Managing money may not be the most exciting part of running a business, but it is probably the most important. Over half of small businesses fail within five years, and the leading cause (82%) is cash flow mismanagement.
To stay on top of these statistics, you need proper financial planning and oversight. A good starting point is understanding the difference between bookkeeping and accounting and the value of both.
What is Bookkeeping?
Bookkeeping is the process of keeping accurate financial records by tracking transactions to see the funds coming in and out of your business. It is the foundation of money management, providing the data you need to build bigger-picture accounting processes and analyze your operations. For example, you can’t budget for future outlays or produce financial reports for investors without a detailed bookkeeping process that captures your business transactions.
This data includes tracking:
- Income: All revenue streams, including sales and income from other sources
- Expenses: Business-related expenditures such as rent, utilities, payroll, and others
- Invoices: A document issued by businesses detailing products and services provided as well as payment terms.
- Receipts: A document provided after payment confirming the funds were received.
- Bank Transactions: A list of all the transactions in and out of your business account. Reconciling these transactions with their associated invoices and receipts is a fundamental part of bookkeeping.
- Assets and Liabilities: Track the value of your company’s assets and its outstanding debts
Recording these allows you to manage cash flow, monitor business health, plan for future growth, and prepare for tax season.
Traditional and Automated Bookkeeping
The traditional approach to bookkeeping involves manually recording transactions using pen and paper or simple spreadsheets. While it can be effective, particularly for small business bookkeeping, it is less efficient and more prone to errors than the modern alternative – automation.
Taking advantage of technology streamlines the entire process. With automated bookkeeping, software handles many of the repetitive and time-consuming tasks that must be done to maintain accurate financial records. This includes:
- Tracking transactions in real-time through syncing directly with bank accounts
- Automatically categorizing expenses and income
- Managing and storing invoices and receipts
Automated bookkeeping use is not restricted to large operations, and several cost-effective small business tools can do the job. Plus, you can combine automated bookkeeping solutions into wider operations by identifying the best small business management software with compatible integrations such as CRMs or payroll platforms. For example, automatically generating an invoice once a sale is recorded using your CRM.
What is Accounting?
Accounting interprets and analyzes financial information, building upon bookkeeping data to produce reports, tax filings, and strategic insights. Accounting is a more involved and complicated process than bookkeeping. It helps you understand your financial performance and position to make business decisions.
Types of Accounting
Accounting is divided into several key types, each serving a distinct purpose:
- Financial Accounting: Recording and summarizing transactions over a certain period of time. Financial accounting is typically summarized using statements such as a balance sheet, income statement, or cash flow statement.
- Managerial Accounting: This follows the same principles as financial accounting but breaks down finances into specific segments. This could be by department, region, product line, customer type, or something else. The goal is to provide context for financial activity at the company.
- Tax Accounting: Analysing and organizing finances per the tax rules you must follow. Depending on your location and operations, these may not align with other accounting standards. In this case, businesses generally separate financial statements, generating one for tax purposes and one for financial accounting.
Outsourcing vs. In-House Accounting
Accounting is more complex than bookkeeping. While learning bookkeeping processes and implementing automated solutions is more manageable, accounting requires greater knowledge. Generally, you should utilize a qualified accountant either through outsourcing or hiring a dedicated in-house member of staff.
Outsourcing is more affordable as you only pay for what you need. Plus, you can adjust the level of service as you grow and your accounts become more complex. Small businesses and startups often hire freelance accountants for specific purposes, for example, during tax season or if you need financial reports to attract investors. However, this does mean sharing sensitive financial information with a third party.
Hiring an in-house accountant is more expensive as you have to pay a full-time salary and benefits. However, it provides a greater level of control and oversight of your financial processes. In-house accountants can be found through a number of channels including professional networks and recruitment agencies.
Choosing between outsourcing and in-house accounting depends on several factors, including the size of your business, the complexity of your operations, and the budget available. Rough estimates for outsourcing your accounting needs range from $500 to $5,000.
Do I need both a bookkeeper and an accountant?
While bookkeepers handle the day-to-day management of financial records—such as tracking expenses, managing payroll, and organizing receipts—accountants provide higher-level financial analysis, tax preparation, and long-term strategic advice.
Like many modern business operations, having the right tools on your side can make all the difference. As a Startup, you oftenly work under strict financial constraints and have only a small workforce tackling a constantly expanding to-do list. Therefore, there is a need to consider tools and software that can deliver an immediate impact and ROI. With tools like Receiptor AI, which automates many of these tasks by integrating bookkeeping and accounting functions, startups can streamline their financial processes and delay the need to hire dedicated staff. This allows businesses to save time and resources while ensuring their financial operations are organized and efficient.
The best small business management software for finances integrates bookkeeping and accounting functions, allowing you to manage everything from payroll to tax filings in one place.
To find a practical accounting and bookkeeping service for startups and small businesses, you need to consider cost-effective solutions that will have the most significant impact in terms of streamlining financial workloads.
Receiptor AI
Receiptor AI is on a mission to make bookkeeping and pre-accounting as easy as possible for SMEs. Powered by AI, our platform finds and extracts receipts, bills, and invoices directly from your inbox in real time. Categorizing them into accountant-ready reports for forwarding to popular accounting solutions. It’s like having a bookkeeper working 24 hours a day, always organizing your finances, never missing a receipt.
Sign up today and demo Receiptor AI for free.
