As a small business owner, you have a lot of priorities that demand your attention. Your finances aren’t going to manage themselves, so it’s important to make your accounting and bookkeeping as simple as possible. By finding tools and strategies that help you streamline money management and stay on top of your business finances, you’ll have more time to focus on your other priorities.
Here are a handful of tips for effective small business accounting.
1. Keep business expenses separate from personal expenses
This seems like basic advice, but you’d be surprised how many small business owners use the same bank account for personal and business transactions.
The first step you should take is to open a business checking account. Use this account to pay your bills, deposit cash, and for all your business transactions. Remember, this account is not for your personal finances.
Next, get a business credit card. As its name implies, you should use the card only for business transactions. A business credit card can help keep your personal and business expenses separate, making it easier to track money in and out, as well as file your taxes.
You should differentiate between personal and business finances for several reasons:
- Year-end accounting for small businesses is much simpler if your personal receipts and payments are in a separate account. Mixing funds would force you or your accountant to spend hours or days sifting through each entry in your bank statements to determine if it’s a personal or business transaction.
- According to IRS rules, many business expenses are deductible and could reduce your taxable income. But if you don’t keep track of what you’re spending on, you could end up missing out on this benefit.
- If you keep your business assets separate from your personal finances, it could help protect your personal assets. If you default on business debt obligations, creditors may pursue legal action, and you don’t want to put your personal savings or even your home at risk.
2. Carefully track business expenses and income
Keeping close tabs on your company’s income is crucial. Firstly, doing this will help you know if you are on budget or on track to meet your sales targets. The other reason is equally, if not more, important. Under-reporting revenues could lead to lower profits in your books. This could result in paying less tax than you’re liable for. If the IRS believes you’ve underreported your income, you could face an IRS audit.
Many new business owners would like to know how to do accounting for small business in an error-free and timely manner. Remember that it all starts with your expenses and income. It’s advisable to track these carefully and make the correct accounting entries as soon as possible. One of the best ways to ensure accurate expense tracking is to record expenses as soon as you make them. If you can do this, you will be laying the foundations for creating accurate accounting records on which you can base your business decisions.
Paying your bills through an online bill pay platform can make tracking even easier, especially if the tool is integrated with your business checking account. Some tools even let you use your business credit card to make payments, which allows you to earn credit card rewards.
3. Automate where you can
If you haven’t already automated your business’ monthly bill payments, you should set up recurring payments to save time.
An automated payment is a payment that’s made directly from your business checking account or credit card every month. You don’t need to receive a paper invoice and process it when you use this payment method. All that you’re required to do is authorize an automatic payment to be made from your account. This is a one-time action and ensures that your bills are paid on time.
You can automate cell phone payments, utility bills, credit card bills, and any other regular payments you need to make.
A good business checking account will seamlessly sync with your accounting software. This will save your accountant time and will also prevent manual data entry errors.
4. Budget strategically
A budget is a spending plan based on your expected revenues and expenses. Think of it as a road map that will get your company from where it is to where you want to take it.
What does a budget have to do with how to do accounting for a small business? The key to making the best use of a business budget lies in comparing the actual numbers from your accounting records to your budgeted figures. You’ll realize where you’re falling short, and you can use this information to take corrective action.
Here’s a tip that will help you budget effectively: Choose a business checking account that lets you open sub-accounts with designated account numbers. This helps you keep finances separate for different purposes, plus you can control which accounts your vendors can bill. Sub-accounts also help simplify your accounting.
5. Consider hiring an accountant
Accountants are responsible for keeping and interpreting your company’s financial records. Additionally, they can make your life much easier come tax season, or when you’re planning your budget for next year.
Some small business owners are reluctant to hire an accountant because they don’t want to give them access to their bank account. However, the best business checking accounts let you share access securely, without needing to share passwords. Giving your accountant dedicated access to your business checking account means they can get all the transaction and tax information they need on demand, using their own login.
We hope these small business accounting tips help you save time and headaches while managing your finances––so you can continue growing your business with confidence.
