11 Accounting Tips All Small Businesses Should Know

What small businesses need to know about accounting

Small business accounting is relatively straightforward, particularly if you’re using one of the best accounting software solutions. Companies that operate in a single state with a simple business structure have three accounting priorities:

• Ensure that revenues exceed expenses.
• Keep the books clean.
• Pay all necessary taxes.

Consider the following accounting tips to cover your priorities and keep your business’s financials in order. 

1. Keep business and personal accounts separate.

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: 

• Start with a sound business structure: Establish your company as a distinct legal entity, such as an S corporation or limited liability company (LLC). 
• Open a business checking account: Open a business checking account as your financial hub and pay yourself a salary from it each month.
• Get a business credit card: Apply for a business credit card for expenses you can’t or don’t want to pay cash for.
• Open a business savings account: Open a business savings account as a rainy day or investment fund. 
• Monitor personal item usage: Track any business usage of your personal items.

2. Classify workers properly to streamline accounting.

Classifying workers properly is a top accounting challenge for small businesses. 

When you’re ready to build a team, you have two choices: Employees or contractors: 

• Employees: The IRS considers employees to be those over whom you have behavioral authority and financial control. You also likely have long-term business relationships with employees.
• Contractors: Independent contractors are people who work for your company on a project basis. They retain control over their schedules and business decisions.

It’s crucial to classify workers correctly, as misclassification penalties are steep:

• Employers pay $50 for each W-2 form for misclassified contractors. 
• Employers pay fees of 1.5 percent of wages and 40 percent of Federal Insurance Contributions Act (FICA) taxes they didn’t withhold from an employee. 
• Employers must also pay 100 percent of the FICA taxes it would’ve paid per employee. 
• If the IRS believes the misclassification was intentional, the employer could be fined up to $1,000 per worker or imprisoned for a year.

Other consequences could include back pay for benefits and protections employees would have been entitled to, as well as penalties from state agencies, depending on labor laws.

3. Calculate total labor costs before you hire.

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: 

• Benefits and payroll taxes: At least once a month, you must ready funds for employee benefits and payroll taxes. Those costs add up faster than many small business owners realize. 
• Wage increases and bonuses: According to a 2024 Robert Half report, 51 percent of businesses have increased or plan to increase salaries, 40 percent are offering signing bonuses and 36 percent are offering retention bonuses. Clearly, a competitive labor market means businesses must create a competitive compensation package to attract and retain top talent — and they must also ensure they can handle these increased costs over time.

4. Create profit-and-loss statements regularly.

A profit-and-loss (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:

• Total the revenue you generated in the quarter.
• Itemize your company’s expenses. Sort them into two categories: operating expenses and cost of goods sold.
• Subtract the total expenses from your gross profit to get your operating profit.
• Subtract interest and taxes from that operating profit and you’ll know whether your business operated at a profit or a loss that quarter.

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. 

5. Always get a receipt.

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: 

• Meals with clients
• Inventory purchases
• Business travel
• Ad campaigns 
• Office rent 

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.

6. Keep a close eye on accounts receivable (AR).

Although staying on top of accounts payable (AP) is essential, AR dictates your company’s survival. If money isn’t coming in the door, the company can’t continue operating. 

Each month, review the percentage and total amount of outstanding revenue. Generally, no more than 10 to 15 percent of your AR 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.

7. Invoice accurately and regularly.

Invoicing is necessary for owning a business, but it can feel cumbersome and time-consuming. Mistakes impact your payments, so sending accurate, regular invoices is critical. 

These are some best practices for creating invoices:

• Provide specific information about the transaction.
• Send invoices in a timely manner. 
• Follow up via email or text with payment reminders. 

By keeping detailed and accurate records of your invoices, you can identify customers who fail to pay on time and reward those who always pay early.

8. Stay on top of tax deadlines.

Individuals usually pay taxes once per year. However, many small businesses file estimated quarterly tax payments. Quarterly payments must 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:

1. Subtract your federal income tax withholding from the federal taxes you expect to owe this year. If that figure is less than $1,000, you don’t need to make quarterly payments.
2. Take the total federal tax you expect to owe this year and multiply it by 0.9. If you’ve withheld at least that much, there’s no need to make quarterly payments.
3. Compare your total federal income tax on last year’s return to your withholding amount. If it’s at least as much, you don’t need to pay those quarterly taxes.

If you must make estimated tax payments, here’s when they’re due.

• First quarter: April 15
• Second quarter: June 15
• Third quarter: September 15
• Fourth quarter: January 15

Organizing your finances properly is key to staying compliant. Sarah McNamara, founder of McNamara Solutions, advises breaking payments into categories to minimize your tax liability. “Learn to split out net deposits from payment processors into gross sales, refunds, discounts, [and] payment processing expenses,” McNamara recommended. “Create a liability for any sales tax collected as part of these net payouts.”

9. Set (and stick to) your own payment terms.

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.

10. Bring in the experts instead of do-it-yourself accounting.

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 certified public accountant (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.

Kathy Gilchrist, founder and chief financial officer (CFO) at Cardinal Bookkeeping & Advisory, emphasizes that not all accountants are the same, so finding the right financial professional for your business is key. “Your accountant may be a tax preparer, a bookkeeper, a fractional CFO or they may have a different area of specialty,” Gilchrist explained.

According to Gilchrist, these financial professionals handle the following tasks:

• Tax preparers help business owners comply with tax regulations and may offer tax planning strategy services to lower the owner’s tax obligations. 
• Bookkeepers ensure your accounting system records and correctly categorizes all past transactions.
• Fractional CFOs focus on the future and handle budgeting, forecasting and helping business owners prepare a financial strategy. 

“When you’re looking for accountants, make sure you hire ones that offer the services you need for your business,” Gilchrist stressed.

11. Use accounting software.

Choosing the right accounting software can be a game-changer. Accounting software was once cost-prohibitive for many small companies, but now, every business owner can access robust platforms 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 AP and accurately tracking and balancing your books, cloud-based accounting software can often integrate with your other business software. Sharing data across applications can reduce errors and save the time it would take to manually input data into your accounting software. 

Accounting is a crucial component of running a business

Accounting may not be the most exciting 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 worsen with time and you may miss a tax deadline. If you’re in over your head, call an accountant. Asking for help is a wise business decision that can set you up for growth and success. 

Jennifer Dublino contributed to this article.