When you start a business, it’s hard not to go “all in.” Everything is on the line when you’re trying to build your own company, and things can naturally get overlooked or out of hand quickly. No amount of research can ever truly prepare you for the challenges of being a small business owner. Wisdom may be learned with time and experience, but knowledge is easily acquired with some patience and diligent studying.
Understanding the ins and outs of your business’ accounting might seem impossible, but you don’t need a math or financing degree to stay on top of your revenue and make sure your company maintains steady growth.
These small business accounting tips will help you continue to thrive and adapt as your business grows. As early as possible, switch to digital bookkeeping. Small business accounting software like QuickBooks, Freshbooks, and Xero make money management easy and help you track your income and expenses with the reliability of impeccable computer calculations.
Now, let’s dive in and cover the 10 most important small business accounting tips to ensure that your next endeavor is prosperous and profitable. These tips are generalized enough to apply to any industry, so it doesn’t matter what service you offer or products you sell. Anyone can benefit from learning how to handle their business’s finances.
Keep Your Private Finances Out of the Equation
Most small business owners are their own first investor. In order to get your idea off the ground, you’ll have to supply the funding. Even people who acquire sponsors or investors still have to cover the majority of startup costs.
The first thing you want to do when it comes to business accounting is distinguishing your company from yourself. Set up a business banking account so that your own personal checking and savings accounts are secure. It can easily become overwhelming to differentiate your business expenses from your personal spending, and investing your own capital into the company becomes ambiguous and even detrimental when there’s no clear division between self and startup.
If you can, acquire a business credit card instead of using your own. Don’t rely on this entirely, though. Business credit cards often come with hefty interest rates and plenty of hidden fees that make debt difficult to pay off.
Leave No Expense Undocumented
If you’re keeping financial records by hand, things are bound to slip under the radar. A few minor omissions can lead to major miscalculations that cost you big time. Invest in a digital accounting program for your business that makes it easy to track your cash flow and ensure you don’t miss out on important tax credits, deductibles, and other write-offs.
Money can disappear in an instant; you should know where yours is at all times. Explore different accounting methods and find one that works best for you so that you can implement it as soon as possible.
Cash basis and accrual are two of the most popular accounting methods for small businesses.
Cash basis records income when it’s received and marks expenses when they’re paid. Accrual accounting, on the other hand, records expenses when they’re earned even if the money hasn’t been paid or received. The latter method can be helpful if you want to get an idea of where your business is headed, but if you aren’t sure whether the income you write down is reliable, you could wind up over-spending and tapping out your business’ bank account.
You may want to rely on a cash basis method as you start and switch to accrual when your business grows and its revenue becomes more stable and predictable.
Work With a Professional as Needed
You don’t need to hire a full-time accountant, but working with a professional bookkeeper can help you properly organize, document and categorize your business expenses. Professionals can set up a system that you can maintain even when they sign off, but their expertise should come in handy when you’re going to file taxes and want to know about all the deductibles, write-offs and filing methods that can save you thousands.
Even filing personal taxes can be confusing, so it’s difficult to navigate the small business provisions and requirements of the IRS when you’re new to the industry. A professional consultant will ensure that your business saves as much as possible so that your profit is as large as it can be.
Save Time With Automated Accounting
You might think that you’re safer doing things by hand, but the old-fashioned method of calculating expenses takes time and is prone to error. Even the most diligent attendant can skip a number or misplace a comma when they’re tired and already overworked.
Use an accounting program that automatically adjusts all of your figures when income is added or expenses are subtracted. Instead of having to deal with the hassle of carrying numbers over from one aspect of your business to another, automated accounting programs ensure that you’re always up to date on your finances and never a penny short.
Take Time to Manage Your Account
Even if you go digital from the get-go, you should still invest a block of time each week to go over your expense report and make sure everything checks out. Make sure that all documentation is properly filed, including receipts and billing invoices that will help you when tax season rolls around.
Small business faces a tax rate anywhere between 10 and 35 percent of its revenue. You don’t want to miss out on any savings or exclusions simply because you misplaced the appropriate files.
Stay organized throughout the year to spare yourself the stress later.
Prepare Major Expenses
Running a business isn’t cheap, and you shouldn’t expect any hardware and equipment you start with to last forever. Even in the first year, you may find that you need electronic upgrades, computer updates and new machinery to accommodate your business’s growth. Thanks to the IRS’s Section 179, a small business can claim up to $1 million in expenses related to business property and equipment every year.
Big purchases might feel like a massive loss right now, but they can improve your business’s overall productivity and output. In addition to a tax break, business upgrades are often best implemented when the need for them arises rather than delayed. If your company needs better computers to work more effectively, buying them now will save time, money and labor in the long run.
Keep Inventory Records Updated
Each year, 70 percent of all check fraud is committed by businesses with under 100 employees. U.S. businesses lose millions due to employee theft and embezzlement.
Make sure that you keep tabs on what you have at all times. Don’t consider merchandise “lost,” and don’t brush off any money that doesn’t add up, even if it’s a small expense. Over time, small theft can cost you big time, and the last thing your business needs is to be slapped with hefty fines and penalties from the IRS as a result of tax fraud.
Small business inventory management software can automate recordkeeping, ensuring that everything is updated in real time.
Don’t Delay Invoices
Send your clients an invoice as soon as possible, and make sure that you follow up in a timely manner. Don’t wait around for someone to pay you and hope that they’ll pull through. Whether it’s vendors or customers, stay on top of who owes you money and be diligent about receiving payments on time.
Incentivize your clients by offering discounted rates for quick pay, or implement mandatory, non-refundable deposits that equate to a small percentage of the total bill. Use online payment services to facilitate the process and keep electronic records of your transactions; services like PayPal, Google Wallet, and 2CheckOut allow easy, secure credit and debit card payments for people around the world. All they need is their banking info and an internet connection.
Think About the Future
Taking things one day at a time is helpful, but you shouldn’t ignore the future and all of its possibilities. Many owners with thriving businesses fail to anticipate future obstacles. Risk management and prevention strategies are an essential part of being a successful small business owner.
When your company is small, the stakes are high. Even a minor flub can jeopardize your entire business’s longevity. Make sure that you have definitive plans to capitalize on your growth and either maintain your current profit or allow you to expand with ease.
Check in with your accountant or software monthly or quarterly to run routine maintenance and get an idea of where your company is headed. Setting smaller goals will make it easier to prevent oversight. Don’t let current success blind you to potential risks or major losses.
If needed, make preliminary cutbacks to ensure that your company doesn’t get swept out from under itself by deals that didn’t come through or unreturned investments.
Understand When to Stay Still
The worst mistake you can make as a business owner is growing your business when it isn’t ready. A lot of entrepreneurs become blinded by a flood of revenue and rush to extend their success by investing in a new office, hiring new employees and adding more services. The only problem is that these additions cost a lot to maintain, and if cash flow suddenly drops, a business can plummet.
Final Words of Advice
Improving your own management skills is the best way to manage your small business’s finances. Even if you don’t have any accounting experience, you can learn to track your cash flow, monitor expenses and stay ahead of your game. Running the day-to-day operations of a business can make diligent bookkeeping difficult, so you may want to switch to an automated, digital software as soon as possible to avoid any undocumented expenses or lost tax cuts.
You could also take some online courses, hire outside help when necessary and take advantage of the benefits of professional consultation. You may start a business on your own, but you’ll have to rely on others as well to ensure that your company grows effectively.
It’s important to manage and streamline your company’s financial health today so that you can reap the rewards in the future. You’ll want to anticipate expenses, accommodate for losses and invest your profits to grow your business progressively. As the saying goes, slow and steady wins the race. You might not want to take things at a snail’s pace when it comes to business, but setting aside time to analyze, interpret and understand your business’s finances will pay you tenfold in the long run.
Chris Fuller went to the University of South Florida and has worked in the financial sector for over 20 years. He has extensive experience in all aspects of personal and small business lending, from personal loans, equipment finance to cash flow based solutions for small mom and pop businesses, and large corporations.