- What is Small Business Accounting?
- Benefits of Small Business Accounting
- Essential Accounting Practices for Small Businesses
- Choosing the Right Accounting Software
Q: What are Essential Accounting Practices for Small Businesses?
A: Essential practices include regular bookkeeping, separating personal and business finances, consistent financial reporting, tax preparation and compliance, and periodic financial reviews.
Running out of money is the biggest risk that small businesses face, and when it happens, business failure often follows.
The cause? Poor financial planning and management.
Thankfully, there are various small business accounting practices you can incorporate to avoid being included in the statistics of businesses that fail due to poor cash flow.
Small business accounting practices help business owners and managers gain an in-depth understanding of their company’s financial status. It empowers them to make informed financial decisions across all operations, make budgets, and allocate resources appropriately.
Business accounting is the solution to most of the challenges owners and managers face with small business finance management, including excessive debts, sudden market shifts, poor cash flow, poor tax compliance, falling behind on bills, and poor planning and budgeting.
When done well, effective small business accounting is your gateway to small business financial success.
There’s a lot to learn, so let’s dive right in, covering what small business accounting entails, the benefits, best practices, and how to choose the right business accounting software for effective implementation.
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What Is Small Business Accounting?
Small business accounting involves all the financial activities, including documentation, classification, analyses, and reporting of financial transactions, that provide valuable insights into your business’s financial health.
Small business accounting is systematically keeping a complete record of all your business incomes and expenses in a manner that makes it easy to accurately extract financial information from all your business transactions.
It is a financial management practice that assesses a company’s income statements, balance sheets, and cash flow to make sense of the state of the company’s finances. This helps small business owners better track and manage their finances responsibly and effectively.
The key components of small business accounting include:
Bookkeeping: The process of keeping accurate records of your business’s financial transactions, mainly incomes and expenses. Small business bookkeeping is a vital small business financial management practice that business owners sort out daily to stay on top of their expenses and account balances.
Financial reporting: A practice that generally focuses on tracking, analyzing, and documenting cash outflows and inflows to identify potential cash flow risks. Financial reports include:
- Cash flow statements
- Accounts payable and accounts receivable reports
- Balance sheets
- Income/profit and loss statements
Tax compliance: This comprises all the small business finance management practices that contribute to the business’s adherence to relevant tax laws and regulations. It involves accurately reporting expenses, incomes, and other financial details to relevant financial bodies and tax authorities.
Understandably, if you are not used to crunching numbers, most things about small business accounting will seem like a big chore, especially when you consider all the paperwork involved.
However, the truth remains that if you do not have any mechanism in place for managing your business finances, running your business smoothly would be extremely difficult. Therefore, it is important that you take your business accounting seriously.
Having a comprehensive financial report can help you:
- Gain insight into your business’s financial strength and growth potential.
- Identify trends and patterns that could help you avoid potential financial mishaps.
- Identify opportunities for investments and overall business improvements.
More importantly, you have a general picture of your business performance, which is a great first step for making informed decisions and creating effective business strategies that ensure financial stability.
Thankfully, there is small business accounting software that can help you execute your small business accounting practices effortlessly and reap the associated benefits.
Let’s have a broader look at the benefits of accounting for small businesses.
Benefits of Small Business Accounting
Businesses with effective accounting practices position themselves to be the recipients of the many benefits of accounting, most of which could be compressed into the following themes.
Financial Clarity
As we’ve already established, small business accounting is a way for small businesses to keep track of all their financial transactions in a manner that provides an overview of their financial health.
Data from proper financial reporting, such as balance sheets and income statements, provide a clear picture of the business’s financial status, eliminating guesswork from the financial planning and budgeting process.
Essentially, small business finance management, when done properly, helps business owners make informed financial decisions with accurate, up-to-date data.
Regulatory Compliance
As tax rates rise and tax codes become more complex, small businesses are finding it harder to keep up.
Thankfully, having your books in order from the onset can help you sort and file your taxes early while keeping up with other financial reporting standards.
One of the core problems that block small businesses from filing their taxes appropriately is poor financial organization and record-keeping.
Eliminating this problem through regular financial accounting saves you the cost of last-minute hurries and errors.
It also helps ensure that you apply proper deductions on time. More so, having a good tax record could substantially boost your chances of accessing U.S. SBA grants.
Improved Cash Flow Management
According to the National Federation of Independent Business, small businesses rely on cash flow for their daily expenses, including wages, utilities, and benefits.
Effective accounting helps track income and expenses, ensuring sufficient cash flow to meet obligations.
For starters, it helps you make sense of and forecast how much cash you need to run your business efficiently for the foreseeable future.
You can answer a critical question: how much do you need to reserve to pay all the bills, suppliers, and your employees without unnecessary delay in the coming months?
More importantly, your cash flow statement is a measure of your business’s financial stability. It lets you know if you are generating enough money from your operating, financial, and investing activities to keep the lights on at your business.
Your cash flow statement reveals where you are lagging, helping you decide how to fix things up.
Enhanced Planning and Budgeting
Detailed financial records aid in creating accurate budgets and forecasts, allowing for better planning and resource allocation.
Budgeting and accounting practices meet at the intersection of financial management, planning, allocation, and disbursement of monetary resources. This creates a two-way relationship, and properly addressing one helps the other.
In this context, small business accounting identifies available cash flows to facilitate the required spending needed to keep the business running at optimum performance. This is most beneficial during budgeting, as it cuts the risk of underbudgeting and overbudgeting—both of which come with a baggage of consequences.
By diligently tracking and recording all sources of income and categorizing expenses, business owners can better analyze and understand their spending habits and make proper adjustments to meet their financial and overall business goals.
Operational Efficiency
Operational efficiency; last but not in any way the least.
Operational efficiency is one of the benefits of accounting that business owners visibly tap into without much thought.
Keeping your books in order results in so much ease that you might not immediately appreciate it until you see another business owner or manager running helter-skelter when it’s time to file their taxes or during an audit.
Their business basically stands still until they are able to get those activities out of the way—and this could be a regular occurrence throughout the year.
With regular bookkeeping, you get to continually sort your accounting tasks in bits and accurately with proper information.
Over time, time and efforts invested become negligible, reducing administrative burdens and freeing up time for core business activities all year round.
Top 5 Essential Accounting Practices for Small Businesses
Here are some accounting and bookkeeping tips that can help you stay on top of your small business finances effortlessly.
Regular Bookkeeping
Businesses run on money. Therefore, it’s crucial that you have your eyes on your business financial transactions regularly to identify anomalies as they occur and correct them.
From a general perspective, these bookkeeping benefits streamline business planning and effortlessly stimulate business growth, as you are empowered to proactively block all financial leakages or excesses.
Separation of Personal and Business Finances
Most small businesses fail due to cash flow problems, often due to a lack of clarity about how money is moving in and out of their business.
This unfortunate occurrence sometimes results from using business finance to fund personal expenses without any guardrails to check careless spending or at least define how much cash is available to spend freely.
Whether this is your first rodeo or your tenth as a business owner, the rule of separating your business and personal finances applies to everyone.
It is important to recognize that although you are part of the business, it is still a separate entity from yourself—even if you are running it from your garage or kitchen. Similarly, your small business finance is a separate entity from your personal finance, and both should be under different accounts.
To balance things out, you should establish a standard wage structure, pay yourself from the business, and only stick to what’s due to you. This helps maintain financial discipline at both ends, allowing your business to run optimally without unnecessary financial stress due to careless withdrawals.
More importantly, separating personal and business finances is very important for tax filing and protecting your personal assets in case of any legal issues. Where there is no clear demarcation between your business and personal finances, legal issues facing your business may spill over to affect your personal assets.
Consistent Financial Reporting
Consider generating regular financial statements, such as income statements, balance sheets, and cash flow statements, to monitor business performance.
With consistent financial reporting across these statements, you can easily walk through your financial history to accurately measure your company’s financial health and growth over time.
The data provided by these statements are comparable over time throughout the various business operations you have engaged in since establishment. This practice helps facilitate accurate comparative trend analysis and benchmarking for financial forecasting.
It is also in line with the Consistency Principle of financial reporting, which states that businesses should maintain the same accounting method throughout their accounting periods, applied across all the statements including balance sheet, cash flow statement, and income statement.
Consistency across the board, both in regular updating and in accounting methods, enables users and reviewers of the financial reports to easily arrive at meaningful conclusions from the presented data.
Tax Preparation and Compliance
Being consistent with financial reporting can help you sort your taxes in a timely and accurate manner. Hence, it makes sense to prepare your taxes alongside your financial statements.
On the one hand, preparing for taxes throughout the year and ensuring compliance with tax laws comes with the peace of mind that enhances the ease of doing business.
On the other hand, it saves you the risk of running into business penalties, criminal prosecution, and audits that might ruin your business reputation or sink it entirely.
You should take the time to learn how to keep small businesses tax-compliant according to IRS guidelines.
Periodic Financial Reviews
Conduct regular financial reviews to identify trends, assess performance, and make necessary adjustments to establish optimal business financial health and growth.
A periodic financial review is a systematic evaluation of your business’s financial activities across various operations and departments, with the aim of generating insights for strategic decision-making.
Financial analysis helps you understand your company’s financial status, with a focus on profitability, revenue generation, and creditworthiness.
It is also an avenue for identifying potential roadblocks while equipping you with pointers for quick and sound decisions to navigate them.
Overall, periodic financial reviews give you an in-depth, real-time overview of your company’s internal performance, which is instrumental for setting benchmarks and strategizing pathways to business growth and sustainability.
Choosing the Right Accounting Software
If someone asked you for the best small business accounting software, you would likely mention QuickBooks and Vyde right off the bat.
However, it’s not enough to know the best bookkeeping and accounting software for accounting automation and expense tracking and jump on one right away.
You must determine how each software fits into your financial management strategies and choose the one that efficiently meets your needs without draining most of your small business finances.
Consider the following steps when choosing a business accounting software.
Identify Your Needs
Evaluate your entire business operations to highlight your accounting needs across all activities, especially recurring activities. From invoicing and expense tracking to utilities, loan repayment, supplies, marketing, employee benefits, and payroll management, no stone should be left unturned.
It sounds like a lot, but it is absolutely necessary.
Identifying and understanding your needs throughout your business operation is instrumental in determining which business accounting software fits the bill. You don’t want to end up with software that doesn’t cater to some of your critical accounting needs.
Evaluate Features
Some accounting software will boast of having all the features you’ll ever need for effective financial management. Amidst all the bells and whistles, there are four things you should look out for in business accounting software.
- Automation: Does the software have automation capabilities? What task does it automate? Automation lets you automate some accounting and bookkeeping processes, so you don’t have to spend your evenings updating critical records across different financial aspects. Besides saving time, automation also reduces errors and enhances efficiency. Some accounting tasks you can automate include invoicing, data entry, and financial reporting.
- Integrations: Does the software integrate easily with existing systems to collect, process, and consolidate financial data?
- User-friendliness: Alongside being easy to use or navigate, does the software provide an easy-to-understand overview of your small business finances? Can it present information in infographics or allow the easy translation of data into charts, graphs, or infographics?
- Scalability: Maybe your business is currently processing barely up to $1 million per annum. But can the software effortlessly keep up when you have more finance data points and millions of dollars to process annually?
Compare Options
The first option you come across isn’t necessarily the best option for you. Check out all the popular accounting software providers trusted by business owners in your industry and request a breakdown of their provisions and demos where possible.
Some popular business accounting software and platforms to check out include QuickBooks, FreshBooks, Vyde, and Xero.
You can run side-by-side comparisons to find which would work best for you. Generally, these software solutions meet the accounting needs of most small businesses.
If you are running a peculiar business that doesn’t have traditional accounting needs, it might help to consult other business owners in the field to know what’s working for them.
Cost Consideration
Here, you shouldn’t limit your thinking to just the acquisition cost. What is the cost of using the software over time? How much do you have to set aside monthly for subscription fees and potential add-ons?
As part of your small business accounting practice/task, cost consideration should be one of your priorities when choosing the right business accounting software for your business.
You want to be sure you are not spending money on unnecessary features while also ensuring that your choice meets your needs at a reasonable cost. The ROI should be substantial.
Seek Professional Advice
Most small business owners lack accounting expertise, which sometimes means that even from the get-go, they are unable to fully identify their accounting needs.
It’s likely that the counsel in the “Identify your needs” section above sounds like a lot to handle.
You feel tired just thinking about how to go about evaluating all your business operations to identify your accounting needs. And that’s where consulting expert advice comes in—right from the start.
To ensure maximum control of your small business accounting practices, consider consulting with a certified public accountant or accounting professional. Professional consultation ensures that you identify all your needs and that the chosen software meets all business needs and compliance requirements.
Conclusion
Small business accounting, through bookkeeping, financial reporting, and tax compliance, puts you in control of your business finances.
It’s a powerful financial management practice that ensures that your books are in order, equipping you with the financial clarity for accurate and timely regulatory compliance, cash flow management, planning and budgeting, and operational efficiency across business operations.
Further Reading:
- How AI is Transforming Small Businesses: Key Benefits and Future Trends
- Technologies Powering Virtual Office Spaces
- Empowering Independence: A Guide for the Modern Independent Business Owner
- Maximizing Customer Value: A Guide to Customer Retention Analysis
The benefits of accounting come in abundance to small business owners and managers who do right by themselves to ensure regular bookkeeping, separation of business and personal finances, consistent financial reporting, tax compliance, and periodic financial reviews.
These essential accounting practices blend to keep you constantly updated on your business’s financial health, empowering you with accurate data for strategic, informed decisions that amount to business success and sustainability.
Follow the steps provided to choose the right tools and resources for streamlining your financial management activities while saving costs and enhancing productivity.
To save costs without sacrificing productivity and efficiency, consider the benefits of a virtual office for small businesses, including cost savings up to tens of thousands of dollars annually. This ensures that there are fewer reasons for your business to suddenly run out of cash.
Contact us to learn more about how having a virtual office can improve your overall financial management.
