Each small business is different. It has different financial needs, tax needs, and revenues and expenses. Small business owners have enough on their plate without adding up income statements and hoping they align with the business expenses. Your business finances require more than just tracking and monitoring - they require analysis and attention.
Small business accounting is more than just bookkeeping. To stay ahead of the curve, you need to understand your business’s bank statements, what they indicate about the business’s financial health through financial statements, and form patterns based on these analyses. With the right intel, accounting principles, and a reliable professional accountant, your small business is sure to succeed.
Though they’re invariably used in similar contexts, there’s a difference between accounting and bookkeeping. Don’t make the mistake of thinking a bookkeeping solution is also an accounting solution. They’re inextricably linked, but each can help your small business in different ways.
Bookkeeping is the storage, organization, and containment of financial data. A business’s bookkeeping methods can determine its scalability, accessibility, and flexibility by just how efficiently they are maintained. Whatever bookkeeping method your small business uses, it needs to accurately record financial records, income, and expenses.
Cloud-based solutions, automated data entry, and even AI have drastically impacted the way bookkeeping is done. With these tools, bookkeeping can be accessible and automated for even the most complex of business and personal accounts. Business funds are utilized, distributed, and saved based on reliable bookkeeping solutions.
Accounting utilizes the data from bookkeeping to analyze, interpret, and present patterns in everything from income statements to cash flow statements. With accounting principles, you are able to analyze these financial trends and course correct when they’re detrimental for your business or emphasize them when they are working well.
Basic accounting software can analyze these trends, generate reports, and allow you financial evidence for pivotal steps going forward. Whether it’s about payroll management, income revenues, or your small business’s balance sheet, sound accounting is fundamental for the success of your business.
Accounting is a broad term and not every business needs the same financial model to make it work. There are two types of accounting and which one your business uses is totally determined by its complexity, financial makeup, and how you anticipate being paid and spending funds.
Using cash-based accounting, revenue is only attributed to the income statement only when cash has been paid and received. Expenses are recorded when the cash changes hands, not before the expense is posted. This kind of accounting is most commonly used by smaller businesses and for personal finances.
Using accrual accounting, revenue is attributed to the proper accounts when it is earned. This is used with the expectation that funds will be released instead of the actual funds being released. Using accrual accounting, the promise of funds is just as good as the funds themselves. When it comes to goods or services, the expenses associated with these are attributed before any cash is actually paid.
These different methods are all about when funds are actually attributed to separate bank accounts. Whether it’s when the funds are fully released (the cash method) or when the funds are just attributed (accrual method), it’s all about how your business’s accounting system views money and when it really counts. For instance, only when a business has a reliable estimate of accounts receivable and accounts payable will it be able to utilize accrual accounting.
When you’re developing a business plan, be it for financial loan applications or for your own peace of mind, a budget should be your primary goal. In the first few years, it’s natural for a small business to barely break even. Your startup funds and initial loan offerings should cover these first few years, allowing you to maintain your business and cover its expenses.
Let’s look at what aspects should make up your small business’s budget and the financial ramifications of them.
These are the funds you have to have to keep the lights on, employees paid, and the internet bill paid. Whether their management expenses or payroll expenses, the expenses you anticipate in your first few years of operation are a crucial part of your budget. Before you get paid, the expenses need to be settled and the money for taxes set aside.
Taxes are a crucial expense of any small business. Accounting software can alleviate the strain of tax returns, annual tax payments, and even payroll withholdings for your employees. Around tax times, these funds should have already been set aside. The last thing you need is an audit or back taxes to complicate your small business’s financial health. Using separate accounts for tax savings and regular savings is an excellent way to be sure you have the tax bill when it comes due.
This is the part all small business owners anticipate the most. When developing a budget, utilize comparison budgets and financial projections to estimate your anticipated business income. Out of this gross income will come your expenses, taxes, and deductions. Only then will you accurately determine your net income, which is what your business actually makes after it’s paid the bills.
Whether your small business utilizes loans as startup costs or has to pick up a small business loan or two along the way, loans are a crucial part of any business’s budget. Specifically the regular payments and the eventual return on investment are important for your budget. If you take out a small business loan for equipment, startup costs, or even growth costs later in your business’s lifespan, being able to reliably pay down these loans is crucial.
The sooner you implement internal controls that rely on consistency, reliability, and accuracy, the better your small business will be. You don’t want to find these inconsistencies as you’re trying to grow or expand your business. These internal controls can be as simple as regulatory, compliance, or even monitoring and can go a long way towards maintaining financial security and preventing troublesome financial errors.
No one wants to think about consumer, business, or employee fraud, but maintaining vigilance is the best way to insulate your business from these deleterious effects. By implementing employee verifications, reducing opportunity, and increasing supervision, you can reduce instances of employee fraud especially.
Whether you’re trying to reach a certain financial benchmark by a certain quarter or get a loan payment paid off, having benchmarks set and achieved is utilized to meet financial obligations. Establish internal controls like schedule monitoring and check-ins to be sure these important deadlines are being met.
Accounting software is an ideal solution when it comes to internal controls involving financial regulations. Tax regulations are constantly changing, to say nothing of the elaborate tax rules that govern ecommerce, credit cards, and even import taxes for goods and services. By utilizing a reliable accounting software solution, your business is less susceptible to these mercurial and potentially harmful regulations.
With a business, no matter what size, money is coming in and coming out. Often at different intervals, regularities, and amounts. By tracking your accounts payable and accounts receivable concurrently, you are able to determine (with a margin of error) the financial health of your business.
This represents the funds that are going out - money owed to suppliers, vendors, and ancillary services. An accounts payable department (or software service) monitors this by invoices received for services, regular expenses, and inventory tracking.
The funds in the accounts receivable represent the money earned from goods or services. Before expenses are withdrawn, this is an accurate representation of a business’s income. Whether this is money owed to a business by customers, debtors, or vendors that are expected to be paid to the company.
Consistently tracking and monitoring both the accounts payable and accounts receivable is the best way to have an awareness of the financial worth and health of the business. Without a full understanding of how much income is being generated in correlation with the expenses being paid, you’ll never have the full picture.
Even if you are the sole owner and employee of your small business, it’s best to separate business from personal accounting. If not, blowback from your business can impact your personal finances.
You could find yourself damaged from any of these damaging financial circumstances:
The more insulated you keep your personal finances from your small business’s finances, the more protected you are if the worst should happen. You are also more prone to losing the limited liability that covers your business if something happens and it is discovered that you’re using business or personal funds interchangeably. Separate bank accounts and credit cards will make everything from taxes to expense allocation that much easier.
There are excellent tools out there designed to make your business run more efficiently. By saving you time, energy, and money, the right accounting software can alleviate several kinds of strain you may have as a business owner.
Accounting software can help by:
Utilizing these advanced tools, especially if your accounting department is a team of one, will save your business valuable time that could be spent elsewhere.
Accounting software will help you launch your business, but will become immensely helpful as you decide to grow, scale, or expand your business. Having expense and payroll management alone that is scalable is the easiest way to ensure your business profits as it grows.
Taxes may occur annually, but the financial burden of them will feel a lot less damaging if you prepare for them on a regular basis. By allocating funds regularly instead of taking funds out of your savings account come the end of the year, you will be much less likely to be surprised and financially impacted by your business’s taxes.
By monitoring receipts, expenses, and deductions throughout the year, you’re more prepared when it comes time to gather your tax documentation. Whatever accountant you utilize will be grateful for this forethought as will you. The more deductions and expenses you can prepare for a write off at the end of the year, the stronger your small business will be because of it.
More importantly, always plan to overpay for taxes. If you have more funds than you need at the end of the financial year, you’ll end up having money left over instead of dipping into your business’s savings to pay the gap.
If you’re launching, scaling, or expanding your small business, getting a handle on your accounting practices is the best first step. By monitoring your business’s spending and income through accounting services, you’re sure to be prepared for whatever financial undertaking comes next.
The best accounting practices come from monitoring and accuracy. Being diligent about crunching and analyzing the numbers, the more likely you are to ensure financial success. There’s much at stake when it comes to your small business - be sure you have all your questions answered by the experts at Inspired Accounting to start off right.