Running a business of any size requires at least a basic understanding of small business accounting. Accounting allows you to keep track of expenditures and revenues and manage your company’s cash flow. It also provides insight into your company’s finances, and enables you to provide financial information about your business to potential investors and lenders. These basics will get you started.
Key Points
• Accounting is crucial for small businesses, allowing you to keep tabs on your company’s financial health and manage your expenses effectively.
• A good accounting system enables you to present financial information about your company to stakeholders, investors, and lenders.
• Owners should understand key financial statements like balance sheets and income statements to monitor profitability.
• Good bookkeeping habits, such as checking your cash balances daily and recording all financial transactions, are essential for financial organization.
• Utilizing accounting software helps manage bookkeeping tasks efficiently and ensures accurate financial records.
What Is Small Business Accounting?
Small business accounting is the process of tracking and analyzing your company’s financial information. It can help you evaluate the health of your business, stay on top of necessary administrative tasks, and make it easier to file your taxes. A good small business account system also makes it easier to apply for small business financing, or bring in outside investors.
Before diving into the basic steps of accounting, it’s a good idea to familiarize yourself with a few key business accounting terms.
• Liabilities: A business liability is any type of financial obligation that a business owes to another entity, such as money, goods, or services. They are divided into current (due within one year) and non-current (due after one year or more) and listed on the balance sheet.
• Assets: This refers to any goods or property that add value to the business. Assets can be tangible (like inventory or offices) or intangible (such as patents, trademarks, or even brand recognition). They’re itemized on the balance sheet.
• Accounts payable: A type of short-term liability, accounts payable is the amount of money a business owes to its suppliers for goods or services purchased on credit. It’s recorded as a current liability on the balance sheet.
• Accounts receivable: This term refers to the money a business’s customers owe for products or services that have been sold but not yet paid for. It’s listed as an asset on a company’s balance sheet.
• General ledger: This is a record of all financial transactions made by a business. An entry into this ledger is called a “journal entry.”
• Equity: This is the value of the business’s assets minus its liabilities and is a measure of the business’s ownership and value.
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9 Steps for Small Business Accounting Success
Basic accounting for small businesses involves a variety of tasks. Some need to be done on a regular basis, while others you might need to do only once every quarter or every year. Here are some of the most important steps to take, along with how often each one should be performed.
1. Keep Up With Basic Bookkeeping Functions: Daily or weekly
It’s important to track your accounts for your small business on a regular basis. That means developing several good habits:
• Check your cash balances every day. This lets you know how much is coming in and going out. That way, you’ll stay on top of managing your daily cash and avoid overdrawing any accounts.
• Record your transactions. This includes all income and expenses. You can use either a spreadsheet or accounting software.
• Keep and file copies of your receipts and invoices. This can make it much easier to organize paperwork for your tax records when it comes time to file. And if you’re ever audited, you’ll have an organized system with all of those documents at hand.
You generally want to perform all of these tasks daily or weekly. If you put them off longer than that, you’re more liable to make mistakes or miss something, which can ultimately hurt your bottom line.
2. Process Payroll: Biweekly
If you have employees, you’ll need to stay on top of payroll. It’s important to meet your payroll schedule deadlines, which are typically biweekly. Consider setting up direct deposit if it makes sense with the size of your business. You can also outsource the process to a part-time or contracted payroll manager.
In addition to making sure your employees are paid, payroll for small businesses involves meeting tax requirements for federal, state, and local jurisdictions.
3. Send Invoices: Weekly or Monthly
Sending out invoices is one of the most important parts of your business because it’s how you actually get paid. This business accounting task could be done weekly or monthly, depending on what makes sense for your business model.
You’ll want to put a due date on each invoice, then track unpaid invoices according to the deadlines. It’s also a good idea to set up a system that reminds you to follow up on overdue payments — otherwise you could develop cash flow issues. Using invoice tracking software, for instance, allows you to add automatic reminders. Taking some of the manual work off your hands also enables you to focus on other areas of your business. It can also help you keep track of invoices that your business needs to pay.
4. Track Upcoming Bills: Monthly
Just as you keep track of your personal bills each month, you’ll want to do the same with your small business bills. You can create a calendar and enter information for all of your vendors and service providers (like utilities) that need to be paid each month. Also include payments due on any types of small business loans. Mark how much is due and when (estimate, if you need to), then note when you actually make the payment.
In some cases, a vendor may offer a discount if you pay your invoice early. If you have any relationships that offer this perk, you’ll want to make note of that as well. Once you see the full picture on your calendar, you can try prioritizing your bills to get the discount. Just make sure you don’t fall behind on other bills in the process, since that can result in late fees, damaged relationships, and even a drop in your credit score if you’re late on a loan or credit card payment.
5. Manage Your Cash Flow: Monthly
A solid invoicing system can also help you successfully manage your business cash flow. It tracks your accounts payable and accounts receivable, as well as inventory. For a less complex small business, you can look at unpaid expenses versus total sales each month to determine your cash flow. If you owe more than you’ve brought in for the month, you’re experiencing a cash flow crunch and will need to take steps to address it. If your total sales amount is more than your expenses, you’re experiencing a surplus.
6. Make Sales and Income Tax Payments: Varies by Location (at least quarterly)
Not only are you responsible for payroll tax, you typically also need to pay sales and income taxes as part of your small business accounting routine. It’s a good idea to get to know your state’s specific requirements for each type of tax. Sales tax is required in 45 states, and your local county or city may also collect this type of tax from small businesses. You may qualify for an exemption, depending on your type of business. If not, check each locale’s payment schedule and note it on your calendar.
You’ll want to apply the same process to income tax. The federal government, and most state governments, collect income tax, with estimated payments due each quarter. Check with an accountant or tax advisor if you’re unsure of how to estimate your income taxes.
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7. Review and Compare Financials: Monthly or Quarterly
You can analyze your financials in several ways to gauge the health of your small business. For example, you might look at your profit-and-loss statement and income statement to get an idea of how well the business is performing.
There are also several accounting financial ratios worth reviewing regularly. Here are three that may be particularly helpful.
• Gross margin profit ratio lets you see how much profit your business is making after expenses are paid.
• Debt-to-equity ratio can help you assess whether or not your company is overleveraged (has too much debt compared to equity).
• Cost of capital evaluates how much your company must pay for funds. It’s a useful metric since it helps you see if your financial decisions are paying off in terms of profit margins. And it’s also something that investors may look at.
Tracking these numbers regularly also reveals long-term trends. It’s wise to compare current financials to those from the previous month, quarter, or year to identify factors that are either hurting or helping your business.
8. Prepare Annual Taxes: Yearly
Accounting for small business includes annual responsibilities as well. But even if these only occur once a year, they’re still extremely important.
The first is to file your taxes and pay any additional taxes owed beyond the quarterly estimated taxes you already paid. All of the recordkeeping you’ve done throughout the year makes this much easier. You’ll have all of your invoicing and expense receipts in one place so you can easily report your income and deductible expenses. Be sure to file on time to avoid penalties and interest.
9. Create Annual Financial Reports: Yearly
A final component of your accounting plan is to pull together financial reports each year. This usually includes a balance sheet, income statement, and cash flow statement. These can help you file your taxes, as well as give you an educational overview of how well your business performed over the year.
Just like quarterly reports, your annual report can help you figure out how much growth (if any) you’ve experienced and what opportunities may be worth pursuing in the future.
Some Small Business Accounting Solutions
Staying on top of your accounts is a sound business practice, but that doesn’t mean you can’t get some help. Here are some possible aids to consider.
Accounting Software
Basic accounting software can help you with everything from tracking expenses and sending out invoices to calculating annual revenue and generating various financial reports. For example, your accounting software may be able to produce a cash flow statement so you can see where money is coming in and where it’s going out. There are numerous free bookkeeping and accounting programs. If you’re willing to pay for your software, you may be able to get more bells and whistles along with the basics.
Accounting Services
While you may not be able to afford a full-time accountant on staff, hiring an accountant on a part-time or consulting basis may be worthwhile for your small business, particularly if you’re too busy or feel uncomfortable delving into the numbers yourself. An accountant can help with everything from setting up a bookkeeping system to preparing financial statements to filing your tax returns.
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The Takeaway
Understanding basic accounting for small businesses automatically sets you up for a better chance of success. If you’re just starting out, you may be able to manage all of these tasks on your own, especially with the online accounting software available today. As your business becomes more complex, however, it may be time to start outsourcing tasks that are either out of your comfort zone or take up too much time.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Can you do your own small business accounting?
Yes, it’s possible to handle your own small business accounting, especially with the help of accounting software. These tools simplify tasks like tracking income, expenses, invoices, and payroll, making them doable even if you have limited accounting experience. As your business grows, however, you may benefit from hiring an accounting professional to manage complex tasks, ensure tax compliance, and provide financial insights that can help with long-term planning.
What accounting is required for a small business?
Small businesses are typically required to maintain accurate records of income, expenses, assets, and liabilities. This involves tracking your revenue and costs, managing accounts receivable and payable, and maintaining records of any inventory or equipment. You’ll need these records to prepare financial statements, file your taxes, and monitor profitability. Depending on your business structure, certain tax or financial reports may be mandatory, like a balance sheet or income statement.
Which accounting method is most commonly used by small businesses?
Small businesses typically use the cash basis accounting method due to its simplicity. With this approach, income and expenses are recorded only when cash is actually received or spent. This offers a clear view of cash flow without the need to make complex adjustments. However, some small businesses may prefer accrual accounting, which records transactions when they occur and before any money is received or paid out. While this accounting method is more complex, it can provide a fuller picture of a company’s long-term financial health.
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