What are the ESSENTIAL small business accounting tips?
Effective accounting is crucial for the success of any small business. It provides insights into financial health, aids decision-making, and ensures compliance with regulations. But accounting doesn’t have to be daunting. So, in this expert round-up article we asked some of the most successful accountants to share some most important tips for small business owners according to them.
The following tips are the tips you can implement right away or the tips you can implement over time to improve your finance, maximize profits, minimize taxes and similar.
Let’s dive in and unlock the secrets to efficient small business accounting!
Tip 1: Learn How to Read a Financial Statement
According to Matthew Beck of Parkeast Bookkeeping Solutions LLC, a crucial tip for small business owners is to know how to read a financial statement. While it may seem complex at first, understanding financial statements is essential for gaining insights into your business’s financial performance. By familiarizing yourself with key elements like balance sheets, income statements, and cash flow statements, you’ll be better equipped to make informed decisions, identify areas for improvement, and monitor the overall health of your business.
Tip 2: Keep Accurate Business Records
“Keep accurate business records: Gross receipts and expenses require you to have proof during tax time. Grab a binder with pockets and label each pocket with the client or vendor and organize them. IRS Publication 583 is an excellent go-to for more information on this.” says Tracie Archbold.
Tip 3: Seek Professional Help for Accurate Financial Preparation
Matthew Beck emphasizes the significance of having a professional prepare your financial statements. Hiring an experienced accountant or bookkeeping service can ensure accuracy and compliance with accounting standards. Professionals have the expertise to navigate complex financial tasks, handle tax obligations, and maintain meticulous records. By outsourcing this crucial aspect of your business, you can focus on core operations while having peace of mind that your financial statements are prepared by skilled professionals who understand the intricacies of small business accounting.
Tip 4: Hire a Bookkeeper, Not an Accountant, in the Initial Stages
According to Laura Lee of Laura Lee Bookkeeping and Accountancy Services, a valuable tip for small business owners in the early stages is to hire a bookkeeper instead of an accountant. While accountants play a crucial role in providing financial advice and handling complex tax matters, bookkeepers specialize in day-to-day financial tasks, such as record-keeping, reconciling transactions, and managing invoices. By hiring a bookkeeper first, you can ensure accurate and organized financial records, allowing you to have a clear overview of your business’s financial position without incurring the higher cost associated with hiring an accountant.
On what to look for when hiring a bookkeeper, you can read here.
Tip 5: Keep All Receipts for Better Expense Tracking
Laura Lee stresses the importance of keeping all receipts. Maintaining a systematic approach to organizing and retaining receipts is vital for accurate expense tracking and ensuring tax compliance. Whether it’s physical copies or digital scans, create a dedicated system to store and categorize receipts for all business-related expenses. This practice not only helps you monitor your spending and claim tax deductions but also provides a comprehensive audit trail in case of inquiries or financial reviews.
Tip 6: Establish Processes Before Starting to Avoid Future Overload
Laura Lee advises entrepreneurs to establish processes before launching their business. Setting up efficient systems and procedures early on, such as creating standardized templates for invoices, receipts, and financial reports, can save valuable time and effort in the long run. By implementing processes from the start, you’ll streamline routine financial tasks, reduce errors, and be better prepared to handle the growing demands of your business. Taking the time to plan and organize your financial workflows early on will prevent chaos and ensure smooth operations as your business expands.
Tip 7: Keep Your Bookkeeping in Order
Mansoor Suhail of The Accounting and Tax emphasizes the importance of maintaining organized bookkeeping. Keeping accurate and up-to-date records of your financial transactions is essential for effective financial management. It enables you to track income and expenses, monitor cash flow, and generate reliable financial reports. By implementing a systematic bookkeeping system, such as using accounting software or hiring a professional bookkeeper, you can ensure that your financial records are organized and easily accessible, saving you time and helping you make informed business decisions.
Tip 8: Timely Tax Filing and Payments to Avoid Interest and Penalties
According to Mansoor Suhail, it is crucial never to be late in making interim payments and other tax payments and filing your taxes promptly to avoid interest and penalties. Staying on top of your tax obligations, including income tax, sales tax, or any other applicable taxes, and meeting tax filing deadlines is essential to avoid unnecessary financial burdens. Stay informed about the relevant tax filing dates and ensure you have all the necessary documentation and information ready in advance. Set reminders or use calendar alerts to ensure timely payments, and if needed, consult with a tax professional to understand your specific tax requirements and deadlines. By meeting your tax obligations promptly, you can avoid costly penalties and maintain a good standing with tax authorities.
Tip 9: Separate Business and Personal Expenses
As advised by Ashfaq Muhammad, it is crucial to always keep your business and personal expenses separate. Mixing personal and business finances can create confusion, complicate bookkeeping, and even raise red flags during tax audits. Establish separate bank accounts and credit cards for your business to ensure clear differentiation.
Tracie Archbold also recommends maintaining two bank accounts in different banks – one for your business and one for personal use. Combining personal and business finances can lead to confusion and make it easier to deviate from your budget.
Having separate accounts helps you maintain financial clarity, prevents mixing funds, and makes it easier to track business-related transactions accurately which also simplifies tax preparation and ensures compliance with tax regulations.
Tip 10: Maintain a Track Record of Your Business
According to Ashfaq Muhammad, it is important to maintain a comprehensive track record of your business activities. Especially in the initial stages, utilizing tools like Excel or Google Sheets can be an effective and accessible way to record and track income, expenses, and other financial transactions. Create organized spreadsheets to capture crucial financial data, such as sales, expenses, inventory, and cash flow. This record-keeping practice provides you with valuable insights into your business’s financial performance and helps you make informed decisions.
Tip 11: Invest in Bookkeeping Software
Related to previous tip, Tracie Archbold, a bookkeeper, advises small business owners to use bookkeeping software instead of relying on a box of receipts and a notebook. Bookkeeping software streamlines the process, allowing you to track income, expenses, and financial transactions more efficiently. It provides accurate financial records, simplifies tax preparation, and offers valuable insights into your business’s financial health.
Tip 12: Understand Tax Regulations for Your Industry
Before embarking on a specific industry, Ashfaq Muhammad advises business owners to thoroughly understand the tax implications specific to that industry. Different industries may have unique tax requirements or incentives. Research and consult with a tax professional to ensure you are aware of any industry-specific tax regulations, deductions, or credits that may apply to your business. Being informed about the tax landscape relevant to your industry will enable you to plan and prepare your finances more effectively.
Tip 13: Create and Stick to a Budget
Having a budget is crucial for a healthy business, according to Tracie Archbold. When creating a business plan, include a revenue projection and make an effort to stay within its limits. A well-managed budget helps you control expenses, allocate resources effectively, and ensure profitability. Regularly review and adjust your budget to adapt to changing circumstances and make informed financial decisions.
Tip 14: Choose an Accounting Method
Selecting an appropriate accounting method, either cash basis or accrual accounting, is a decision that should align with your business’s needs and goals. Understanding the differences between these methods is crucial for accurate financial reporting and tax compliance. Consult with an accountant or tax professional to determine the best accounting method for your business.
According to accounts manager at Peacock Accountants Limited, it is advisable to work on accrual accounting. Accrual accounting is a method that recognizes revenues and expenses when they are incurred, regardless of when the actual cash is received or paid. By adopting accrual accounting, you gain a more accurate representation of your business’s financial position, as it provides a clearer picture of your revenue and expenses over a specific period.
Accrual accounting allows you to match revenues with the expenses they generate, providing a more comprehensive view of your business’s profitability. It enables you to make informed decisions based on a more accurate understanding of your financial performance.
By embracing accrual accounting, you can better manage cash flow, accurately assess your financial health, and plan for the future. Consider consulting with an accountant or financial professional to help you transition to accrual accounting and ensure its proper implementation within your small business.
Tip 15: Optimize Accounts Payable (AP) Terms
“Take advantage of AP terms when paying invoices. Pay bills on a schedule that will maximize a steady cash flow.” says Tracie Archbold.
Efficient AP management helps maintain good relationships with suppliers and ensures a steady flow of goods and services to support your business operations.
Tip 16: Follow the Tax Calendar and Meet Deadlines
“Make sure you follow the tax calendar and pay or prepare taxes on time. There are worksheets that help with this. Keeping a close on this will eliminate penalties and fines.” says Tracie.
Staying on top of tax obligations is vital to avoid penalties and fines. She emphasizes the importance of adhering to the tax calendar and paying or preparing taxes on time. Utilize worksheets or tools available to help you stay organized and meet tax deadlines, ensuring compliance and preventing unnecessary financial burdens.
Tip 17: Prioritize Paying the Principal, Not Just the Interest
“When tackling debt – make sure you are actually paying the principal and not just the interest. The best thing I have advised friends and family to do, is to pay their loans twice a month!” says Hayley Stark of Tombstone Bookkeeping Services LLC.
Tip 18: Pay Loans Twice a Month and Utilize the Snowball Method
“Utilize the snowball methods – when doing this, always start with the highest interest, but the smallest payment. You will be able to pay down faster on the loan itself without paying all the extra in interest rates.” says Hayley Stark.
Tip 19: Set a Debt Repayment Timeline
“Create your timeline – we would all love to get out of debt quicker and faster. However, what is your end goal? When would you like to be out of debt? Your birthday? Christmas? New Years? Having a preset plan will help you stay on track!” says Hayley.
Tip 20: Reward Yourself Along the Way
“Last, but not least – reward yourself. If you are the only ever paying off loan after loan, and don’t set any money aside for you, chances are, you’ll burn out quickly. We don’t want that to happen. Take that little extra cash and do what you want with it. Shopping, going out to eat or anything.” says Hayley for the end.