Before we dive into the meat of how a bookkeeping system is set up, let’s establish an understanding of what bookkeeping is, what it isn’t and what makes a good bookkeeper.
Small business functions around the framework of good bookkeeping practices which include keeping accurate and complete financial records on a daily basis. This is what good bookkeeping does. It’s the practice of collating, interpreting and maintaining financial records for a business.
Sometimes bookkeeping is mistaken as accounting. While both are closely connected there are differences. As stated above, bookkeeping involves the systematic recording of daily financial transactions. Accounting, on the other hand, encompasses a broader scope, including analysing, interpreting, and the summarising of financial data and offering insights for decision-making on the business’ financial position.
A good bookkeeper for small business in Australia is someone who is detail-oriented, has a knowledge of Australian tax laws, is proficient with accounting software and ensures accurate, timely financial records and compliance.
Setting Up Your Bookkeeping System
Here are are 9 steps to setting up your bookkeeping system.
Cash or Accrual Bookkeeping Systems
When deciding the best way to set up your bookkeeping system there are two main types of bookkeeping systems:
- Cash – This systemrecords income and expenses only when cash is received or paid out. It is straightforward, making it suitable for small businesses or sole traders.
- Accrual – This system records transactions when they are earned or incurred, regardless of when cash is exchanged. This method provides a more accurate financial picture by matching revenue with the expenses incurred to generate that revenue. It is commonly used by larger businesses.
Choosing the right accounting software for your business
Another bookkeeping task is deciding what accounting software is best for your business. Bookkeeping software, in this day and age, is a must for any small business. It is designed to record, track and process everyday business transactions, integrating them within one dynamic system. This included tasks such as billing, payroll, accounts payable, GST filing and general financial management reporting. It ensures efficiency and accuracy.
Choosing which bookkeeping software to use is often a personal choice. It will also depend on the size of your business. Our pick for the top 3 bookkeeping software options in Australia are:
- Xero
- MYOB Account Right Live
- QuickBooks Online
For a more comprehensive overview of each of these please visit our wrap up of each one here.
Establishing a chart of accounts and financial categories
Every business needs a chart of accounts. A chart of accounts is an index of all financial transactions in a company’s general ledger. It separates and categorises expenditures, revenue, assets and liabilities. The chart of accounts is safely embedded within any good bookkeeping software system.
Setting up a dedicated business bank account
Separating business expenses and personal expenses are key to running a successful business. So, when setting up your bookkeeping system ensure you have set up a dedicated business bank account. You will need to gather required documents to do this – ABN and business registration details. Select an account type, ensure easy online access and keep personal finances separate.
Implementing a system for tracking invoices and payments
Tracking invoices and payments includes choosing reliable invoicing software, creating standardised invoice templates, setting clear payment terms, tracking due dates, and regularly updating records. and reconciling payments with bank statements.
Creating a monthly reconciliation process
In addition to the above, it is critical to create a monthly reconciliation process. Regularly reviewing and keeping your bank reconciliations up to date will ensure your business transactions are accurately recorded and there are no missing or duplicate transactions.
Hiring a Bookkeeper or Managing Bookkeeping In-House
There are some compelling reasons why ‘doing-it-yourself’ bookkeeping is not always the best option. Outsourcing a bookkeeper has huge benefits for a small business. Here are some:
- Accurate and up-to-date information
- Understanding of ATO compliance, rules and regulations
- Training in software
- Financial management and decision-making skills
- Peace of mind
- Freeing up your time to concentrate on building your business
Factors to consider when deciding whether to outsource bookkeeping
Several things to consider when outsourcing bookkeeping.
- Cost effectiveness
- Qualifications of the bookkeeper
- Knowledge of Australian tax law
- Data security
- Communication reliability
- Ability to meet compliance deadlines
Most importantly, when working with your bookkeeper, is the need for good communication. As you work together, creating a good synergy through providing timely financial data, setting clear expectations and using compatible software are good tips for working effectively together.
Ensuring Compliance and Managing Taxes
There are some things to keep in mind in terms of compliance and managing taxes. Firstly, it’s important to understand a small business must manage GST, PAYG withholding, income tax, superannuation contributions, lodge BAS and annual tax returns.
Documenting and tracking deductible expenses with receipts, categorising them, using accounting software, maintaining organised records and reviewing with a tax professional are also things to address when setting up your bookkeeping system.
Critical to meeting compliance and tax demands is maintaining up-to-date records, using bookkeeping software, tracking deductible expenses, reconciling accounts regularly and consulting tax professionals.
Optimising Bookkeeping for Growth and Financial Planning
While good bookkeeping is the financial framework of every small business, bookkeeping data can also help to optimise growth and planning. It can measure key metrics such as revenue growth, profit margins, cash flow, customer acquisition costs, return on investments (ROI), debt to equity ratio and ultimately measure how effectively a business is achieving its objectives.
If you are looking to leverage your bookkeeping to make informed business decisions, then there are a few strategies you can implement.
- Analyse cash flow
- Monitor expenses
- Identify profit trends
- Optimise budgeting
- Assess financial health
Conclusion
Just to recap, here are the 9 essential steps in setting up and managing a bookkeeping system:
- Decide if you want a cash or accrual system
- Choose accounting software
- Create a Chart of Accounts
- Establish a business bank account
- Implement a system to track invoices and payments
- Create a monthly reconciliation process
- Managing bookkeeping – in-house or outsource
- Consider compliance and taxation requirements
- Optimise bookkeeping for growth and financial planning
If you need help to set up your bookkeeping system, or if you just want to fill in some missing pieces, contact us at Numble for an obligation-free consultation.
