Most small business owners aren’t accountants or bookkeepers by trade. But learning the nuts and bolts of accounting is essential no matter your background. Your company’s financial documents can provide valuable insights into what to focus on, change and strengthen — and you should be able to read and understand them on your own.
Still, small business accounting can be a challenge for leaders without a financial background. We’ll share 11 tips to help demystify accounting and help you keep your company on the right path.
Small business accounting is relatively simple. Companies that operate in a single state with a simple business structure have three accounting priorities:
Consider the following accounting tips to keep your business’s financials in order.
One of the messiest accounting blunders small business leaders make is mixing their business and personal funds. Although many entrepreneurs self-fund their businesses, business revenue and expenses must be kept separate from personal finances.
Here are some tips for keeping business and personal accounts separate:
Classifying workers properly is a common accounting challenge.
When you’re ready to build a team, you have two choices: employees and contractors.
The penalties for misclassifying workers are steep:
If you decide to hire employees, you’ll be on the hook for more than just their wages. When calculating labor costs, consider the following:
It’s best not to cut compensation post-hire. Even if you were generous with initial wages and benefits, your workers will feel cheated if you pare them down — and you may end up with high employee turnover rates.
A profit-and-loss statement, or P&L statement, is a staple accounting tool that summarizes your company’s income and expenses over a given period. All public companies are required to put out these statements once per quarter. Although small business owners aren’t legally required to create them, P&L statements are a great way to see whether you’re on track to meet your financial goals.
Follow these steps to generate a P&L statement:
Although individual P&L statements are valuable, quarter-by-quarter comparisons are even more critical. Are your operating expenses growing? Is your profit shrinking, despite your sales figures going up? Checking P&L statements against one another yields valuable insights.
You can claim a good chunk of your company’s expenses as tax deductions. Various categories allow expenses to be fully or partially deducted, including the following:
However, to claim these deductions, you need receipts for financial tracking and verification purposes.
Business owners often forget to get receipts for charitable donations. Although companies of specific structures, such as LLCs and partnerships, can’t claim charity contributions as business expenses, the owner often can. Ask recipients of in-kind donations for written confirmation of the time spent, and use documentation to defend the fair market value of any property donations you make.
Each month, review the percentage and total amount of outstanding revenue. Generally, no more than 10 to 15 percent of your accounts receivable should be past due. Reach out weekly to those clients. While you don’t want to start the debt collection process too soon, you must ensure you get paid.
One solution is charging interest and late fees. For example, set a monthly finance charge of 1 percent or 2 percent of the principal. If you decide to charge 2 percent on an initial charge of $5,000, you’d add $100 to the invoice every month it isn’t paid.
Be sure to tell clients about finance charges in advance. It’s important legally, and the threat of penalties is often enough to dissuade poor payment practices.
Invoicing is a necessary part of owning a business, but it can feel cumbersome and time-consuming. Plus, any mistakes impact your payments. Sending out accurate, regular invoices is critical.
These are some best practices for creating invoices:
By keeping detailed and accurate records of your invoices, you can spot customers who fail to pay on time and reward those who are always early.
Individuals usually pay taxes once per year. However, many small businesses file estimated quarterly tax payments. Quarterly payments need to be made on self-employment tax (including Social Security tax and Medicare tax) and income tax on your company’s profits.
Follow these steps to determine whether you must pay quarterly taxes:
If you must make estimated tax payments, here’s when they’re due.
Big companies commonly pay on net-60 or even net-90 terms — meaning they transfer funds either two or three months after receiving an invoice. Your small business can manage its cash flow by operating the same way.
Consistency is key. Let’s say you pay on net-30 terms. Make it clear at the time of service that your vendors can expect you to pay in 30 days. Don’t pay early, or the vendor will expect the same next time. Don’t pay late, or the vendor may not want to work with you in the future.
Business owners like to control all aspects of their organizations. However, sometimes it pays to outsource processes and functions — like accounting and bookkeeping — to the experts. By hiring a CPA, you can reduce accounting mistakes and ensure your records are accurate and current. You’ll also save time. A CPA can review your books to help you identify ways to cut costs and boost spending in growth areas.
Choosing the right accounting software can be a game-changer. Accounting software was once cost-prohibitive for many small businesses, but now you can access robust accounting software for a monthly fee (or even for free). Accounting software is increasingly easy to use and provides small business owners with many features and services, including sales tracking, budgeting, inventory management, financial statements, payroll and taxes.
In addition to automating accounts payable and accurately tracking and balancing your books, cloud-based accounting software can often integrate with the other software you use. Sharing data across applications can reduce errors and save the time it would take to manually input data into your accounting software.
The best accounting and invoicing software for your business fits into your budget while providing the features your organization needs. Here are some top solutions to consider:
Accounting may not be the sexiest part of being a small business owner, but it’s an essential one. Mistakes in your books will come back to haunt you. Tax troubles will only get worse, and you may miss a tax deadline. If you’re in over your head, call an accountant. There’s no shame in asking for help.
Jennifer Dublino contributed to this article.