Unless you happen to own a financial services company, chances are that you are not well-versed in accounting practices. And as a small or new business, we’d also wager that you do not have the capacity (yet) to hire in-house help or even outsource at this point. What do you do? Since finances are the lifeblood of your company, read up on these essential small business accounting tips and tricks.
5 Small Business Accounting Tips and Tricks
Keep Business and Pleasure Separate
This is good advice for entrepreneurs – both when it comes to finding that elusive “work life balance and in terms of finances. Always separate business expenses from personal expenses to create a cleaner, more streamlined accounting system while protecting your personal assets. Create a business bank account; if you are a sole proprietor, you can use your social security number. If not, simply obtain an Employer Identification Number (EIN). (Sole proprietors can do this as well.) Just apply online with the IRS.
Separate business accounts (savings, checking, credit, and merchant services) make it easier to track, manage, and provide evidence of business expenses, which is essential for tax purposes. It also offers the benefits of giving you protection from personal liability if your business is in financial difficulty and gives you the option for a line of credit that you can use to fill gaps in cash flow, if necessary. Next up in our list of small business accounting tips and tricks: organization in your bookkeeping.
Clean Up Your Books
Most entrepreneurs and startups do not have in-house accounting; further, many lack experience in this area. The best way to proceed is to start with a clean slate, so to speak. Implement an organized system that saves you from having to hunt for bills, invoices, and receipts, that makes billing and invoicing faster, makes tax prep more seamless, and allows you to pull financial reports that inform important business decisions.
One of the best investments you can make in your business is a solid accounting software solution. There are various cloud-based options that automate key bookkeeping processes, reduce/eliminate errors, and collate information in an accessible way.
It is important to keep your books up to date. The time you spend doing so will pay you back exponentially in terms of ease of use, accuracy, tax preparation, etc.
Accurate, accessible accounting records are a must, especially when it comes to tax purposes. The IRS also mandates the keeping of certain records for specified periods of time (i.e. typically three years though accountants recommend hanging on to them for seven). These include cash register tapes, deposit information, receipt books, invoices, 1099-MISC forms, canceled checks, account statements, credit card receipts, statements, and invoices, purchase and sales invoices, real estate closing statements, etc.
Again, if you do not have an in-house accounting function or do not outsource this task, your software solution can be an invaluable aid in ensuring these records are kept and managed safely and easily.
Note: Remember, in most cases, your coworking, shared office, and private office space can be deducted as a business expense. Be sure to check with your tax prep pro!
Choose an Accounting Method
Your accounting method will dictate how and when you report income and expenses. Small businesses can typically choose between cash basis accounting and accrual accounting.
Cash Basis: This is an easier method and can be more manageable for small businesses. Revenue is recorded when payment is received, and expenses are deducted when the monies actually come out of the account. Simple.
Accrual: Many companies prefer this method, however, as it may be required under Generally Accepted Accounting Principles (GAAP). Here, sales are recorded when a product is shipped or a service is delivered. Depending on the industry, revenue may not be recorded for weeks or even months after a sale. Another reason it is often preferred is that it provides a bigger and more clear picture of the company’s overall financial standing.
Your accounting method has a significant impact on taxation, so it is important to give this matter some serious thought… which leads us to the last of our small business accounting tips and tricks,
Even if you cannot afford a full-time accountant now, it is worth it to get some professional advice and guidance as you establish a solid financial system within your company. You can even find reputable services that provide help over the phone (e.g. 1800Accountants). Regardless, make sure any professional you work with speaks to you in a way that is clear and understandable – they can leave the jargon at home. Financial terms and complexities make most of us feel lost at sea. The best accountants help us find our sea legs and navigate our business more easily.
When it comes to tips and tricks for small business accounting, we could write volumes (and trust us, volume upon volume has been written!). These strategies will help you get started and take the next steps toward a profitable, sustainable future.