8 Steps to Setting up an Accounting System
Open a Business Bank Account
Never mix your personal money with your business money; it can make tracking your expenses very difficult. A dedicated business account is the first step in setting up an accounting system for a small business. It helps you:
- Clearly separate your business money from your personal money
- Know exactly how much your business is making
- Easily track your business income and spending
- Make professional payments to vendors and staff
With a business account, your accounting app or software can automatically import your transactions, making bank reconciliation faster and more accurate.
Choose an Accounting Method
Before diving into the software, it’s important to pick your accounting method. This is the foundation of the accounting structure for a small business.
There are two main methods of accounting for small businesses;
- Cash-based accounting means you only record income when you actually receive the money and expense when you pay them. It’s simple and perfect for startups, freelancers, or side hustlers looking for simple accounting for a small business.
- Accrual accounting, on the other hand, records income when you’ve done the work or delivered the product, even if the customer hasn’t paid you yet. It also records expense as soon as you receive a bill, even if you haven't paid it yet. This method is better for businesses that manage inventory, send out invoices, or have customers who pay later.
Which should you choose?
If your business is still small or just starting out, cash-based accounting is easier to manage. But if you have suppliers, track invoices, or deal with a lot of credit sales, accrual might give you a more accurate picture of your business finances.
Choose an Accounting Software for Your Small Business
You can manage your business finances with notebooks or Excel sheets, but as your business grows, manual record-keeping becomes time-consuming and full of errors. That’s why using accounting software is very important for your business growth.
A good small business accounting software can help you track income and expenses, send invoices, and even prepare reports, all in one place. It saves you hours of work and reduces costly mistakes.But not every software is suitable for small businesses in Nigeria. When choosing the best financial software for a small business, here are some important features to look out for:
- Expense tracking: Set up a budget and know where your money is going.
- Inventory management: Monitor stock levels if you sell products.
- Sales and invoicing: Send receipts and track who has paid or not.
- Payment integration: Easily receive payments online through platforms like Paystack, Flutterwave, Stripe, PayPal, etc.
- Simple data insight and reports: Track your business growth with accurate reports, get insight into your finances, and make informed decisions.
- Affordable pricing: Make sure the accounting software you are choosing for your business fits your budget as a small business owner
- Cloud-Based Access and Data Backup: When your accounting tool is cloud-based, it means your data is stored securely online, and you can log in from your phone, tablet, or laptop, irrespective of your location.
A great example of a small business accounting software is Esemie, built for businesses that either render services or sell products. Esemie is user-friendly, affordable, and offers all the tools needed for solid small business financial management, including invoicing, expense tracking, inventory, and easy-to-read reports, all in one place.
See also Top 10 Accounting Features Every Small Business Needs for advice on how to choose the right accounting app for your business.
Connect a Payment Collection System
To run a successful business, you need a reliable way to receive payments from your customers. Regardless of whether you sell online, in person, or both, integrating your accounting software with a payment platform like Paystack, Flutterwave, Stripe, or PayPal helps you send invoices to customers with a payment link. This way, customers can pay you easily in any currency using their debit or credit cards, and bank transfers, among others. Additionally, your business will be charged a small fee per transaction, which is worth it for the convenience and trust it brings to your business.
When you connect your payment system to your accounting app, all the payment records are automatically updated in your dashboard. That means less manual entry, fewer mistakes, and more time for you to focus on running your business.
So, when choosing software for a small business, make sure it supports payment integration. It’s one of the easiest ways to stay organized and get paid on time.
Keep a Record of Your Transaction
Every payment, every expense, every bank deposit, your accounting software should track them all. One of the most important features to look for in small business financial management is its ability to match records of what is actually happening in your bank account. This is called bank reconciliation.
Bank reconciliation simply means checking to confirm that the transactions in your accounting app (like money you received or spent) match the ones on your bank statement. For example, if your records say you paid a supplier ₦50,000 last week, you want to make sure that the ₦50,000 has also left your bank account.Sometimes, there may be small differences. It could be because:
- A customer paid you, but the money hasn’t reached your bank yet
- You issued a transfer to a vendor, but they haven’t received or cashed it
- You made a mistake in entering the amount
Doing this reconciliation regularly, at least once a month, helps you catch errors early, avoid fraud, and stay informed about your real cash balance. If you have a lot of transactions, you can even do it weekly.
The best part is that when you use financial accounting software for small businesses, the data from your reconciliations flows straight into your reports. You’ll see updated figures in your profit and loss, cash flow, and expense reports, helping you make smarter decisions about your business.
No matter your business size, keeping good records gives you peace of mind and helps your business grow in the right direction.
Set up your business budget
A good budget is like a map for your business; it helps you plan where your money should go and stops you from overspending.
Budgeting helps you stay in control of your finances, especially when things are tight. Without a budget, it’s easy to spend money on things that don’t bring results to your business or run out of cash before month-end.To set up a proper budget, start by listing your regular business expenses. These may include:
- Rent for your shop or office space
- Data and airtime
- Supplies or raw materials
- Transport or delivery fees
- Staff salaries (if you have any)
Then, set income targets. Ask yourself: - How much do I want to make this month?
- How many products or services do I need to sell to reach that goal?
Doing this reconciliation regularly, at least once a month, helps you catch errors early, avoid fraud, and stay informed about your real cash balance. If you have a lot of transactions, you can even do it weekly.
The best part is that when you use financial accounting software for small businesses, the data from your reconciliations flows straight into your reports. You’ll see updated figures in your profit and loss, cash flow, and expense reports, helping you make smarter decisions about your business.
No matter your business size, keeping good records gives you peace of mind and helps your business grow in the right direction.
Customize Your Chart of Accounts
Think of the chart of accounts as a digital filing cabinet where all your business money-related activities are grouped. Each "folder" (i.e., account) represents a part of your business, like sales, rent, supplies, transport, or internet expenses.
For example:
- If you’re a fashion vendor, your chart of accounts might include “Clothing Inventory”, “Online Sales”, “Logistics”, and “Social Media Ads.”
- If you're a freelance graphic designer, your accounts might include “Design Income”, “Data Subscription”, and “Software Tools.”
If you run a side hustle selling cleaning products, you’ll want accounts like “Product Ingredients” and “Packaging.”
Many small business accounting software tools come with a default chart of accounts, but it’s important to adjust it to match your business type. This helps keep your records neat and your financial reports easy to understand.
When you use financial software for a small business, you can easily rename, remove, or add new accounts that fit your operations. That way, when you check your profit and loss, you’re seeing the real picture of your business, not irrelevant categories.
A well-organized chart of accounts is the backbone of any accounting structure for a small business. It supports accurate reporting, smarter decisions, and overall better small business financial management.
Building Key Reports
Reports help you understand what’s really happening with your business money. Instead of guessing, you can see the facts on how much you’re making, how much you’re spending, and where your money is going.
When you use financial software for a small business, these reports are generated automatically and updated in real-time. This saves you the stress of doing manual calculations at the end of every month.
These are some of the key reports you should check weekly or monthly:
Profit and Loss Report (P&L)
This report shows whether your business is making a profit or running at a loss over a certain period. You’ll see your total income, minus all expenses (like rent, data, fuel, and supplies). It helps you track growth and understand if you need to cut down spending to increase sales.
Cash Flow Report
Cash flow is about controlling how money comes in and out. This report helps you see how much actual cash is available now and when you might run out. It’s very important if your business is still small and cash is tight.
Expense Report
This shows exactly where your money is going. Are you spending too much on transport? Or are your online ads not bringing results? This report helps you cut waste and plan better.
Using a good accounting app with these built-in reports makes simple accounting for small businesses easier. You don’t have to rely on manual paper for accounting or use an Excel sheet. These tools support small business financial management and help you make smarter decisions, spot problems early, and plan for growth.
How Esemie Helps You Build the Best Accounting Software for Your Small Business
If you want to grow your business and stay on top of your finances, you need a tool that’s simple to use but powerful enough to handle your business finances. That’s exactly what Esemie is built for.
Esemie is a small business accounting software that helps you manage Inventory, create invoices, and track expenses all in one place. It also gives you easy-to-understand reports like profit and loss, cash flow, and expenses. You don’t need to be an accountant to understand if your business is growing or needs adjusting.