Key takeaways:

• Bookkeeping isn’t just about taxes—it helps you track cash flow, qualify for funding, and make smarter financial decisions. Learn why keeping accurate records is essential for your business’s success.
• You don’t have to be a finance expert to set up a solid bookkeeping system. With advice from tax pros, we’ll break down the basics.
• Avoid costly mistakes and stay tax-ready with simple strategies. Discover common bookkeeping pitfalls, how to manage your records efficiently, and when to consider outsourcing.

“A box full of tax receipts blew out my car window!” 

The business owner I was talking with looked like she was on the verge of tears. She and her husband owned a business they wanted to sell, but they were several years behind on bookkeeping and tax filings. They had no chance of selling the business in the shape it was in. Now they had lost vital records that would take hours to pull together—if they could find the information they needed at all. 

While this may be an extreme example, it’s not unusual for business owners to find themselves struggling to keep up with bookkeeping. Weeks turn into months, and before you know it, it’s time to file taxes but all you have is a box of unorganized. 

Here we’ll share the why, how, and benefits of setting up and maintaining a bookkeeping system for your small business. 

Why Bookkeeping is Essential for Small Businesses

While you may think of bookkeeping as a necessary evil—something you must do to avoid IRS trouble—it actually has many benefits beyond making tax time easier.

“Having an efficient and accurate accounting system for your business is truly the foundation for your business taxes, financial goal budget and revenue tracking, and the ability of your business to qualify for funding,” says Talibah Bayles, CEO and founder of Bankably. 

The impact on tax preparation can’t be overstated. Keeping your books up to date makes tax season manageable instead of overwhelming. It helps ensure you capture legitimate business deductions and have the documentation you need if the IRS questions them. In case of an audit, organized records are your best defense and can save you a lot of money, not to mention lowering your stress levels. 

The reality, though, is that most entrepreneurs don’t love the accounting process. It may feel like it takes time away from more important — or enjoyable — tasks.. There is a learning curve that can be intimidating to beginners, and it’s easy to make mistakes. 

These challenges are real, but they aren’t insurmountable. 

With the right systems in place, any small business owner can maintain accurate, useful financial records that support their business success.

Bookkeeping Basics: What You Need to Know

At its core, the bookkeeping process is simply tracking and organizing all your business transactions. When done right, you can see how money flows through your business and where you stand financially at any given moment.

Before getting started, you’ll need to make a few important choices. 

Cash vs. accrual accounting

The first choice is to choose between cash and accrual accounting methods. Cash accounting is straightforward – you record income when you receive payment and expenses when you pay them. It’s like your personal checkbook.

Accrual accounting, on the other hand, records transactions when they’re committed to, not when money changes hands. For example, you’d record a sale when you send the invoice, not when the customer pays. 

While cash accounting is simpler, accrual gives you a more accurate picture of your business’s financial health, especially if you deal with inventory or offer credit terms to customers.

Most small businesses, including independent contractors and freelancers, operate on a cash basis. But if you plan to grow significantly or need to track inventory, accrual accounting might be the better choice, even if it seems more complex at first. Consult an accounting professional. 

Fiscal year vs. calendar year

You’ll also need to choose between using a calendar year or fiscal year. A calendar year, January 1 to December 31, is the most popular choice for many small businesses, especially those with relatively steady revenue throughout the year. It’s simpler to manage since it aligns with personal tax returns and most standard financial reporting timeframes. Many accounting software packages default to calendar year reporting, making it a convenient choice for businesses just starting out.

However, a fiscal year might be more suitable if your business follows an operating cycle that doesn’t align with the calendar year. For example, retail businesses might prefer a fiscal year ending January 31 to capture the complete holiday season in one reporting period. 

Seasonal businesses, like landscaping companies or academic institutions, often choose a fiscal year that ends during their slow period, making it easier to close the books and complete tax reporting when they have more time and resources available. 

Once you choose your tax year, you’ll need IRS approval to change it. Consider your business cycles carefully and get advice from a tax professional before deciding.

Setting Up Your Small Business Bookkeeping System

There are a few key steps in getting started with small business accounting. We’ll talk about accounting software in a minute, but in the meantime, keep in mind in that you’ll need to:

Get a business bank account

One of the easiest ways to start on the right foot is to get and use a dedicated business bank account. It creates a clear separation between personal and business finances – a distinction that protects you legally and makes tax preparation so much easier. 

A business bank account is required if you form a business entity like an LLC or corporation. And while it’s optional for a sole proprietorship or partnership, it’s highly recommended.

Another reason to open a business bank account: small business loans often require copies of business bank statements to qualify for financing. 

It’s also helpful to get a business credit card or charge card for business expenses. It offers another way to keep business and personal finances separate. 

Use these accounts exclusively for business expenses. If you need funds from your business to pay personal expenses, pay yourself and then use personal funds for those purchases. 

“Do not mix personal and business expenses,” Carolyn Walters, owner of Financial Solutions, warns.  “Have separate bank accounts.” 

Set up your chart of accounts

Bookkeeping starts with your chart of accounts. Think of it as the filing system for your business financial transactions. It should be organized into clear categories: assets (what you own), liabilities (what you owe), equity (your ownership stake), revenue (money coming in), and expenses (money going out). 

From there, accounts are broken into specific types of expenses, revenue, etc. For example, instead of having a single “advertising” account, you might have separate accounts for “social media advertising,” “print advertising,” and “online advertising” if tracking these separately would help you make better marketing decisions. 

However, you probably don’t need separate accounts for different brands of office supplies – that level of detail typically creates unnecessary complexity without providing actionable insights.

“Be very organized and intentional with creating the chart of accounts,” Ebe Osaigbovo, CPA and president and owner of Smart With Money CPA recommends. “When in doubt, make a separate account. It’s easier to fix the books by merging extra accounts, then sorting through an account with transactions which should’ve been booked separately.”

Even if you decide to do your own bookkeeping, consider getting expert help to set up your chart of accounts. 

You need to “choose account classes that reflect your business operations,” Walters explains. 

Organize receipts

You need a system for keeping receipts and entering them into your bookkeeping system. If you wait until tax time, you’re likely to miss receipts for expenses that could have been deducted, or find it hard to categorize expenses. 

You can use an expense tracking app, or do as Osaigbovo recommends and “snap a picture of receipts and email them immediately after purchases, or choose to receive receipts via email. Then sort the receipts in a dedicated folder and upload them timely. Have a special email just for receipts if you can: receipts@yourcompany.com’,” he suggests.

Schedule bookkeeping time

It’s easy to get so busy running your business that you let administrative work pile up, so schedule time for bookkeeping, or to review documents to send to your bookkeeper or accountant if you decide to outsource. 

“Set aside time each week or month to keep your books in order,” Walters advises. “Waiting till year-end consumes more time and is often frustrating and can be expensive.”

Staying on top of this task has an additional benefit: it can help you identify ways to save money.

“Don’t ignore your books!” Osaigbovo warns. “You can easily be wasting money on unused expenses, or spending money foolishly on things that don’t provide a good enough return on your spending. 

“Also, there may be unauthorized transactions decreasing your funds and you only find out by examining your books and spending,” he warns. 

Financial Statements for Small Businesses

By staying current on your bookkeeping, you’ll easily be able to produce financial statements, either for your own benefit or for lenders who may request them for small business financing. 

While the term “financial statements” may sound intimidating, these reports actually answer basic questions every business owner needs to know: Are you making money? Can you pay your bills? How much is your business worth?

Here are few key statements to keep an eye on: 

The balance sheet provides a snapshot of your business’s financial position at a specific moment in time. It lists everything you own (assets), everything you owe (liabilities), and what’s left over (equity). This statement helps you understand your business’s net worth and financial structure. 

For example, if you own a food truck, your balance sheet would show the value of your truck and equipment (assets), any loans you’re paying off (liabilities), and the money you’ve invested plus accumulated profits (equity).

Your income statement, sometimes called a profit and loss statement, shows your revenue and expenses over a specific period. It reveals whether you’re actually making money and where your money is going. 

This report helps you spot trends, like rising costs in certain categories or seasonal revenue patterns. The bottom line of your income statement – your net profit or loss – tells you if your business model is working.

The cash flow statement might be the most crucial report for day-to-day operations. It tracks the actual money moving in and out of your business, showing where your cash comes from and where it goes. 

Many profitable businesses fail because they run out of cash. This financial statement  helps prevent that by forecasting when you might face cash shortages or have extra funds to invest in growth.

Most accounting software can generate these reports automatically, provided you’ve entered and categorized your transactions correctly. Of course, you need to keep accurate records and keep them up to date. 

Take this financial information one step further to help make sure your business doesn’t run out of money. “After you get your net profit finalized on your profit and loss statement, calculate 25% of the profit and transfer it to a dedicated business bank account for future income tax,” Osaigbovo advises. “Most taxpayers are safe to assume a 25% or 30% overall effective tax rate, depending on their income and tax liability history.”

“Don’t forget to set aside the money for estimated taxes and sales taxes (usually 10%) if it applies,” he adds.

Best Tools and Software for Bookkeeping for Small Businesses

There are a lot of tools that can help your business stay organized, and make bookkeeping easier.

Avoid “solely relying upon a manual record keeping process (such as a spreadsheet and file folder of receipts) and/or not having an efficient technology-enabled accounting system,” Bayles advises. 

She encourages small business owners to “Embrace technology-enabled accounting systems with features that make it easier for you to track all of your financial data in one platform/subscription plan. 

“Mileage tracking apps have been helpful to my clients over the past few years in documenting business travel,” Walters says. “It eliminates writing and tracking mileage documents.”

Step By Step Instructions for Recording Transactions

Once you’ve chosen your accounting software and created your chart of accounts, you’ll need to record transactions. 

Single-entry bookkeeping and double-entry bookkeeping represent two fundamentally different approaches to tracking your business finances. 

Single-entry is like keeping a personal checkbook – you record money coming in or going out in a single line. While this might work for very small businesses with simple transactions, double-entry bookkeeping provides a more complete and accurate picture.

In the double-entry bookkeeping method, every transaction affects at least two accounts – for example, when you make a sale, you record both the increase in your bank account and the corresponding revenue.

Details matter. For sales, you’ll want to capture not just the amount, but also key details like the customer, payment method, and any sales tax collected. 

When recording expenses, include the vendor, payment method, and expense category. Your accounting software can help automate much of this process, and you may even be able to use integrations to speed things up. For example, linking your point-of-sale system directly to your bookkeeping software can automatically record sales and categorize them appropriately.

Here’s a practical example: When a customer pays their $1,000 invoice, in double-entry bookkeeping you’d record a debit to your bank account (increasing your assets) and a credit to accounts receivable (reducing what customers owe you). This two-sided entry helps prevent errors and provides a clearer audit trail.

Now this may sound confusing, but if you’re using accounting software, much of this process is automated. 

For example, if you’re using Quickbooks, when a customer pays an outstanding invoice, you can click “receive payment” and then record how the customer paid (ACH or check, for example), and which account the money was deposited into. 

When possible, attach receipts to your transactions. 

After you enter transactions you will be prompted to “reconcile” accounts, which is basically a process of making sure everything is accurately entered. 

Bank reconciliation might seem tedious, but it helps you catch mistakes, errors and even fraud. 

Look for discrepancies like missing deposits, unauthorized charges, or bank fees you haven’t recorded. Many business owners find it helpful to reconcile accounts more frequently – even weekly – to catch issues while they’re fresh and easier to resolve.

Some accounting tools will allow you to link your bank or credit card account to your accounting software to periodically import transactions. Review those transactions to make sure everything is accurate. 

Bayles says a common mistake is “treating accounting software systems such as QuickBooks or Wave Accounting as ‘set it and forget it’.” She reminds business owners that they need to “complete the bookkeeping/accounting work necessary to ensure accuracy in financial data.” 

How Bookkeeping Can Help You Stay Tax-Ready

As a small business owner, you’ll need to track tax deadlines throughout the year, not just April 15th.

Self-employed individuals typically need to make estimated tax payments every quarter – due April 15, June 15, September 15, and January 15. And if you have employees, you’ll need to manage payroll tax deposits and filings quarterly. (A payroll service can make this easy.) 

Missing deadlines can result in penalties, even if you’re profitable and can pay the tax. Sales tax collection and payment schedules can also vary by state and locality, so check your local requirements.

When to Outsource Bookkeeping

If you’re consistently behind on recording transactions, spending late nights or weekends catching up on paperwork, or feeling overwhelmed, these are red flags. 

Watch for growing complexity in your business—adding employees, expanding to new states, or dealing with inventory often means you’ll need professional support. When basic bookkeeping tasks start taking you away from revenue-generating activities, it’s time to evaluate outsourcing.

When the balance sheet doesn’t balance, and you don’t know why, it’s probably time to get help, Walters suggests. 

A bookkeeper or tax professional can take this task off your plate, and give you insights that can help you make better decisions. 

Choose carefully. Before hiring anyone, verify their credentials and ask for references from businesses similar to yours. A good bookkeeper should be able to explain their processes clearly and demonstrate how they’ll add value to your business. If they don’t already work with your CPA, they should be willing to do that. 

“You get what you pay for,” warns Osaigbovo. “Like with many things, if you get a cheap bookkeeper (online), then you will get cheap quality. Get a bookkeeper who has an accounting degree and credentials, who can help you work with banks and government entities directly for funding and compliance,” he recommends. 

A qualified tax professional such as a CPA, EA, or tax attorney can help structure your business for optimal tax treatment and identify deductions you might miss on your own. They can also help you understand how different business decisions affect your tax situation. For example, the timing of major equipment purchases can significantly impact your tax bill, and a CPA can help you plan these decisions strategically.

But even if you decide to outsource your bookkeeping, don’t check out completely on your business finances. Keep close track of your spending and provide your bookkeeper with the information they need, including well-organized receipts and records.

The better organized your records are, the less time your bookkeeper will spend organizing your data, which can also save you money. 

Remember that tax planning should happen year-round, not just during tax season. Regular meetings with your accounting professional can help you adjust your strategy based on changing business conditions or new tax laws. 

For instance, if you’re having a particularly profitable year, your tax advisor might suggest accelerating some expenses into the current tax year or making additional retirement contributions to manage your tax liability.

Cost vs. benefit of hiring a bookkeeper or CPA.

The cost-benefit analysis of hiring bookkeeping help isn’t just about hourly rates. 

Consider the real cost of your time. If you bill clients $150 per hour but spend 10 hours monthly on bookkeeping tasks you could outsource for $50 per hour, you’re essentially losing $1,000 in potential revenue. 

Professional bookkeeping services can often complete tasks more efficiently and accurately than business owners, reducing costly errors and missed opportunities. They may also help identify cost-saving opportunities. You may even decide as your business grows to bring your bookkeeping in-house with a full-time employee. 

Common Bookkeeping Mistakes to Avoid

Mixing personal and business finances is more than just a bookkeeping headache – it’s a serious liability risk that can undermine your business’s legal protections. 

Even small lapses, like using your business card for personal groceries or paying business expenses from your personal account make it hard to get an accurate picture of your company’s financial situation. Set up separate accounts from day one (or now, if you haven’t already done so), and make it a goal to stick to using the right account for the right purpose. 

Poor cash flow management has sunk countless profitable businesses. A classic mistake is confusing profit with cash flow. You may be profitable on paper but still run out of cash if you’re not tracking the timing of payments and expenses. 

Many business owners also underestimate their tax obligations, leading to crisis mode when tax payments come due. Create a cash flow forecast that looks at least six months ahead, and set aside money for taxes with every sale rather than scrambling at deadline time.

Walters says the most common bookkeeping mistakes she sees when clients do their own bookkeeping are:

1. Lack understanding of accounting 
2. Misclassify expenses
3. Neglect or forget to post transactions

Osaigbovo sees these common mistakes: 

1. Getting all of the bank and credit card statements 
2. Lack of communication about transactions which may be business or personal 
3. Amount of follow-up needed with busy business owners

In addition to her warning earlier that accounting software isn’t “set it and forget it”, Bayles said these issues are common:

1. Solely relying upon a manual record keeping process (such as a spreadsheet and file folder of receipts) and/or not having an efficient technology-enabled accounting system. 
2. Not completing the bookkeeping/accounting work necessary to ensure accuracy in financial data.
3. Not consulting with a tax and accounting advisory professional to explain your financial data to you. Relying too heavily on “internet experts” and self-preparation.

Other common bookkeeping mistakes: 

• Inadequate backup systems for financial records
• Poor documentation of cash transactions
• Failing to track reimbursable expenses
• Not keeping receipts 
• Running personal expenses through the business 

Remember that most bookkeeping mistakes compound over time.  Small errors can grow into major problems if you don’t catch and correct them quickly. Set up regular review periods to catch issues early, and don’t hesitate to ask for professional help if you find yourself making these common mistakes repeatedly. 

The cost of fixing problems almost always costs more than preventing them in the first place.

Final Tips: Keeping Your Business Finances on Track

If you’re serious about making your business successful, you’ll need to create a system for bookkeeping and managing your financing. 

Make it part of your routine to enter (or at least review) transactions, analyze your cash position, and plan for upcoming expenses. 

The most successful business owners treat financial management as a core business function, not an afterthought they’ll get to when they have time.

Review your key financial metrics monthly, including your cash position, accounts receivable aging, profit margins, cost of goods sold, and upcoming expenses. This financial information helps you make smarter decisions about everything from pricing to hiring to expansion plans. 

Pay special attention to your cash conversion cycle – how quickly you can turn inventory and receivables into cash – as this directly impacts healthy cash flow.

Nav understands the unique challenges small businesses face in managing their finances and building business credit. 

A financial health platform designed specifically for small business owners, Nav provides tools to help you track both your personal and business credit, understand your financing options, and make informed decisions about your business’s financial future. 

With Nav Prime, you can build your business credit history while maintaining clear visibility into your overall financial health. Nav Cash Flow Health gives you real-time insights into your cash flow. Get started now.