Few procedures are as essential to running a small business as accounting. Not only does accounting give you a clear financial picture of your business’s health, but it also provides the data you need to make informed strategic decisions. Most of all, good accounting practices help you avoid any legal trouble with the IRS. In this blog post, we’ll give you six tips for small business accounting to help you get started on the right foot.
Why Is Small Business Accounting Important?
Nobody starts a business with the intention of failing, but 20% of businesses fail within the first year and over 65% of businesses will fail before their tenth year. The number one reason that businesses fail is because of cash-flow-related issues. This is where accounting comes in.
Without proper accounting infrastructure, even profitable businesses can fail due to a lack of working capital. This is because they don’t have a clear idea of their inflows and outflows, as well as their overall profitability. On the other hand, businesses with strong accounting practices are more likely to weather tough economic times and come out stronger on the other side, and can make more informed decisions about where to allocate their resources.
3 Tips to Improve Your Small Business Accounting Today
When it comes to managing your finances, there are plenty of things that you can improve over the years. However, you may be wondering what you can do to improve your accounting today. Here are three tips:
1. Invest In Small Business Accounting Software
The pen-and-paper method of accounting is no longer feasible in today’s business world. This is because businesses are simply too complex and there’s too much data to keep track of. Investing in small business accounting software will save you time and money in the long run. Not only will it automate many of the tedious tasks associated with accounting, but it will also provide you with real-time insights into your business’s financial health.
There are many different accounting software programs on the market, so be sure to do your research and find one that’s a good fit for your business. QuickBooks and Xero are two of the most popular accounting software programs for small businesses. When choosing accounting software, there are a few things to consider:
- Ease of use: The software should be easy for you and your employees to use. Most accounting solutions are straightforward, but you may need to try a few products before you find the right one.
- Affordability: The software should fit within your budget. In many cases, you can get a discount by paying for the software upfront.
- Compatibility: The software should be compatible with your other business systems. For example, if you run an ecommerce business, you’ll want to make sure that the software can integrate with your shopping cart software.
- Features: The software should have all of the features that you need. For example, if you’re required to file taxes in multiple states, you’ll want to make sure that the software can handle taxes effectively in multiple states.
- Support: The software company should offer good customer support in case you run into any problems. Look for 24/7 online chat, email, and phone support.
- Security: The software should have robust security features to protect your data. This is especially important for bookkeeping software, since it will store sensitive information like credit card numbers.
2. Implement Internal Controls
Internal controls are procedures that are put in place to prevent and detect errors in your accounting system. There are many different types of internal controls, but some common examples include separation of duties, reconciliations, and approvals.
Implementing internal controls will help you catch errors before they become a problem and ensure that your financial statements are accurate.
There are numerous controls you could implement, but it’s important to tailor them to the specific needs of your business. You should also periodically review your controls to make sure that they’re still effective. If you’re not sure where to start, here are a few ideas:
- Separation of duties: This internal control ensures that no one person has complete control over all aspects of the accounting process. For example, the person who enters invoices into the system should not be the same person who approves them.
- Reconciliations: This internal control compares two sets of data to make sure that they match. For example, you would reconcile your bank statements with your internal records to make sure that there are no discrepancies.
- Approvals: This internal control requires that certain transactions be approved by more than one person. For example, you might require that all invoices over $500 be approved by the manager before they’re entered into the system.
Some businesses choose to outsource their accounting to a professional firm. This can be a good solution if you don’t have the internal resources to manage your finances. Outsourcing your accounting will give you peace of mind knowing, and free up time for you to focus on running your business.
3. Maintain Accurate Records
It’s important to maintain accurate financial records for your small business. This includes keeping track of your income, expenses, and assets. One way to ensure accuracy is to use double-entry bookkeeping. This method involves recording each transaction in two places. For example, if you receive a payment from a customer, you would record the payment in both the accounts receivable and cash accounts.
Double-entry bookkeeping provides a checks and balances system that can help prevent errors. It can also make it easier to spot errors if they do occur. Accounting software is also an incredibly useful tool in maintaining accurate records. The software can help you track your income and expenses, as well as generate financial statements.
3 Long-Term Strategies for Your Small Business Accounting
By following the tips above, you can set up a strong accounting foundation for your small business. However, it’s also important to think about long-term strategies for your business. Here are three long-term strategies to consider:
1. Hire a Professional Accountant or Bookkeeper
As your business grows, you might need to hire a professional accountant or bookkeeper to help manage your finances. This is especially true if you start to experience cash flow problems or need assistance with tax preparation. Outsourcing your accounting can be a great solution because it gives you access to expert advice and frees up time for you to focus on other aspects of your business.
When choosing a professional accountant or bookkeeper, be sure to look for someone who is knowledgeable about the specific needs of small businesses. It’s also important to find someone you can trust and who you feel comfortable working with. Once you find the right fit, they can be an invaluable resource for your business.
2. Bring a CFO Into Your Business
A Chief Financial Officer (CFO) is responsible for the financial health of a company. They create and oversee the financial strategy for the business. They also manage the day-to-day finances of the company. Having a CFO in your business can be a huge help because they can take on some of the financial responsibilities that you might not have time for. They can also offer valuable insights and advice when it comes to making financial decisions for your business.
If you’re not ready to hire a full-time CFO, you can also consider working with a fractional CFO. This can be a great solution if you need help with scaling your small business but don’t have the budget for a full-time financial executive.
3. Separate Your Personal and Business Expenses
Regardless of the kind of business you run, it’s important to keep your personal and business finances separate. This can help you stay organized and make it easier to track your expenses. For some business owners, this is easier than for others. For example, a single-member LLC will be taxed as a sole proprietor, which means that the business income and expenses will be reported on the owner’s personal tax return.
In this case, it’s still important to keep track of your business expenses so you can deduct them come tax time. If you registered your business as a C-corp or S-corp, you’ll be taxed as a separate entity. This means that your business will have its own tax return and that you will need to file personal and business tax returns separately.
One way to do this is to open a separate bank account and credit card for your business. Without a business bank account, it can be difficult to track your business expenses and income. This can lead to problems come tax time.
Now that you know some tips and strategies for small business accounting, it’s time to put them into action. Start by setting up a system for tracking your income and expenses. Then, consider hiring a professional accountant or bookkeeper to help you manage your finances. Once this is taken care of, make sure to separate your personal and business expenses consistently. By following these tips, you’ll be on your way to keeping your small business finances in order.