No matter what your trade is, you should develop an understanding of the basics of accounting and bookkeeping. These are critical business skills that every business owner should know. Here are 9 useful small business accounting tips that owners should keep in mind.
Key Takeaways:
- Keep records and receipts organized.
- Set up accounting systems by opening a business bank account, choosing an accounting method, and outsourcing accounting tasks as needed.
- Create and analyze your financial statements to get insights into your business’s health.
Purchase Bookkeeping Software
If you’re looking for accounting and bookkeeping software, you’re spoiled for choice. Some options are quite expensive, yet reputable, whereas others are cheaper but not well known.
The benefits of having reliable bookkeeping software include greater accuracy, the ability to scale, and streamlined tax compliance. It’s worth investing in accounting software immediately. Using a digital app, be it QuickBooks, Zoho Books, or Freshbooks, will make the entire process easier.
Separate Personal and Business Accounts
You’ll get more clarity and organization to help accurately track expenses and manage where your money is going simply by separating personal and business accounts.
Don’t Procrastinate with Tax Deadlines
Tax deadlines are stressful. Stay true to the deadlines by keeping a running note of when fees are due. Whether you’re an S-Corp or LLC, you should create several reminders, written on paper and on your computer if needed, that give you enough time to make corrections to your taxes should the need arise.
Understand The Basics of Tax Rules and Laws
You need to know which taxes apply to you and your business and which ones do not. Most business owners are expected to pay a variety of taxes:
- Federal income tax: taxes paid on income earned.
- Excise tax: a legislative tax on specific goods and services.
- Self-employment tax: self-employment taxes to fund Medicaid and Social Security.
- State and local taxes: taxes paid to run local and state governmental institutions.
- Sales tax: paid on products used for business purposes.
Meet with Your CPA Regularly
You should aim to meet with your certified public accountant at least once every quarter, four times a year. Regular meetings keep you in the loop should something unexpected arise. If you haven’t hired a CPA yet, and your business is expanding, doing so could save you a lot of time, energy, and even tax burden.
Your CPA can serve a myriad of other functions outside of tax preparation, including consulting, tax projections, succession planning, and handling your company’s payroll. It’s up to you to decide what roles you want to outsource or not.
Classify Workers Properly
The consequences of not classifying your employees correctly are severe, often resulting in fines from the IRS. Know the difference between a 1099 contract worker and a W2 employee.
- Contractors: work on a project-by-project basis, and the employer has little control over when and where they work.
- W2 Employees: an employer has behavioral and financial control over their work.
Create a Profit and Loss Statement
The P&L statement, commonly called an income statement, summarizes business expenses, earnings, and various costs to determine a business’s profitability. Reviewing and understanding income statements will give you insight as to what’s making your business profitable or not-so-profitable. Get a quick grasp of your P&L by looking at these five areas:
- Revenue: all income items.
- Operating Expenses: where you’re money is going.
- Cost of Goods Sold (COGS): the cost required to sell the good.
- Depreciation: assets like machine equipment and vehicles that lose value over time.
- Gross Profit: the money earned from sales after your expenses.
Create a Cash Flow Statement
Unlike a P&L, a cash flow statement gives you a visualized report of where your money is coming and going. You can use this as the groundwork for any strategic business decisions you may want to make, such as:
- Adjusting timing for customer payment terms, or extending supplier payment times, from one to two months.
- Create a margin of error for cash flow projections.
- Establish an emergency cash reserve for when sales get low.
- Extend your credit line with a business credit card to use during periods of low cash flow.
By creating a cash flow statement, you’ll be able to gauge the timing of money coming in and coming out. Alternatively, by hiring a CPA firm, you can outsource tasks like these.
Choose an Accounting Method
As a small business owner, there are two accounting methods to choose from:
- Cash Accounting: expenses and earnings are recorded at the time of sale; this is ideal for a budding startup or smaller enterprise.
- Accrual Accounting: sales and expenses are recorded at the time of sale, but payments may not go through until weeks or months later, standardly used among large companies.
Hire Professional Accounting Help Today
Our team of experienced CPAs and accountants can help you get a handle on your business’s finances, provide strategic insights on how to scale your operations, and give you peace of mind when it comes time to pay Uncle Sam. Give us a call today: 417.823.7171
Sources:
https://www.investopedia.com/accounting-for-small-businesses-8419573
https://www.easybooksapp.com/blog/essential-accounting-tips-for-small-businesses
https://www.shopify.com/blog/accounting-tips#6
https://www.business.com/articles/small-business-accounting/
