Accounting means charting a course for your small business’s finances: it shows you exactly where your money is coming from, where it’s going, and how much you have. This knowledge helps you make strategic choices about your business, such as how much to charge for your products, whether to buy new equipment, or when to hire more people. Detailed financial records also help businesses secure loans and attract investors, as they prove the business is reliable and has growth potential. Perhaps most importantly, accurate accounting keeps you on the right side of the law – it’s the most basic way to avoid costly tax penalties and legal troubles.

In short, accounting is everything to small businesses, which make up 99.9% of all businesses in the US and are a part of the small and medium-sized enterprises (SMEs) that make up 90% of businesses globally. Keeping your financial records organised allows you to track your cash flow, find patterns in your spending and earnings, and make adjustments as needed to stay profitable. Below, we’ll talk through some must-know tips for accounting as a small business.

What’s in this article?

• What is accounting?
  
• Accounting tips for small businesses
  

What is accounting?

Accounting is the process of recording, organising, and interpreting financial information for a business or individual. It’s a detailed record of all the money that comes in (income) and goes out (expenses), along with tracking assets (what you own) and liabilities (what you owe). This information is used to create financial reports such as balance sheets and income statements that demonstrate the financial health and performance of the business.

Accounting helps businesses track financial progress over time; stay compliant with financial regulations and tax laws; and make informed decisions about pricing, investments, hiring, and other operational aspects. Accurate financial records also demonstrate integrity and transparency – qualities that can help the business succeed in the long term.

Accounting tips for small businesses

Here are some accounting tips small businesses should keep in mind.

Separate business and personal expenses

Keeping business and personal expenses separate is the most important rule of business accounting. This simplifies bookkeeping, making it easier to track income and expenses, prepare financial statements, and file taxes. It also protects your personal assets and provides a more accurate picture of your business’s financial health. These are some key considerations to help keep expenses separate.

• Open a separate business bank account: Don’t use your personal account for business transactions, which can mix and confuse funds.

• Get a business credit card: This helps track business expenses and can build your business’s credit.

• Pay yourself a salary: Set a regular amount to transfer from your business account to your personal account as income. This creates a distinction between your business’s money and your personal earnings.

• Track shared expenses: If you use something for both personal and business purposes (such as your car or mobile phone), allocate a percentage for business use and track it meticulously.

Use bookkeeping software

Bookkeeping software can be an immense help for small businesses struggling with financial management. Manual bookkeeping is prone to errors and can be incredibly time-consuming, while bookkeeping software automates these processes. This reduces the risk of human error and frees up time for strategic activities. Here’s how to implement this software.

• Choose the right software: Select a bookkeeping platform that suits your business size, industry, and specific needs. Popular choices include QuickBooks, Xero, and FreshBooks. Each has unique features such as cloud-based operations, integrations with other platforms, and scalability.

• Train your team: Train your staff to use the software effectively. Many software providers have tutorials and customer support to help in this process.

• Set up and integrate: Configure the software to match your business’s accounting requirements. Integrate it with other systems – including your point-of-sale (POS) system, payroll, and banking – for unified financial planning.

Create a budget

A well-designed budget provides insight into your financial situation, allowing you to identify areas where you can cut costs, invest in growth, or save for the future. Let’s take a closer look at how to create a budget that works for your small business.

• Estimate your income: Project your monthly or annual revenue based on past performance, market trends, and sales forecasts. Be realistic and consider seasonal fluctuations or potential economic changes.

• List your expenses: Categorise your expenses into fixed costs (e.g. rent, salaries, insurance) and variable costs (e.g. inventory, marketing, utilities). Make sure you include taxes and loan payments. Track your expenses for a few months to get an accurate picture of your spending patterns.

• Set financial goals: Determine what you want to achieve with your budget. Are you looking to increase profits, pay off debt, or save for expansion? Let your goals shape your budget priorities.

• Allocate funds: Assign a portion of your income to each expense category, making sure your total expenses don’t exceed your income. If they do, you’ll need to adjust your spending or find ways to increase revenue.

• Review and adjust: Regularly review your budget to see if you’re on track. As your business evolves, your income and expenses will change, so it’s important to make adjustments as needed.

Automate manual processes

Automation tackles the repetitive and routine. By automating time-consuming manual processes, businesses can save time, reduce the risk of human error, cut costs spent on administrative overhead and labour, and build employee satisfaction by freeing up their time for more strategic efforts. Steps for introducing automation to your business are below.

• Identify which processes could benefit the most from automation.

• Choose software options that integrate with your current technology and can grow with your business. For example, systems such as customer relationship management (CRM) for managing customer relationships or enterprise resource planning (ERP) for company processes are great places to start.

• Roll out the implementation of your new tech solutions in stages to avoid operational overload.

• Make sure staff is fully trained on how to use these new tools and why they’re helpful to the business.

• Monitor how this technology is performing over time and adjust as needed for continual improvement.

These are some areas where automation can make a big impact.

• Invoicing and billing: Automated invoicing software can generate and send invoices to clients, track payments, and send reminders for overdue invoices.

• Payroll: Payroll software can calculate wages, deductions, and taxes – and it can automate direct deposits for employees.

• Expense tracking: Expense management tools can capture receipts, categorise expenses, and generate reports.

• Data entry: Data entry automation tools can extract data from sources such as invoices or receipts, and import it into your accounting software.

• Social media scheduling: Social media scheduling tools can automatically post content across platforms.

Keep detailed records

Detailed record-keeping helps your business make informed decisions; comply with audit requirements; and quickly address and resolve any disputes with customers, suppliers, or employees. Reviewing these records can help you strategise about how to cut costs, optimise operations, and boost profitability. Keeping thorough records also helps build a strong reputation, projecting reliability and transparency. Here’s how to implement good record-keeping practices at your business.

• Use digital tools to capture and store receipts, invoices, and bills. Track client interactions, supplier agreements, and employee records.

• Use cloud services to securely store your documents, protect them against physical damage, and make them accessible anywhere, at any time.

• Routinely update your records. Regular entries and backups prevent pileups and data loss, keeping your information current and retrievable.

• Organise your records with a system, whether by date, project, client, or type of expense.

• Set a schedule to periodically review your records. Analyse trends and performance to inform your plans.

Understand sales tax laws

Sales tax rates and rules can vary even within localities. As a small business owner, you need to keep up-to-date on the sales tax laws that apply to your specific products or services, location, and customers. Failing to comply with these regulations can result in hefty fines and penalties, putting your business at risk. Below is a look at what you should know about sales tax.

• Nexus: In the US, this refers to the connection between your business and a US state that triggers the obligation to collect and remit sales tax. It can be established through a physical presence – such as a store or office – or economic activity, such as online sales exceeding a certain threshold.

• Exemptions: Some products or services might be exempt from sales tax or value-added tax (VAT), such as groceries or prescription medications. Be aware of any exemptions that apply to your business.

• Registration: You’ll normally need to register with the local tax authority and obtain a sales tax permit.

• Filing and remittance: You’ll be required to file sales tax returns periodically (monthly, quarterly, or annually) and remit the collected tax to the appropriate authority.

Categorise expenses

Categorising expenses simplifies bookkeeping and provides valuable insights into your spending patterns. These are some of the ways that categorising expenses can help your business.

• Tax deductions: Certain expenses are tax-deductible, but only if they’re properly documented and assigned to the correct category.

• Budgeting: By analysing your expenses via category, you can identify areas where you’re overspending and adjust your budget.

• Financial analysis: Categorising expenses allow you to generate detailed reports that show how your money is being spent. This can help you identify trends, track spending over time, and make informed decisions about resource allocation.

Here’s how to strategically categorise expenses:

• Establish categories: Create a list of categories that align with your business activities. Some common categories include rent or mortgage, utilities, office supplies, marketing, payroll, travel, and professional services.

• Be specific: Don’t lump everything into broad categories such as “miscellaneous”. Be as specific as possible (e.g. “office supplies - paper”, “marketing - social media ads”, “travel - air ticket”). This level of detail provides more granular insights.

• Use accounting software: Many accounting software apps have built-in expense categories, making it easy to assign transactions by category. Some software allows you to create custom categories to fit your particular needs.

• Review regularly: As your business evolves, your expenses might change, so regularly review your categories to confirm they’re still relevant and comprehensive.

Manage cash flow

Managing your business’s cash flow is key for small business accounting. These are some ways to effectively manage your cash.

• Forecasting: Use historical data, sales forecasts, and expense projections to predict cash flow. This allows you to anticipate potential shortfalls and take preemptive action.

• Payment terms: Negotiate favourable payment terms with suppliers and customers. Extend payment terms with suppliers to preserve cash and incentivise early payments from customers with discounts or late fees.

• Invoice financing: If you have outstanding invoices, consider invoice financing. This allows you to access a portion of the invoices’ value while you wait for payment.

• Lines of credit: Secure a line of credit as a safety net. It can provide a buffer during leaner months or if you encounter unexpected expenses, giving you access to funds when you need them most.

• Dynamic pricing: Adjust your pricing based on demand and seasonality. Offer discounts during slow periods to stimulate sales and consider raising prices during peak seasons to maximise revenue.

• Inventory management: Optimise your inventory levels to reduce carrying costs and avoid tying up too much cash in stock. Use data and forecasting to anticipate demand and adjust your inventory accordingly.

Choose the right accounting method

The accounting method you choose determines how you record income and expenses, which in turn affects your financial reporting and tax obligations. The two main accounting methods are cash basis and accrual basis, and each has its own advantages and drawbacks.

• Cash basis accounting: This method recognises income when it’s received and expenses when they’re paid. It’s simpler and more straightforward, making it popular among small businesses with a smaller volume of transactions. But it may not provide the most accurate picture of your financial health, as it doesn’t account for outstanding invoices or unpaid bills.

• Accrual basis accounting: This method recognises income when it’s earned and expenses when they’re incurred, regardless of when cash changes hands. It provides a more accurate view of your financial performance, but it can be more difficult to implement and might require an accountant’s help.

Here’s how to choose the right method for your business:

• Business size and complexity: If you’re a small business with simple transactions and limited inventory, cash basis accounting might be sufficient. But if you have substantial accounts receivable or payable, or if your inventory is a major asset, accrual basis accounting might be more appropriate.

• Industry standards: Some industries have specific accounting requirements or preferences. Research the common practices in your industry to see which method is more widely used.

• Tax implications: The accounting method you choose can affect your tax liability. Consult a tax expert to assess the tax implications of each method and determine which one is more advantageous for your business.

• Long-term goals: Consider your long-term plans for your business. Accrual basis accounting is often preferred by investors and lenders, as it provides a more comprehensive view of your financial performance; so it might be the better choice if you’re planning to seek outside funding or go public.

Keep up on accounting

A well-organised accounting system provides a clear view of your business’s health and facilitates strong decision-making. Let’s look at how to be proactive in your accounting.

• Regularly reconcile: Don’t wait until year-end to reconcile your accounts. Make it a monthly or even weekly practice to compare your records against bank and credit card statements to help identify discrepancies early on – before they become larger issues.

• Address discrepancies promptly: If you find errors or inconsistencies, thoroughly investigate them and take immediate corrective action.

• Review ageing reports: Regularly review your accounts receivable and accounts payable ageing reports to identify any overdue invoices or unpaid bills. Work to collect outstanding payments and resolve payment issues.

• Archive historical data: Keep your current financial data readily accessible but archive older records to prevent clutter. This can be done electronically or by storing physical documents in a secure location.

• Manage how you handle documents: Create a written guide to your bookkeeping procedures, including how you categorise expenses, reconcile accounts, and handle transactions. This provides consistency and makes it easier to train new staff.

Plan ahead for taxes

Taxes are an unavoidable reality for small businesses, but they don’t have to be a source of stress and anxiety. By planning ahead and staying organised throughout the year, you can make tax season easier and avoid costly penalties for missed deadlines. Let’s take a look at how to handle tax planning.

• Set aside funds: Set aside a portion of your income throughout the year to cover your estimated tax payments.

• Track deductions: Keep meticulous records of all eligible business expenses. Use accounting software or spreadsheets to track these expenses throughout the year so you don’t miss out on any potential deductions.

• Make estimated tax payments: If you expect to owe taxes, make quarterly estimated tax payments to the appropriate authority for your location. This helps you avoid underpayment penalties and spread your tax burden out over the year.

• Consult a tax professional: Consider hiring a professional to help you navigate tax prep, keep up with compliance, and identify possible strategies to save on taxes.

• Stick to deadlines: Make sure you note important tax deadlines such as quarterly estimated tax payments and the annual filing deadline. Missing these deadlines can result in penalties and interest charges.

• Gather documents early: Start gathering your tax documents well in advance of the filing deadline (e.g. bank statements, receipts for deductible expenses, employee documents).

• File electronically: Filing online is faster, more accurate, and often results in quicker refunds than paper filing.