Owning a small business comes with a lot of details to consider. The hassle of learning back-office basics and accounting practices can distract you from the important task of growing your business.
In the beginning, you might not feel the need for accounting help as such. But as the company grows or the tax season approaches, you might start to feel a little overwhelmed. File incorrect tax returns or unsolved paperwork can put you in trouble, which can be time taking and expensive. However, if you make sure that your revenue, expenses, and profits are tracked from early on, it will prevent cash flow snafus and paperwork headaches, and you can focus more on business expansion.
Every business (big or small) requires accounting services at one point. Even if it’s temporary, it allows you to manage your business, plan ahead, and prevent an audit by providing the Internal Revenue Service (IRS) with the information they require.
Below, we have listed a few proven small business accounting tips to improve profits and reach your long-term goals.
11 Accounting Tips For Small Businesses
Bookkeeping and accounting might seem less important than other things on your to-do list, but following the right procedures can make your business more successful.
Listed below are the top tips and tricks for small business accounting. Let’s check these out.
1. Hiring A Professional Resource
It can make a big difference, even if you hire an accountant or bookkeeper for a few hours each week or month. A bookkeeper and accountant do similar work, though a bookkeeper mainly records and classifies income and expenditures. In contrast, an accountant will also file taxes and assist with planning business strategy.
Someone with a BBA in Accounting would be a skilled resource because they would have the right skills and knowledge to take your business to the next level. You can rely on a professional to keep your records up-to-date and in order and learn about potential fees, loopholes, or additional tax deductions.
Getting tax advantages and saving time can be accomplished by knowing different IRS provisions and requirements. An accountant will help you with that. Offloading accounting responsibilities to a professional can result in small business owners generating an additional $320,000 per year.
2. Keeping Personal And Business Expenses Separate
Accounting for deductible business expenses is easier when you have a separate business checking and savings account. From the get-go, get used to using separate bank accounts for business and personal purchases. Be sure you clearly document any contributions from your personal assets to your business.
If you run a limited liability company (LLC) or corporation, you will also benefit from maintaining a dedicated business bank account and business credit card.
Tax returns for businesses do not allow the deduction of personal expenses. If you use a property for both personal and business purposes, such as a car or office, you can deduct how much time you spend using it. But more than that is not allowed and if you will do it, you can get penalized for up to 75% of your additional tax liability.
3. Keeping Track Of Every Expense
Keep track of your cash flow to maximize tax deductions and credits. Label and categorize each expense. Money adds up quickly, and it is easy to run out. You won’t have to sort through a wallet full of paper receipts if you use your business credit cards.
Additionally, you’ll earn cashback and rewards as you spend. Keeping a copy of checks and invoices that you’ve paid is also possible with accounting software. Whenever you can only spend cash, keep a digital copy of your receipts in your accounting software. How you account for expenses and income will depend on the accounting method you choose.
4. Maintain Accurate Records Of Income
You should keep track of all your incoming cash flow, including loans, revenue from sales, and other cash infusions. By not paying your taxes on time, you risk underpaying your taxes, leading to penalties levied by the IRS. How you record income will depend on how you account for expenses.
5. Make Accounting Practices More Automated
Almost any small business can benefit from accounting software. When you decide to hire an accountant or bookkeeper, you can give them secure access to the software. There are several smaller accounting software companies available now. Most good accounting software lets you link your credit card or bank account. This software then tracks your income and expenditures, categorizes them, lets you send and pay invoices, and generates reports.
6. Keep Your Books Up-To-Date
Organize your paperwork on a weekly basis and avoid letting receipts and invoices pile up. Be sure to stick to the schedule you’ve established. This will save you a lot of work as tax season approaches. Software that categorizes income and expenses, and reconciles your credit cards and bank accounts can automatically save you time here.
7. Monitor Labor Costs
A business’s total budget might be 70% accounted for by paying its employees. Keep track of overtime, benefits, and other perks to avoid over and underpaying. Payroll taxes, which have different deadlines and rules from income taxes, can also be calculated and paid by your accountant or accounting software.
8. Budget For Major Expenses
We shouldn’t be surprised by computer upgrades, equipment replacements, and tax deadlines. Plan ahead to avoid a cash crunch during slower months when capital expenses are higher. There is a provision in the tax code called Section 179, which allows you to deduct up to $1 million in business property and equipment in the tax year they are purchased instead of depreciating them over time. So even if you experience a pinch now from large purchases, you may benefit later from tax breaks.
9. Keep An Inventory Record.
During the 2010 fiscal year, U.S. businesses lost $50 billion in theft. To prevent misplacing merchandise or theft, note the date of purchase, stock number, price, date of sale, and final cost. Organize your records to the best of your ability. Many accounting software packages integrate with inventory management tools, so you don’t need to buy separate software for this task.
10. Review Invoices And Receivables
Invoices don’t guarantee that you’ll get paid. Retrace your steps with vendors who owe you money to prevent overpaying taxes and hours spent sifting through revenues and receivables records. You can increase the likelihood of prompt payment by sending invoices right after a job and reminding customers as the deadline approaches. To encourage your customers to pay quickly, you can offer early payment discounts. Additionally, cloud-based accounting tools can be helpful for automating this process.
11. Prepare Financial Forecasts For The Future
You want to ensure that your business continues to be profitable, even if things are going well now. You can predict where your business will be in a year, or even a few years from now, by analyzing financial statements, such as a basic profit and loss statement. Estimating your business’s revenue can help you decide where to invest it and when to apply for a business loan.
A tricky aspect of financial forecasting is figuring out how expenses can fluctuate over time due to external factors like inflation or client choices. When determining revenue, you will also have to factor in price increases and the number of customers your marketing will generate every year. The best way to develop realistic financial projections is to work with your accountant or use accounting software.
Small business accounting tips and tricks contribute greatly to a company’s success, as finances are the backbone of any operation. Getting started can be easy if you speak with a knowledgeable accountant. As an alternative, you can use accounting software, which does the accounting work for you. Your business will not only thrive financially now, but it will also prosper in the years to come if you follow these tips for startups and established companies.