10 Tips to Save You Money and Time: Small Business Accounting 101

As a small business owner, you’ve got a lot on your plate. You’re searching for new leads, training employees, and you’re always looking for ways to improve business operations and increase profit margins. Probably the last thing on your mind is keeping track of receipts, budgets, and crunching numbers for financial reports. But here’s the thing: these tedious tasks are actually a major part of your business’ success. So no matter how much you despise math and analytics, you should learn at least a few small business accounting tips so that you can 1) comply with accounting standards and 2) expedite business growth.

Business accounting doesn’t have to be as complicated as it’s made out to be. In this post we’re going over 10 accounting tips to help you: stay organized, evaluate your finances, and identify opportunities for growth. Plus, we’re reviewing some important accounting equations you can start using in your accounting strategy ASAP. Use the links below to navigate throughout the page, or read all the way through to learn about all of our best accounting tips.

• The Status of Small Business Accounting Today
• General Small Business Accounting Tips
• Basic Accounting Formulas to Know
• Community Tax Can Help

The Status of Small Business Accounting Today

Before we reveal our top accounting tips, let’s take a look at where small business accounting stands in the modern marketplace. Here are some things you should know:

• Of 104 business owners surveyed, 64.4% said they used software to perform accounting duties.
• According to AccountingToday 39% of small business owners said they were most likely to hire an external organization to handle bookkeeping.

10% of business owners said maintaining financial stability and cash flow was the most important challenge they’ve faced in 2019.

Based on these statistics alone, it’s easy to see that accounting has long been a pain point for small business owners. It requires practice, organization, basic accounting know-how, and most importantly, commitment in order to do it right. The good news is, there are plenty of resources, software programs, and of course accounting professionals ready to lend a helping hand to business owners who are ready to level up their small business accounting strategy.

General Small Business Accounting Tips

Now that we know where small business accounting stands as it is today, let’s talk about how you can set up your own business accounting for success and maintain accounting practices that move your business forward.

1) Be strategic about your business formation

If you’ve already opened up shop and introduced your business concept to the world, you know that starting your own business isn’t as simple as cutting the red ribbon with a giant pair of scissors. There’s a lot more to it than hosting your grand opening party. Setting up your accounting process actually starts at the very beginning of your business’ inception when you form your leadership team.

When you apply for a business license, you’ll have to determine your business structure: will you be the sole proprietor, or will your company be considered a partnership or S-corporation? This distinction will guide how you make financial and general decisions for your business, so it’s important to do your research and make a commitment early on.

2) Adopt an accounting strategy and stick to it

Speaking of making decisions ahead of time, there are two standard accounting methods to choose from: cash basis accounting and accrual basis accounting. Both cash and accrual accounting are platforms for businesses to track expenses and glean insight from reports, but there are some major differences to consider before deciding which accounting method is best for you.

Cash accounting

Put simply, cash accounting recognizes revenue and expenses as they happen—kind of like your bank account. When you spend money, it’s taken out of your account and when you make money, your balance increases. This method gives you an accurate picture of what’s in your account but it doesn’t consider what money is coming your way, nor what expenses will be billed to you in the future.

Cash accounting is typically considered the simpler of the two accounting methods, but you get less insight into long-term trends.

Accrual accounting

Unlike cash accounting, accrual accounting recognizes revenue and expenses as they are earned and billed. This method tends to make more sense for businesses that invoice their customers rather than recording payment at the time of service.

Note: You can change the method of accounting that you use, but you’ll have to go through the process with the IRS which can be more of a hassle than sticking to one or the other from the start.

3) Separate business and personal expenses

They say work becomes your life when you run a small business—but the line between work and life should not blend when it comes to managing finances. It can be tempting to use your personal credit card for business expenses or vice versa, but if you want to comply with IRS and business regulatory standards, it’s essential that you draw the line right away.

Here are some tips to help you make sure your business and personal expenses never cross paths:

• Open a business banking account
• Apply for a business credit card
• File business receipts in a separate area away from your personal expenses
• Track any shared expenses such as a home office or business use of your vehicle
• Make sure employees and partners are following SOPs for recording business transactions, too

4) Track expenses and stay organized

If you want to fend off an IRS audit, it’s important to track your business expenditures and revenue accurately and in an organized manner. Make sure that anyone handling money or bookkeeping for your business is following the same procedures so that records are easy to locate and understand when you need to access financial data.

The IRS can conduct an audit up to 6 years after filing if the tax amount is greater than 25% of your business’ gross income. So it’s best to keep your business records for at least 7 years.

5) Keep digital and physical copies

You really can’t be too cautious when managing your business’ financial accounts, so it’s a good idea to keep your bases covered when recordkeeping. Hold onto a physical copy of your records for the 7 year standard, but also create digital copies that can be saved on a cloud-based server throughout the lifetime of your business.

In addition to protecting yourself from IRS trouble, this practice also allows you to review historical data that can help you better manage your finances, identify problem areas, and predict trends.

6) Set up payroll

If your small business has employees, you’ll need to set up a payroll system that’s easy for you and your employees to understand. Your employees will appreciate the transparency (and knowing what to expect on payday) and you’ll be able to better plan for payroll expenses (including payroll taxes).

7) Review your numbers regularly

The data you collect as part of your bookkeeping process won’t do you much good if you don’t look over it from time to time. Make it a habit to conduct financial reports on a quarterly or monthly basis, whatever makes sense for your business structure. This will help you check in on your financial goals and make sure your books are kept in order throughout the entire year.

Note: We’ll discuss some key metrics you can include in your reports a little later on in this post!

8) Get paid, seriously

Small business owners often establish strong connections to their clientele. You have regulars that come into your establishment weekly, you see the same faces time and time again, and more often than not, your customers become your close friends. Doing business with people you enjoy is one of the great perks of owning your own business, but it can quickly become a major source of financial stress if you’re not careful. In fact, the average small business in the U.S. has $80,000 in unpaid invoices.

Designing a process to get invoices paid is a key lesson in small business accounting 101…and it’s clearly a problem that many business owners face. But how do you collect payment from customers without compromising your friendly reputation?

• Be clear on invoice payment terms: Your customer invoices should explicitly state how and when payments are due, and they should describe what the invoice is in reference to. If it was for a service or project, include the dates you and/or your employees worked as well as any billable materials that were purchased.
• Send a few reminders: Sometimes a missing payment is totally unintentional! Send a few kind reminders by phone or email to follow up on invoices before you take any further actions.
• Implement a penalty for late payment: It’s never ideal to charge customers extra…but in some cases it’s necessary. If you do decide to implement a late payment penalty, just be clear on the payment terms from the start.

9) Optimize your tax strategy

Taxes are (or should be) a big part of your small business accounting strategy. We’re not saying it’s always easy, but refining your tax strategy is typically easier than dealing with IRS trouble. Here are a few questions you should ask yourself as you plan for small business taxes:

• Do I need to collect sales tax?
• Should I pay estimated taxes?
• What small business tax deductions do I qualify for?
• What is my projected tax liability, and do I need to budget for it?

If you need help answering any of these questions, our team of tax experts are happy to help.

10) Review your accounting options

There are a few ways you can go about accounting for your small business:

• Add an accountant to your payroll: One option for accounting is to hire an accountant on as an employee of your business. With payroll taxes and wages, this route tends to be the more expensive option, but it can be a benefit to have one person handling your account rather than many.
• DIY: Doing your own accounting for your small business requires a lot of time, but it can be cost-effective if you’re well versed in small business accounting tips and best practices. If you decide to take on accounting duties on your own, you may consider investing in accounting software to help you keep track of records and interpret data.

Hire an external accounting professional: You can also outsource your accounting duties to a professional. Hiring a qualified accountant can help you ensure you’re in compliance with accounting standards and provide some guidance when analyzing financial reporting.

Basic Accounting Formulas to Know

No matter how you assign accounting responsibilities for your small business, there are a few basic accounting equations every small business owner should know:

• The Accounting Formula
• Cost Benefit Analysis
• Gross Margin Formula

The Accounting Formula

The accounting formula is essentially the foundation of small business accounting. This metric combines your business’ liabilities (expenses such as loans, utilities, and inventory) to your equity (owner’s retained earnings). When complete, the accounting equation should balance out if you’re using the double entry system. This lets you know that your liabilities and equities are being recorded accurately.

This number is really important to consider because it can help you identify a problem in your accounting system quickly so that you’re books don’t get out of whack.

Cost-Benefit Analysis

As a small business owner, you’re naturally going to have to make some financial decisions for your company. You might want to make a real estate investment by opening a new location or remodeling your current one, or you may need to hire additional staff, etc. And the most successful business leaders know, it’s not just about following your intuition whenever money is involved.

The cost-benefit analysis equation is a process that business decision makers use to help them evaluate the integrity and profitability of a financial decision by comparing costs to projected revenue. Consider this example:

Let’s say you own a restaurant with a lovely patio for guests to dine on, but something’s missing. You decide that you want to host live music on the weekends to draw in more customers. But in order to make this dream a reality, there are some steps (expenses) you’ll need to take care of first.

You’ll need to 1) obtain a live music permit from the city which costs $1,000 and 2) you need to buy or lease audio equipment which you figure will cost you about $2,500. This puts your expenses at $3,500 in initial setup fees. Then you estimate how much money you expect to see in return once you bring live music to the table (pun, intended). You figure this will equal about $4,000. Good news: according to the CBA formula this is in excess of your expenses which could mean this addition is a positive investment for your restaurant!

Gross Margin Formula

Our last essential small business accounting formula calculates your business’ gross margin. Gross margin is how much money your business gets to keep (profit) after you’ve subtracted the costs to make your product from your net sales.

• Net sales: Using your income statement at the end of the accounting period, you can calculate your net sales by taking all of your sales (gross sales) and subtracting the total discounts, returns, and allowances that were applied during that period.
• Cost of Goods Sold (COGs): This number refers to the direct expenses you incurred to sell your inventory including production, material, distribution and labor costs.

The gross margin equation is important because it demonstrates how your revenue stacks up to the money it takes to sell your product or service. This can show how efficiently a business is pricing products, ordering inventory, and managing labor.

Community Tax Can Help

Small business accounting is no small feat, but with the right strategy in place and helpful resources on your side, you can learn how to maximize your profits and manage your books more efficiently. Our main takeaway is this: be consistent. Much of small business accounting involves following repeated steps day in and day out, but being diligent about these processes can save you time and money in the long run—especially if you take the time to reevaluate and refine your strategy on a regular basis.

The truth is, not all business owners have the time (or desire) to fumble over numbers and spend time entering data, and that’s okay. That’s where we come in. When you sign up for our small business accounting plan you’re assigned to a team of experts that can help you set up and manage an accounting strategy that’s tailored to your business’ needs.

Some of our accounting services include:

• Monthly bookkeeping
• IRS correspondence monitoring
• Small business tax help
• Business credit card and bank account management
• Payroll processing

Want to learn more? Start small business accounting services now for free.