duplicate entries. You’ll also want to keep an eye out for unexplained deposits, missing transactions, or balances that are way off from what’s expected.

Financial Statement Review

Your profit and loss statement tells you whether you're actually making money or just staying busy. Look for trends over time. Are certain months consistently slow? Are expenses creeping up?

Next, check your balance sheet. This report shows what you own versus what you owe. If you're technically profitable but always feel broke, check your accounts receivable: your clients might not be paying fast enough.

Accounts Receivable Management

Run an aging report monthly to see who owes you money and how long they've owed it.

30-60 days overdue: friendly reminder email
60-90 days: phone call and firmer email
90+ days: consider writing it off, depending on how much it is

If you have a lot of payments lingering in those last two categories, consider changing your payment terms.

Tax Preparation

Finally, make sure you’re taking care of your future self. Set aside 25-30% of your profit for taxes every month. This practice keeps you from breaking the bank on tax payments at the end of the quarter.

Best practice is to keep your tax money in a separate savings account, if possible, so you know exactly how much you have earmarked for taxes and how much you have to spend in the business account.

Quarterly and Annual Bookkeeping Tasks

Finally, we have our quarterly and annual bookkeeping tasks. Most business owners are already familiar with these, so we’ll cover them relatively briefly. The point of these tasks is generally twofold: compliance and future planning.

Quarterly Tax Payments

If your business makes enough money to owe quarterly taxes, you’ll need to calculate and pay these every three months.

Missing your quarterly tax payment deadlines results in penalties and fast-compounding interest, so make sure to mark your calendar and follow those dates to the letter.

Calculate what you owe based on your current year's income, then set up EFTPS for electronic federal payments. The online portal is way more reliable than mailing checks.

If you're in Michigan, remember that State Corporate Income Tax has its own estimated payment schedule that doesn't always match federal deadlines, so you'll be juggling two different calendars.

Year-End Procedures

December is crunch time for getting everything cleaned up before tax season hits.

Start with your final bank reconciliations to ensure everything through December 31st is accounted for. Clean up your accounts receivable and payable lists, writing off any truly uncollectable debts.

Some other year-end procedures to keep in mind:

Organize all tax documents in one place
Review asset purchases and depreciation schedules
Prepare a summary of the year's major financial events for your tax preparer

Business Performance Analysis

This process is usually the “fun” part of accounting and bookkeeping. You get to see how your business actually performed that year and plan for the upcoming year to see how you can grow and improve even more.

You’ll compare this year's numbers to last year's to identify growth areas and problem spots and figure out which of your products or services are most profitable. It’s also a good time to assess which customers are worth the effort and which might be more trouble than they’re worth.

Finally, based on the numbers you’re seeing, you should set realistic financial goals for the upcoming year.

Best Bookkeeping Tools and Software Comparison

The right software can make bookkeeping way less painful. There is no shortage of tools on the market, so if you’re feeling overwhelmed, you’re not alone. Thankfully, I’ve got some experience with bookkeeping tools and software, so here’s a quick-and-dirty breakdown of the tools that might be worth your attention:

Free Options

Generally, I don’t recommend free tools for your bookkeeping. But if you’re a solopreneur or really bootstrapping, there are a few free options that are better than others:

Wave offers surprisingly advanced features for free. They have invoicing, expense tracking, and basic reporting. They make money on payment processing fees, so the accounting features stay free.
Excel or Google Sheets can work for very simple businesses, but you'll outgrow them fast. If you're only tracking a few transactions per month — and plan to stay only tracking a few transactions per month — go for it. Otherwise, you're building yourself a future headache.
GnuCash is open-source and completely free, but it's not exactly the most user-friendly of software solutions. It might be worth a look, but generally I’d say to skip this one unless you love troubleshooting software.

Premium Software Solutions

QuickBooks Online is the industry standard for good reason. It handles invoicing, expense tracking, payroll, tax prep integration, and connects with virtually every other business tool you might use. Yes, it can get pricey as you add features, and the interface feels overwhelming at first. But once you're set up, it just works.

Overall, QuickBooks is best for most businesses, integrates with just about everything you might need now and in the future, and, bonus: your current and/or future accountant will definitely know how to use it.

But if you’re not a QuickBooks Online fan, there are some other options:

Xero has a pretty clean interface and allows unlimited users, which is nice for teams. The reporting is solid, but inventory management is limited.

FreshBooks has some great features for invoicing and time tracking, making it a strong option for consultants and service providers. However, the reporting is pretty basic, making it hard to get a good grasp on your financials.

Specialized Tools

These tools won’t do everything the other tools we’ve talked about so far can do, but if you have really specific needs, you might want to add some specialized tool to your tech stack:

Receipt management: Expensify or Receipt Bank for automated expense tracking
Time tracking: Toggl or Harvest if billable hours matter
Inventory: inFlow or Zoho if you're selling physical products

Most small businesses do best starting with QuickBooks Online and adding specialized tools only when they need them. I wouldn’t recommend starting with a stack of five tools from day one.

How To Do Bookkeeping for Small Businesses: When To Bring in a Pro

This guide has covered the basics for how to do bookkeeping for a small business… but most small business owners are probably sitting here asking an important question: should I be managing this myself, or is it time to bring in a pro?

If your business is straightforward with limited transactions, DIY can work. But here are the red flags that mean it's time to call in backup:

You're spending more time on books than serving customers
You're missing deadlines or scrambling for receipts
You’re not sure how to accurately read your financial statements
Your business is getting complex with things like employees, multiple revenue streams, and inventory

If you’re struggling with any of the things I just listed, consider hiring a bookkeeper or a full-service CPA. Consistent bookkeeping is critical for making better business decisions, surviving tax season, and, ultimately, sleeping better at night.

You don't have to be a numbers person to manage your business’s books. You just need to start, stay consistent, and know when to ask for help.

Ready to get your books in order? I help small business owners take the stress out of bookkeeping so they can focus on what they do best. Schedule a free Q&A call today, and let's figure out exactly what your business needs.

Steve Koch