Without a little bit of accounting know-how, your small business isn’t going to get off to a good start or have a good chance at succeeding. It’s common for small business owners to have limited knowledge of accounting functions, but that isn’t an excuse for letting this area of business take care of itself. If you ignore the importance of accounting, your business is destined to become another failure statistic.
Help for Small Business Owners
You may not have the time or resources available to take a few online or community college classes in accounting, but there is still a way to ensure you have your basic accounting needs taken care of. There are plenty of accounting services that you can handle through software or through a third-party partner. For businesses that are just starting out, the accounting demands are fairly simple and can easily be managed once you understand the different components. Hiring an accounting service gives peace of mind that everything is under control and your finances are in good hands.
Basic Understanding for Accounting Newbies
Even if you plan to let an accounting service handle the financial priorities of your company, you still need to have a mastery of the basics. In a simple business setup, these basics include paying all applicable taxes, keeping the records and books clean and making sure the expenses don’t exceed the revenue. You can use the following tips to make sure you have the right foundation for your accounting strategies.
1. Separate Personal and Business Accounts
While just starting out, it is easy to confuse or mix your personal funds with your business finances. You will probably contribute a lot to your business account or expenses in the early days of operation, but you need to keep your business expenses and revenue separate from your personal money. Create a sound business structure like an LLC or S corporation and open a business checking account for the company. Pay yourself from that account each month, and use a business credit card or a line of credit for charged expenses.
2. Estimate Costs before Purchases
To keep your finances on track, you need to have a good idea of the budget you can work with. You may not be able to determine all of the details of your revenue, but you can assess your current finances and evaluate them against your predicted expenses. You need to consider what your taxes will be, normal operating expenses of insurance or utilities and any potential labor costs. Labor costs will include payroll taxes, and you may have to provide benefits. An accounting service can keep better track of these payouts, as well as determine what costs will be.
3. Carefully Track Accounts Receivable
It is important for your company to pay its bills each month, but if you don’t keep a close watch on the money you are bringing in, you won’t be able to make your expenses. You should never have more than ten or fifteen percent of your accounts receivable in a past due status. Your accounting company won’t take care of calling your past-due customers or sending out collection reminders, making it your responsibility to track receivables. Instituting penalties for late payments can encourage prompt payments on invoices and keep money coming in.
4. Rely on Profit and Loss Statements
You can’t continue to make financial decisions in your business if you don’t know the big picture of your company. A profit and loss statement is an accounting report that will summarize all of the income and expenses for the company for a specified period of time. Though public companies are required to issue these statements, you don’t have this same mandate as a small business. However, it is highly recommended to see the financial health of your company and if you are meeting the goals you set. Use quarter-by-quarter comparisons for a big picture snapshot.
5. Save Receipts
You make your end-of-the-year accounting processes a lot easier when you get and file a receipt for each business purchase. There are many expenses that can be fully or partially deducted at the end of the year when you file your business taxes. In order to claim them and survive an audit, you must have the receipts. Donations, advertising costs, insurance premiums and meals with clients are all items that benefit your tax filing. Save all receipts. Your CPA or tax service will let you know how the expenses can be deducted.
Paths Toward Success
Accounting isn’t the most exciting part of being a business owner. In fact, it may be your most complex or frustrating area of business operations. However, your company will not survive without an efficient and accurate account of your income and expenses. Through a third-party service, accounting software and a little research, you can make sure your business finances are on the path to success.