If you own a business or just about to start one, you may have probably realized rather quickly that there are tons of details to consider. Most small business owners do not have a background in accounting, making it overwhelming for them. However, they still have to learn its ins and outs if they want to succeed in their business.
While there is a growing to-do list, the good news is that business accounting for small companies is fairly simple. As a small company with a simple business structure, you would need to have three accounting priorities, including ensuring your revenue exceeds expenses, keeping your books clean and updated, and paying the correct taxes on time.
Accounting practices you would implement in your small business would significantly affect performance and growth. With that in mind, here is small business accounting advice you need to consider to help ensure your success and lead to better decision-making.
1. Separate Business and Personal Bank Accounts
After successfully registering your business or company, one of the first steps a small business needs to do is to set up a separate bank account for the company. After obtaining your company's Employer Identification Number (EIN), legally required to create a different bank account for business purposes.
Start by opening a business checking account and then a savings account. This would help you organize and plan your funds and taxes. Additionally, consider applying for a business credit card so you could start building business credit.
A business checking and savings account could help you manage taxes, bills and even help build wealth for future investments. It also allows you to save precious hours of work when accounting cash flow, such as deductible expenses. A dedicated business account will also help you limit your legal exposure to business debts if you have an LLC or corporation.
Always be conscious of spending decisions. Ensure that business-related costs only come from business accounts as much as possible. The same principle also applies to personal accounts and personal expenses.
2. Track Every Business Expense
A quick and straightforward small business accounting advice is to keep track of everything. Record every receipt, business expense, transaction, invoices, etc., in one place so that you could easily manage and monitor them. While it is an essential and easy primary part of bookkeeping, tracking the ins and outs of your finances through your business' bank account could quickly become comprehensive and tricky. This makes it an integral cog in your company's machine.
One of the best ways to track business transactions and keep records is through cloud accounting software. If you have extra cash to spare, utilize them to your advantage. Store and keep tabs of digital copies of all dealings and separate expenses into variable, fixed, intermittent, and discretionary. This also makes it easier for tax planning, and you would see where most of your money goes.
Pay particular attention to out-of-town business travels, home office receipts, vehicle-related expenses, and gifts. They could easily be forgotten or misplaced, and hunting down receipts when filling out a tax form could become troublesome. Divide your receipts and file them immediately so you can track expenses accurately.
3. Differentiate between Receipts and Invoices
Mixing receipts and invoices can make business accounting for small businesses a headache. When balancing your books and you cannot tell what has been completed and what is in progress, your company could suffer from confusion. Ensure that you record and identify each receipt and invoice correctly.
You give receipts to customers once you complete a business transaction with them. It serves as proof for dates and expense details for every purchase made, making it extremely helpful for future references.
Organize each receipt according to a category instead of just putting them all into a single folder. This makes things easier to accomplish, especially when tax season comes around.
Invoices provide customers with detailed bills that outline every service the customer received from your business. You send invoices to customers to remind them how much money they owe and prompt them to make payments on time. Invoices help speed up cash flow and keep financial records, making sure that you receive your pay.
Accurately recording invoices could help you monitor which client consistently completes or fails to make payments based on an agreed-upon timeframe. They also help you to stay organized. Another small business accounting advice is to never add to an existing invoice as this could cause confusion from your side, your client's side, as well as your accountant if you have one.
4. Consider Hiring a Professional Accountant or Bookkeeper
A bookkeeper, an accountant, or a financial advisor can make a big difference in your business in the long run. Even for a few hours a week or month, hiring a professional could help keep your books in order. However, such professionals would cost your business, but the upside is greater than the risk.
Bookkeepers and accountants concern themselves with recording and classifying expenditures and income, but accountants also help you file taxes and strategic business planning. Professionals will maintain orderly and updated records and give small business accounting advice regarding loopholes, potential fees, or tax deductions, giving you a financial advantage and saving you time.
Remember that when you do hire a professional, make sure that you can understand each other.
5. Keep Your Books Updated Periodically
Periodically updating your books and tracking your profit & loss (P&L) statements would give you the easiest way to track how well your business is performing. This small business accounting advice would provide a clear picture of your company's financial state.
You can see your business' progress by comparing statements from two different periods. Companies that have periodic activity and inactivity might prefer making quarterly or yearly statements. One way of tracking and ensuring your books are updated is by automating invoice and receipt capture. This saves time and labor to accomplish.
Some accounting software offers direct integration to banks, making it easier for business owners to manage and complete business accounting for small businesses. You could download credit card and bank statements and manually import them as CSV files.
Do not underestimate the importance of properly recording and updating your balance sheet, cash-flow statements, and P&L statements, as they would give you an in-depth look at your business's performance.
6. Understand and Stay On Top of Tax obligations and Deadlines
To avoid getting caught short and inviting many penalties, you need to understand and plan your tax obligations. Familiarize yourself with the type of taxes that apply to your business and the processes involved in filing them. Remember, personal income tax differs from business tax with different requirements and deadlines.
Tax obligations depend on your business's legal structure. Is it an LLC, a partnership, or are you self-employed, in which case you need to claim business income on your personal tax return? The structure could determine how and when you need to file for income tax and withhold taxes (if applicable).
Another good small business accounting advice is to consult with a professional tax return accountant. The Internal Revenue Services' (IRS) website provides a tax calendar for businesses, which you can synchronize with a cloud-based calendar. The calendar includes actions and deadlines for every month. You could even sign up for email reminders. Doing these steps would significantly cut the time you spend preparing for tax returns.
7. Monitor Accounts Receivables Closely
Accounts receivable refers to the money your business should receive from the customers you provided with goods or services. Simply, it is your business' fuel that keeps it running, and when customers do not pay on time, it can dry up fast.
Unpaid and late bills would affect your cash flow, making it hard to continue operating your small business. However, if you take longer to send out invoices, the more time it would also take payments to come in.
Develop a solid process for following up on accounts receivables. Pay attention to the deadlines of your receivables and contact customers falling behind on payments. Conduct a monthly review of the percentage and total amount of outstanding revenue. Ensure that you document everything for when you need to follow up on payments through the court or a collection agency.
8. Automate Accounting Processes Whenever You Can
One of the best small business accounting advice you should consider is to use cloud-based accounting software. Automate whatever process you can to help you get organized properly. You can synchronize your software with your business bank account to have up-to-date and accurate records. Additionally, using a cloud-based tool would create a safe off-site backup of your financial data.
Automation could even help you track income, expenses, and taxes, allow sending and paying invoices, and generate reports, saving you countless hours of manual labor. It makes it a lot easier and faster for you to manage your business accounting for small businesses.
9. Determine Total Labor Costs Before Hiring
If you do hire employees, expect that you would need to pay more than just their wages. You need to calculate and come up with the funds for their monthly benefit and income tax payments. Setting a budget for these expenses would give you an idea of how many people you should hire.
When eagerly expanding your team without considering labor costs, you might realize that they add up fast, especially for small businesses. This could turn into a problem, and you would find yourself behind on payments. Some owners cut compensation to accommodate new hires. Avoid this practice as it makes employees feel cheated and unappreciated.
10. Perform Quarterly Reviews
Take a deep and thorough look at your bookkeeping and accounting records at the end of each quarter. Keep an eye on trends in your business accounting for a small business, including growing and falling sales, year on year revenue, and the number of on-time and late-paying customers. Taking your time to perform this step would help you better prepare for future budgeting needs and other financial preparations.
Quarterly reviews could tell if you are ready to expand, buy new equipment, or relocate to a bigger space. Hiring a financial professional is also an excellent step to do as they could help in whatever your small business needs.
11. Establish a Payroll System
As your business grows from a one-man-army to a team, you need to determine and set a payroll system that would cater to all existing and future employees. Establish a payroll schedule and make sure you withhold and report correct tax returns.
A small business accounting advice is to set up a system with the help of an accountant, and you could use online payroll and paystub software to make your work easier and faster. Automating your payroll system would make the process much simpler and the review more precise.
12. Update and Upgrade Business Plans
Review over a previous year and look for areas where you can upgrade business and marketing plans. Update financial goals and make preparations for the following year. Have you hit your financial goals for the current year? If so, set new ones to fulfill. This would ensure that your business grows over time. This may be apparent small business accounting advice, but it is something that you should not take lightly.
Remember that one key to success is always planning for your company's future, looking ahead, and preparing for any eventuality.
13. Plan for Major Financial Expenses and Investments
Projecting financial obligations and creating a budget for major expenses and investments help businesses estimate future income, possible financing, or capital expenditures. Account for expenses such as office supplies, repairs and maintenance, and inventory so your business functions efficiently and continuously. You could also review monthly sales and set aside a budget to pay for taxes. Proper planning would help you avoid a backlog in your books and even penalties.
Forecasting financial projections would aid owners in estimating cash flow and whether or not to upgrade or change business plans. It provides essential information to lenders, investors, or other external business stakeholders.
Business accounting for small businesses may not be the greatest part of owning and operating a small business. However, this part of the job as the owner is one of the most essential items on your to-do list. Each small business accounting advice listed above would help your company grow and perform better when executed properly.
Never underestimate accounting details as mistakes in your books could become troublesome, and could even cause penalties. If you are overwhelmed and in need of help, you could always hire an accountant or bookkeeper.