Did you know that cash flow is the number one reasonbusinesses fail? It accounts for a whopping 82% of business failures, and hence, should not be taken for granted. If you want to start a small business or are already running one and have no idea how to handle the accounting side of things, you’re not alone.
Many people don’t know about all the small business accounting tips that exist for handling their finances. They don’t understand the different types of taxes they need to pay, what kinds of accountants can help them, or how much it costs.
The good news is that there are plenty of effective small business accounting tips out there. In this article, we’ll share 13 strategies that will make managing your money easier.
1. Keep Your Business and Personal Expenses Separate
Business expenses are just that — business expenses. You shouldn’t be mixing them with your personal expenses, especially if you’re self-employed and file as a sole proprietor or single-member LLC. Make sure everything you use for business is accounted for so it doesn’t get mixed up in the household budgeting process instead.
An excellent way to do this is by keeping separate credit cards or even getting one dedicated for all business transactions only. This makes doing taxes much easier, too, because there’ll be no grey area regarding where the money came from for each transaction either. Basically, you can’t deduct your personal expenses on your business tax returns.
If you mix them up, separating them during tax time will be next to impossible, especially if you don’t keep track of all the expenses. When we say this, we mean ALL of your expenses. If you need help setting up different accounts like this, an accountant can guide you through the steps.
2. Track All Your Business Expenses
Business expenses can come from so many different places, and the more you spend, the harder it’ll be to remember how much you spent on what. It’s imperative to keep track of all these transactions, or else you’ll have a hard time trying to figure out what is tax-deductible and what’s not. It could be anything from office supplies to mileage driven for work and promotional items that you give away at events.
An easy way to do this is with an Excel spreadsheet that includes columns for dates, descriptions of transactions (make sure they’re specific!), and cost/amount spent. Include who paid for what if someone else is helping you operate the business.
This way, everything has its own place, and nothing gets lost along the way. If you’re not great at bookkeeping or tracking expenses, there are plenty of software programs and even apps that can help make this process easier. Find one that best suits your needs and go from there.
3. Keep All Your Business Receipts
We suggest keeping every single receipt from every transaction, no matter how small. This will make doing taxes much easier come tax season since all of the information will be available. In addition to the actual receipts, you should also keep track of your mileage for business purposes as well.
This can be tracked in a variety of ways, including writing down miles driven on a daily basis and then adding them up at the end of each quarter. If you don’t feel like tracking this manually either, there are apps out there that will do it for you, such as MileIQ or TripLog.
4. Record Your Income Accurately
Similar to tracking your expenses, it’s essential that you keep track of your income accurately as well. This means recording sales and payments received in a timely manner and keeping good records of this information. It means tracking how much money comes in on a monthly/quarterly basis and what kind of payments this consists of (cash, check, online transactions, etc.).
You may also want to consider breaking down each type of payment into its own subtotal, so it’s easier to see at a glance where most of your revenue is coming from. Not only is this helpful for filing out taxes each year, but it can also be used if you ever need to get a loan or line of credit from a bank in the future. Most lenders will want to take a look at your financial history, so having accurate documents related to income/sales will give them a complete overview.
5. Choose an Ideal Accounting Method
There are a few different types of accounting for small businesses, and each one has its own set of pros and cons. The two most popular ones are on a cash basis and an accrual basis. “Cash basis” is when you only record income and expenses when the actual physical cash changes hands.
For example, if you sell a product to a customer but they don’t pay for it until later on, this sale won’t count in your books until the money actually comes in. This can be helpful for businesses that have a lot of irregular or seasonal sales.
It gives them more flexibility when transactions are recorded. However, it can also make things more difficult to track overall progress or performance over time.
Accrual basis accounting is when you record income/expenses as soon as an agreement or transaction takes place. Regardless of whether or not you get money. This method can make it easier to track the overall performance of your business.
However, this means that businesses may have a harder time dealing with irregular or seasonal sales. You see, everything gets counted immediately, even if no money comes in.
6. Keep Your Books Up to Date
One of the most important aspects of bookkeeping is making sure your books are always up to date. This means recording new transactions as they happen and updating any outdated information. This helps you stay organized and makes preparing financial statements (or taxes) much easier in the long run.
Plus, it gives you a more accurate overview of how your business is doing overall, which can be helpful when making future decisions. Luckily, keeping your books updated doesn’t have to be difficult or time-consuming. There are plenty of great apps and software programs out there that can automate most of the process for you.
7. Hire a Professional Accountant
If you’re feeling overwhelmed, hiring a professional accountant or accounting services may be a good idea. This is especially helpful if your business is growing and you start to feel like you can’t keep up with everything on your own. Accountants can help take care of all your financial needs, so you can focus on what matters most: running your business.
There are many different types of accountants out there, so it’s important to do your research and find one that fits your specific needs. You may want to consider looking for a Certified Public Accountant or an accountant specializing in small business accounting.
If you’re running a startup, consider hiring an accountant or bookkeeper who works with startups.
8. Optimize AP Terms and Invoicing
One way to help improve your company’s cash flow is to optimize your accounts payable (AP) terms and invoicing. This means making sure that you’re getting paid as quickly as possible for the products or services you’re providing. You can do this by setting a specific due date for payments, sending out invoices promptly, and/or offering discounts for early payments.
It’s also important to keep in mind that not all customers are equal. Some may be more likely to pay on time than others, so offering different payment terms to different clients may make sense.
One of the best small business accounting tips is to follow up on invoices and receivables. This means staying on top of who’s paid you, who hasn’t, and when they’re supposed to.
It can be a time-consuming process, but it’s definitely worth it in the long run. It’ll help ensure you’re getting paid what you’re owed as quickly as possible.
Create an automated system where unpaid invoices are automatically sent follow-up emails after a certain number of days have passed without payment. You may worry that the constant reminders might turn off some of your customers/clients. In this case, try offering a discount or incentive to those who pay within a certain timeframe.
9. Generate Financial Projections
One of the top small business accounting tips involves creating financial projections for your business. This means making the best guess as to how much money your company will make and spend over the next year or so. This can give you an idea of where things stand financially now and help clarify any future decisions.
There’s no single formula for creating these projections since every business is unique. It depends on what kind of products or services you’re providing and other factors, such as average spending per customer or client.
That said, the basic premise involves looking at past income statements from the previous year and adding or subtracting some percentage to that number based on your expectations for the future.
10. Keep Tabs on Labor Costs
One of the biggest expenses for most businesses is labor costs. It’s important to keep an eye on these numbers and make sure they’re in line with your budget.
This means tracking employee hours and overtime as well as salaries, commissions, and bonuses. You may also want to consider setting a cap on how much you’re willing to spend on labor each month or quarter.
It’ll help prevent any surprises down the road if business starts to slow down. It’ll also help with budgeting and forecasting, since knowing that information can be very helpful when making decisions. You’ll know whether to hire more employees or invest in new technology/equipment down the line.
11. Maintain Inventory Records
Did you know that employee theft and workplace crime cost businesses a staggering $50 billion annually?
It’s critical to maintain inventory records. It’s not only helpful for keeping track of what you have on hand but can be useful if/when the Tax Man comes calling.
This means tracking how much stock/supplies are coming in as well as going out. You should try to keep your asset register up-to-date any time you get new equipment or something significant.
It doesn’t matter whether it takes the form of a spreadsheet, inventory management software, or even a handwritten list. As long as you have some kind of system in place for tracking your inventory, it’ll be helpful down the line.
12. Maintain a Budget
One of the best bookkeeping tips for your small business involves maintaining a budget. Without one, there’s no way to know whether you’re turning a profit, breaking even, or going over budget. This means knowing how much money comes in and goes out each month.
It’ll give you some kind of idea of what future expenses might look like down the line. It’s worth noting, though, that having a budget doesn’t mean you have to stick exactly to it. Still, be sure that if something unexpected comes up, you can cover the cost without negatively impacting your business.
13. Separate Accounting Functions
One of the most useful small business accounting tips involves separating your accounting functions into different categories. This can make it easier to track expenses, revenues, and assets. It’ll also help you stay organized (not to mention making things a lot less confusing when tax time comes around).
You’ll want to have at least the following categories: income, expenses, assets, liabilities, and equity. You might also want to consider adding a category for each major type of revenue or expense. For example, advertising, marketing, and payroll, as well as one-time events such as the purchase of equipment.
The Best Small Business Accounting Tips: A Guide
Running a business is no easy feat, especially when it comes to managing finances. For this reason, you can benefit immensely from these small business accounting tips. There is so much information, from creating a budget to hiring a professional accounting service.
Implementing this information will help you grow your business exponentially. If you found this post valuable, please check our blog for more informative guides.