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There are no shortage of details to consider when you’re a small business owner. Getting the back-office basics of your small business accounting practices in order early on—tracking revenues, expenses, and profits—will keep you out of the weeds of paperwork and cash flow snafus, and let you focus on the important work of growing your business.
You might be able to get away with keeping your own books in the beginning. But, as your company grows and tax time approaches, you might feel a little big lost. Fees for incorrect tax filing or messy bookkeeping can be high, not to mention the time you spend in correcting errors.
Before running into issues, consider hiring a bookkeeper, or automate your accounting practices with one of the many business accounting software tools available to you. These include Xero, QuickBooks, FreshBooks, and Wave.
Bookkeeping is a necessary chore of all businesses. It helps you manage your operations, plan ahead, and prevent an audit by giving the Internal Revenue Service (IRS) what they need. To keep moving toward your long-term goals and improve profits, follow these proven small business accounting tips.
You might be tempted to place bookkeeping and accounting at the bottom of your to-do list, but following the right procedures can set your business up for success.
Here are the top small business accounting tips and tricks:
Having a dedicated business bank account for checking and savings saves you precious man-hours when it’s time to tally up deductible business expenses. Out of the gate, get used to using different bank accounts for business and personal purchases. If you’re contributing capital to you business out of your personal assets, make sure you clearly document the contribution.
Maintaining a dedicated business bank account and business credit card will also help you limit legal exposure to business debts if you have a limited liability company (LLC) or corporation.
In general, you cannot deduct personal expenses on a business tax return. If you use property both for business and personal use, such as a car or home office, then the portion of time you use the property for business is deductible. Otherwise, deducting personal expenses on a business tax return is not allowed. The penalty can be as high as 75% of the additional tax amount owed.
Label and categorize each expense, and track your cash flow to ensure that you can maximize tax write-offs and credits. Dollars add up quickly and you can easily run out of money. Use your business credit cards for all purchases and you won’t end up with a wallet full of paper receipts to sort through. This also means you can earn rewards and cash back for your spend. Accounting software will also store copies of checks and invoices that you’ve paid. When cash is your only option, file digital copies of receipts in your accounting software. Your chosen accounting method will impact when to record expenses and income.
Loans, revenue from sales and other cash infusions are easy to lose track of, but you need to keep tabs on all your incoming cash flow. If you don’t, you could end up underpaying your taxes, and that can lead to avoidable IRS penalties. As with expenses, your accounting method will determine exactly when to record income.
Hiring a professional bookkeeper or accountant, even for just a few hours per week or month, can make a big difference. The work of a bookkeeper and accountant overlap, though a bookkeeper is mainly concerned with recording and classifying income and expenditures. An accountant might also file taxes and help you with strategic planning.
A professional will keep your records up-to-date and orderly, and a pro is better equipped to know about potential fees, loopholes, or additional tax deductions for which you might be eligible. Understanding different IRS provisions and requirements can help you get tax advantages and save time. In fact, the average small business owner can bring in about $320,000 in new business annually by offloading accounting responsibilities to a pro. Just be sure that when you do hire an accountant, they speak to you in a way that you can understand.
Accounting software is a great tool for virtually any small business. You can use it on your own or give secure access to your bookkeeper or accountant, should you decide to hire one. QuickBooks is the best known accounting software, though there are several smaller competitors now as well. You should be able to link your bank account or credit card to any good accounting software. The software will then track your income and expenditures, categorize them, allow you to send and pay invoices, and generate reports. QuickBooks even has a ProAdvisor program to help you find a local QuickBooks expert if necessary.
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Block out weekly time in your calendar to get necessary paperwork in order and avoid letting receipts and invoiced receivables pile up. Make sure to stick to the time you’ve set aside. This can save you a lot of catch up work as tax season nears. Accounting software, such as QuickBooks, can save you time here by automatically categorizing income and expenses and reconciling your bank accounts and credit cards.
Paying employees, including yourself, might account for as much as 70% of a business’s total budget. Take note of overtime, perks, and other benefits you offer to prevent over- or under-paying. Your accountant or accounting software should also be able to help you calculate and pay your payroll taxes, which have different rules and deadlines than income taxes.
Computer upgrades, equipment replacement, and tax deadlines shouldn’t come as a surprise. Larger capital expenses often come up during slower months so plan ahead to avoid a cash crunch. The good news is that an IRS provision called Section 179 lets you deduct up to $1 million of business property and equipment in the year of purchase, instead of depreciating the equipment year over year. So even if you feel the pinch of large purchases now, you might benefit from tax breaks later.
Theft costs U.S. businesses $50 billion each year and can throw off your books. Avoid misplacing merchandise or theft by noting dates purchased, stock numbers, purchase prices, dates sold and sale prices. The more organized, the better. You can buy stand-alone inventory management software to help you with this task, or many accounting softwares integrate with inventory management tools.
Just because you’ve sent an invoice doesn’t mean you’ll get paid. Avoid overpaying on taxes and hours spent sifting through your revenue account and receivables listing by circling back with vendors who owe you money. Send invoices right after a job to increase the chances of prompt payment, and follow up with friendly reminders as the deadline approaches. You can even offer early payment discounts to incentivize your customers to pay quickly. Accepting online payments and using cloud-based accounting software can also help automate this process for you.
Even if your business is financially sound today, you want to make sure things stay positive. Using financial projections and reports—like a common size analysis or general profit and loss statement—you can estimate where your company will be the following year and even two or three years down the road. Financial projections can help you figure out where to invest business revenue and whether and when you’ll need to start applying for a business loan.
Financial forecasting can be tricky because you have to figure out how expenses can change due to natural forces (e.g. inflation) as well as decisions by your clients. The same is true for revenue, where you’ll have to factor in price increases and the number of customers marketing will generate each year. Sitting down with your accountant or using accounting software are the best ways to develop realistic financial projections.
Finance is the backbone of any business, so these small business accounting tips and tricks are essential to business success. Get in touch with an accountant if you don’t already have one, and ask them for the best place to get started! Alternatively, you can try accounting software, such as QuickBooks, which takes the guesswork out of small business accounting. By following these accounting tips for startups and established businesses, you’ll ensure that your company is financially healthy now and for many years to come.