The ultimate small business accounting guide
Many things can make or break a small business, and one of those is undoubtedly the presence or absence of good accounting practices. How you keep track of what comes into and out of your business accounts and how you budget for expenses have a significant bearing on long-term success. With that in mind, below is the ultimate small business accounting guide, offering some essential pieces of advice to small business owners.
Plan for big expenses
As a small business owner, you need to be honest with yourself about the kind of expenses you would expect to face over the short to medium term (one to five years). What kind of major upgrades will you need to make? Are you going to have to replace most of your office furniture or shell out money for new capital equipment purchases? When considering this, always factor in any seasonal ups and downs that your business faces and how these will impact how you spend.
If you have these expenses already in mind, you can ensure that you aren’t taking too much money out of the company during the good months and find yourself scrambling for cash in the lean ones. You can even create separate bank accounts for these earmarked expenditures so that you are not tempted to dip into your cash. Planning future expenses should be part of every small business accounting guide.
Always track your expenses
Expenses might seem easy to track by hand or keep in your head as you are just getting your business off the ground. But, as time goes on, and they start to add up, and you are incurring more expenses–and perhaps many smaller ones–on a regular basis, it is very easy to keep track of where your money is going. A good way to make expense tracking easier on yourself is to use a business credit card. Consulting a single statement at the end of the month is much easier than trying to rack your brain for all of the different accounts you might have used to pay for this and that.
Additionally, to make sure that you are well-prepared in the event of an audit, it is also wise to keep detailed notes in your calendar and day planning tools of all of the business-related events, lunches, coffees and travel that you pay for throughout the year. In the event that the government wants you to substantiate your expenses for your tax records, you will have everything you need to make the process quick and painless.
Set aside money for tax as you go
Every person and business is aware that they have to pay taxes at some point during the year, and they know exactly when that will be. With that in mind, plan your taxes accordingly. It is a good idea for small business owners to put money aside methodically, as unpaid taxes can end up getting you into trouble with tax collection agencies and result in fines and penalties. In addition, it is always much less stressful to have the money there when you need it.
If you can put aside tax money each month, or every time someone pays a contract or invoice, tax time will be much less of an issue for you. One of the biggest downfalls for new small businesses, especially for people who have been employed by someone else for all of their professional lives, is having to write the government a check at the end of the fiscal year.
Always pay attention to invoices
If you make a habit of not collecting invoice payments on time, it can end up having a serious effect on your cash flow. It is a good idea to have a designated person within the company to track your billing and make sure they know what to do when bills are unpaid. This could involve sending out a follow-up invoice, calling the delinquent account or even charging interest and penalties past a certain deadline that is outlined in any contracts your customers sign with you when doing business.
It is always best when you have procedures in place for when clients are 30, 60 or 90 days overdue. If you want to better motivate yourself to collect money that is owed to you, think of it this way: every late invoice is essentially an interest-free loan you have given someone and it is hurting your cash flow.
Be meticulous with your deposits
It doesn’t matter whether you are using a pad and pencil, an Excel sheet or financial software; you need to keep track of the money that is entering your bank account–whether you are depositing it or you have direct deposit arrangements with some of your customers.
As your business grows, you will undoubtedly start to make more deposits to your business account during the year. These could be loans, sales revenue, cash from your own savings, etcetera. If you are unable to indicate where each one of those deposits come from, you are potentially leaving yourself open to paying taxes on money that is not actual income.
Conclusion
Accounting is the foundation of financial health for businesses of all sizes. It is important for small businesses to keep on top of their accounting throughout the year and especially as the business grows, in order to avoid runaway tax bills and not having enough cash to pay for expansions, upgrades, repairs and unexpected expenses. Keep the above small business accounting guide in mind and ensure your small business is dotting its I’s and crossing its T’s.