s an entrepreneur, you invest time, money, and effort to start and run your business. A robust accounting system can help your business survive and grow sustainably. It’s important to keep your business finances organized and to record your business transactions accurately. Even a little knowledge of financial management can take you and your business a long way. Below are five tips to help small businesses keep their companies on track using accounting and financial information.
5 Small Business Accounting Tips
1. Open a separate business checking account
Having a separate checking account from your personal finances. Even for a sole proprietorship, where a different business account is not necessarily required, it is prudent to get one. A business checking account allows easy tracking of income and expenses without mingling business and personal funds. Separating personal expenses from company financial accounts can also make it easier for you to compute taxes come year-end. Accounting processes will become much easier with a separate business checking account.
Novo offers one of the best business checking accounts. No hidden fees, no minimum balance requirements, and hundreds of business software integrations are just a few reasons why Novo is built to help your business thrive.
Learn more about Novo business checking and why it’s the preferred platform for over 175,000 businesses.
2. Monitor expenses
The Internal Revenue Service (IRS) requires businesses to show proof of income and expenses for tax purposes. Remember that you likely have tax-deductible costs, including research expenses for business startups. However, a record of these expenses is required to lower a company's tax liabilities. Thus, it is best to track, keep, and file the following documents for such reasons:
- Business credit card or bank statements
- Proof of payments
- Financial statements
- Previous tax returns
Keeping an organized filing system for receipts is a must from the start of any business. The IRS accepts digital copies of receipts; therefore, you can take advantage of cloud-based storage for scanned receipts. This will ensure that your receipt records are protected from possible theft and damage.
3. Decide on the accounting method that works for your business
Bookkeeping is a way of recording transactions, including categorizing and reconciling them daily. Accountants use these records to prepare financial statements and help you make sound business decisions.
There are two based accounting and bookkeeping methods companies can adopt:
- Cash Basis Accounting Method: This is when you record revenue and transactions each time they happen, whether the business pays for an expense or a customer pays a billed amount. It is ideal for small businesses to verify bank balances at any point in time.
- Accrual Accounting Method: Most businesses use the accrual method. The advantage of this method is that it matches your business expenses to your revenue since you're recording both revenue and transactions, even if no payment has yet been made. That means you record bad debts or refunds in advance and when an invoice is issued to a customer. Companies must regularly monitor and track accounts receivables and payables under this method.
- Profit First Accounting Method: The Profit First method revolutionizes the concept of modern accounting, essentially proposing to reverse the order in which funds are allocated. The general idea behind Profit First accounting is that businesses should pay themselves first and let what remains to dictate how much they can spend on operating expenses. When making a sale, business owners take a percentage of the revenue generated as profit, leaving the rest for expenses.
Businesses may opt to choose from the following modes of bookkeeping services:
- Doing it on your own: Small business owners who know how to do the bookkeeping themselves can save money. There is also accounting and bookkeeping software available to assist small business owners in accomplishing this task. To make bookkeeping even easier, you can link your Quickbooks or Xero account with Novo’s interface, and your transactions will be updated automatically.
- Outsource: For those with no accounting and bookkeeping experience or who find accounting too time-consuming and want to avoid the hassle, it is wise to use the services of accountants and bookkeepers, like a CPA. Outsourcing these services can help you focus more on other business concerns and be cheaper than getting full-time employees.
- In-house: You can hire full-time bookkeepers and accountants if your company has enough money to spend on labor costs.
4. Know how to pay your taxes
Proper accounting, bookkeeping, and record-keeping are essential for tax preparation. From payroll taxes to income taxes, there’s a lot to keep in mind. To make tax season less stressful, track expenses throughout the year, keep digital or paper receipts and always stay on top of your business finances.
Tax professionals can help you prepare the estimated quarterly income tax, which you must pay at the appropriate time. They can also review your business's profit and loss (P&L) to determine your actual tax obligations. Ensure you comply with existing tax laws within your area or state to avoid steep penalties and pressing legal issues come tax time.
5. Prepare financial reports
All businesses need to prepare financial statements. These statements include balance sheets, income statements, cash flow statements, and statements of shareholders' equity. These financial reports give the whole picture of how a particular business is going. Financial reports are done monthly, quarterly, semi-annually, or annually.
Analyzing the figures in these financial records can help companies see trends and reasons why sales are going up or down. This data assists owners in making significant decisions about how to run their businesses. It helps determine how much money small business owners have and whether they have enough assets to pay for liabilities.
Accountants can help you do much of the needed work in preparing financial statements. Don’t forget these reports will be the basis of the taxes you pay each year.
How Novo Can Help
One key aspect of accounting is the day-to-day recording, tracking, and reconciling of your business transactions. With Novo, you can add details to every transaction, including adding categories and notes and uploading images and documents. You can also export this data in a CSV file for easier manual bookkeeping. For a more automated process, you can connect your Quickbooks or Xero account to Novo so that your transactions automatically sync with your preferred accounting software.
As a small business owner, it’s important to remain flexible. With this in mind, regularly revisit and re-evaluate the small business accounting methods you adopt. There might be a need to update or revise these methods to meet market demands and requirements.
As the saying goes, "numbers do not lie." The figures in your financial and accounting reports tell your company's status. Having these numbers available and knowing how to use them can help you improve the way you manage your small business.
This page is for informational purposes only and is not intended to be relied upon as legal, financial, or accounting advice. Please consult your own professional if you have any questions.