The Small Business Owner’s Guide to Accounting

Managing the finances of a small business can seem like a daunting task, especially for first-time entrepreneurs without an accounting background. However, establishing solid accounting practices is critical for any successful business – no matter how small.

Proper bookkeeping and financial management provide clarity into your company’s financial health, help inform business decisions, keep you compliant with tax regulations, and set your enterprise up for scalable growth.

In this blog post guide, we will share and outline accounting best practices for small business owners, freelancers, entrepreneurs, and solopreneurs. Whether you’re just starting out or looking to optimize an existing system, use this advice to build a firm financial foundation that meets all your business needs.

1. The Importance of Small Business Accounting Best Practices

Sound financial practices form the bedrock of a productive, thriving business. Without accurate bookkeeping and organized records, you lack visibility into your company’s actual financial status or profitability. Weak accounting habits can quickly spiral into mistakes or oversight issues that lead to IRS penalties, cash flow problems, bad business decisions, and serious long term consequences. Establishing solid accounting disciplines from day one saves you headaches down the road.

So what exactly are the benefits of prioritizing accounting best practices?

• Financial Clarity & Informed Decision Making: With reliable financial statements like income statements, balance sheets and cash flow projections based on real-time data, you can accurately assess your business’s health and make smart decisions accordingly.
• Tax Compliance: Meticulous expense tracking and bookkeeping help keep you compliant with local, state and federal tax filing obligations and avoid costly IRS audits or penalties.
• Fundraising Potential: Professional investors and lenders look for sound financial record-keeping and healthy statements when evaluating funding proposals.
• Scalability & Growth: The insights gleaned from accurate accounting statistics help identify what’s working so you can do more of it – a key prerequisite for sustainable business expansion.

2. Establishing Strong Foundations – How To Set Up Your Accounting

One of the first steps when starting a small business is deciding on your accounting infrastructure – the methods and tools you’ll use to record financial transactions. Here are some building blocks to consider as you establish systems to suit your needs:

Choose an Accounting Method: Cash vs. Accrual

Small businesses typically use either the cash basis or accrual basis method for income and expenses:

• Cash Basis Accounting: Transactions are recorded when actual cash exchanges hands. Income is recorded upon receiving payments. Expenses are recorded only when bills are paid.
• Accrual Accounting: Transactions are recorded when sales or purchases occur, regardless of whether money has exchanged hands yet.

Accrual accounting gives a more accurate picture of actual profitability relative to cash basis. It records both accounts receivable (for products/services already provided but not yet paid for) and accounts payable (for expenses incurred but not yet paid).

As a small business owner, choosing the right method depends on your operations, preferred tax filing method, and business goals. Consult an accountant to determine what works best for your company.

Selecting Small Business Accounting Software

Gone are the days of tedious manual bookkeeping! Today’s market offers user-friendly accounting platforms for all needs:

• Quickbooks
• Xero
• Zoho Books
• Wave Accounting
• FreshBooks

Key features to evaluate when choosing accounting software:

• Platform: Cloud-based or desktop-version
• Budget
• Ease of use
• Mobility: Access via phone/tablets
• Scalability: handles growing business needs
• Inventory management
• Payroll management
• Reporting and analytics
• Integrations with other business tools

Dedicate Business Bank Accounts and Credit Cards

A critical first step is opening dedicated business checking, savings and credit card accounts, separate from your personal finances.

This separation of funds allows for easier tracking of company income and expenses. Business-only accounts also provide necessary documentation if the company is ever audited by tax agencies.

Be sure to shop around to find the best account packages. Many cater specifically to small business clients.

Document ALL Financial Transactions

Meticulous financial documentation is vital for accurate bookkeeping. Establish rigorous disciplines for recording every single transaction from day one.

• Income: Log all sales, client payments, deposits and other income when received. Retain digital/paper copies of receipts or related paperwork.
• Expenses: Track all operating costs, purchases and payments when spent. Retain invoices, bills and other supporting documents.

3. Essential Accounting Tasks for Small Businesses

Managing your enterprise’s finances involves regularly completing several core accounting activities. Here’s an overview of critical responsibilities:

Accurately Tracking Expenses

Careful spending tracking is imperative. Document all costs across relevant categories like:

• Operating Expenses: Fixed costs to run daily business operations (rent, utilities, admin costs etc.)
• Cost of Goods Sold: Variable production costs for producing/purchasing products sold.
• Sales & Marketing Costs: Advertising, promotions, travel etc. to generate more revenue.
• Miscellaneous Expenses: One-off costs not fitting above categories.

Dedicate time weekly or monthly to collect and enter expense data into accounting system. Retain all receipts, bills etc to back up figures.

Choose a method that suits your workflows and makes recording easy, whether separate business account bank/credit card statements, expense management software, mobile apps, spreadsheets or paper-based journals.

Payroll Processing

For small companies handling payroll internally, diligently track:

• Employee wages: Hourly or salaried
• Bonuses & commissions
• Tax and other deductions
• Payroll tax liabilities

Alternatively, outsourcing to an affordable online payroll service handles paycheck calculations and tax payments for you automatically.

Reconciling Bank Statements

Frequently reconciling bank statement activities with your recorded transactions reveals:

• Accounting errors to correct
• Unauthorized charges
• Suspicious transactions indicating fraud

Review statements monthly (or weekly for high volumes) and resolve discrepancies for accurate financials.

Creating Key Financial Statements

Every small business needs three key reports to assess overall fiscal health:

Income Statement – Shows company profitability over specific time period.

Key elements:

• Revenue: All sales and income
• Expenses: Operating costs, CoGS and other expenses
• Net Income: Revenues minus expenses

Balance Sheet – Snapshot of company’s financial position at given point.

Details company’s:

• Assets = What it owns (cash, accounts receivable, inventory etc)
• Liabilities = What it owes (loan balances, accounts payable etc)
• Equity = Assets minus liabilities

Cash Flow Statement – Shows net cash being generated and spent over set time period.

Highlights:

• Cash from business operations
• Investing and financing activities
• Changes in cash balance

4. Staying Organized and Efficient

When you’re buried with the day-to-day demands of running your enterprise, staying on top of numbers can fall through the cracks. Here are some best practices to maintain efficient systems:

Automate Transactions and Tasks

Leveraging technology eliminates tedious manual processes. Look into:

• Accounting systems handling key tasks automatically like managing invoices, expenses, inventory etc.
• Integrations/syncing between accounting, payment processing, banking and other business platforms for seamless data flows.

Go Cloud – The Benefits of Cloud Accounting

Opting for cloudbased accounting software centralizes access to real-time fiscal information from anywhere increasing efficiency through:

• Improved collaboration – Shared access for accounting staff, bookkeeper or CPA
• Remote access via any device
• Automatic backups and upgrades
• Subscription plans allowing scalability

Schedule Regular Financial Reviews

Set calendar reminders to periodically review critical reports tracking all short and long term business goals:

• Monthly: Key indicators like profit margins, operating costs and collection times
• Quarterly: Granular analysis of financial statement line items
• Yearly: Assess if tax, regulatory and cash flow needs are being met

These regular check-ins allow you to course correct quickly before small issues spiral.

5. Seeking Professional Help

Initially handling all finances independently can save costs but also carry risk. As complexity grows over time, consider the benefits of expert third party assistance.

Hiring a Bookkeeper

A bookkeeper handles routine tasks like recording transactions, reconciling accounts and producing statements freeing you to focus elsewhere. Consider when:

• Your workload exceeds available time for proper financial upkeep
• Business growth adds complexity difficult for non-accounting staff

Finding a Qualified Accountant

Periodically engaging a reputable accountant provides experienced guidance to:

• Select optimal tax structure and filing process
• Ensure regulatory and compliance needs are fully met
• Provide auditing and advisory services shielding you from oversight or mistakes
• Strategize future financial preparations as company scales

Look for an Accountant with:

• Certification (CPA) demonstrating qualifications
• Tax expertise including small business deductions and credits
• Experience advising within your specific industry
• Affordable pricing aligned with your budget
• Strong client references

A reliable accountant quickly pays for themselves by maximizing write-offs, avoiding penalties, and identifying growth opportunities.

Conclusion – Maintaining Diligent Accounting Practices

By now the importance of prioritizing solid accounting should be clear for any small business owner. While handing finances can seem complicated for non-accounting professionals, staying organized from the start prevents future difficulties.

Key Takeaways to Build & Maintain Proper Accounting:

• Select cash or accrual accounting aligned to your operations
• Establish dedicated business banking and meticulous documentation habits early.
• Leverage technology like software and automations for efficiency.
• Completely track all income and expenses in proper categories
• Reconcile accounts and create key financial statements regularly.
• Build relationships with qualified bookkeeping and accounting professionals to guide you.
• Schedule periodic financial reviews to assess progress and pivot when needed.

While hands-on education across basic business finance topics is invaluable, don’t be afraid to ask for help when needed – especially as your company scales. Investing in reliable third party assistance when appropriate allows you to focus on priorities like delighting customers and innovating new offerings.

With the foundations outlined above as a guide, you can take the guesswork out of accounting, gain financial clarity, and set your enterprise up for assured success both today and tomorrow. Here’s to profitability!