Accounting Tips for Small Business Owners

Accounting Ideas

Proper management of your company’s books directly impacts profit margins. Yet, many small business owners don’t have as much time to manage these tasks nor the ability to hire someone full time to work in the company to do so. There is no replacement of a licensed and certified accountant and tax professional. However, there are some things you can do today that can help your business operate efficiently. Take a look at a few of the most important accounting tips for small business owners.

Small Business Accounting Tips You Need

Whether you are a small business owner or solopreneur, these small business accounting tips may help you get on the right page. Be sure to check with your accountant to ensure these strategies apply to your business.

#1: Always Keep Personal and Business Expenses and Income Separate

Perhaps the most important first step is to manage business and personal expenses separately. This means having a separate checking account for each. This ensures you can manage all expenses for the business easily. Make sure all business-related costs, including utilities, leases, purchases, and sales, are managed through this business account.

By doing this, two things happen. First, you are able to easily track income and expenses for your business and plan your taxes accordingly. In some situations where it is necessary to create an LLC, this is critical for minimizing liability as well. It’s easy enough to open a business checking account to manage your expenses. Be sure to pay yourself from that account as well.

#2: Keep Clear, Accurate Records

The records for your business’s spending and revenue need to be detailed and tracked on a daily basis. That includes all sales you make throughout the course of business. You can elect to use software to do this, such as downloading a bookkeeping app. You can also track most of the accounting details you need through your bank records (if you’ve taken the first step) as well as through any credit card statements you use.

If you decide to use software, choose something that allows your accountant to be able to log into automatically. That way, your books can be managed on an ongoing basis and with good consistency. You will always know how much money your company is generating and how much it is spending when you have accurate, up to date records like this in place.

#3: Create a Budget and Make Sure It’s Comprehensive

There’s simply no way to know how much your company is making unless you know what you are spending money on. The best way, then, to ensure you have the insights you need is to start with a budget. Begin by writing down the costs of all expenses you have each month. Break down any quarterly or annual costs by month as well. Be sure to include budgetary room for unexpected expenses as well as savings that you can use later to help your business grow.

A budget like this should be maintained on a consistent basis. You should know if expenses are tracking higher than normal or if your revenue goals are not reaching your expectations. Knowing this in the middle of the month is empowering. It enables you to make decisions and updates as you go, reducing losses.

#4: Automate Anything You Can

Human error costs companies a lot of money each year. Automation can do two things for you – save you time and save you money. Many small business owners don’t realize how easy it is to use automation. For example, some software programs are designed to link directly to your business accounts, such as your checking account and credit card accounts. They can update your accounting software with data based on those transactions, keeping your business on track. Sometimes you can even use software to help with paying invoices or collecting fees as well.

#5: Maintain Receipts and Documentation

One of the biggest mistakes you may make is not having receipts from transactions. As a small business owner, you may head to a local shop to purchase what you need to complete your business. You may receive product from numerous suppliers as well. It’s important to maintain those receipts for various reasons, but specifically for tax benefits. For example, if you have a sales slip, you have information about the date of the service and potentially any available expense details that apply to your taxes.

Set up a simple folder system for this. Organize based on the category of what you are spending. Make it easy to use – such as creating a file system that allows you to just drop the receipt into the right file and move on with your day.

#6: Manage Accounts Receivable with Care

Accounts receivable is more than just sending an invoice to a customer for the work completed. You also need to track when it is paid (as well as if it is paid). Sometimes it is very easy for your business to find itself just moving forward without accurately tracking invoices. This can create problems later at tax time when your accounts don’t balance with what you thought you had earned.

You can set up your accounting software to help you with this. For example, it can keep track of all invoices sent, and in some cases, even automate the process of making sure they are paid on time. You should have a system in place to remind non-payers about those invoices as well.

7: Ensure Proper Classification for Workers

A common mistake for small business owners is the improper classification of workers. This can cause problems come tax time and may lead to complex concerns with labor laws. Employees and contractors are two different things. IRS guidelines must be followed when it comes to employees. If your workers work a schedule with you, and you are telling them what to do, when to do it, and how to do so, they are typically employees. Contractors are people that you may use for projects, but they retain control over their schedules and make their own business decisions.

Be sure to check with your accountant for clarification. All employees need to be properly documented, and taxes should be collected for them on an ongoing basis.

#8: Establish Financial Goals Throughout the Year

Setting clear financial goals ensures you know where your company is and where it is going. That’s not always as easy as it seems. For example, many companies just starting out spend a lot of time just looking for profit. Yet, do you know how many products or how many sales you need to close to reach a profit margin that enables your company to grow? Create financial goals through a series of benchmarks. Manage those throughout the year, so you always know where your next step is.

#9: Set Aside Time to Work on Your Books

Even if you have an accountant and you’re using accounting software, one of the most important tips is this – set aside a few hours each week to work on your books yourself. You need to stay in the loop when it comes to managing profit and loss. You also need to keep everything as up to date as possible since this can directly impact how much work you have to do at tax time.

Steps to take include:

• Reconciling checking accounts
• Maintaining credit card accounts
• Ensuring all expenses are documented
• Verifying all revenue received
• Processing all invoices and checking up on non-payments

#10: Create a Profit and Loss Statement

One of the foundations of staying up to date on your taxes is this – having a profit and loss statement that accurately reflects your business’s operations. This statement provides a fast snapshot of the health of your company from a financial standpoint. It should be completed by your accountant for each month. It’s typically necessary to have up to date books to do this. You can find tutorials online to help you to create your own profit and loss statement as well.

#11: Pay Close Attention to Labor Costs

You may know the importance of tracking expenses for tax purposes, but don’t forget to pay close attention to what is likely your largest expense – your employees. Break down how much your employees are costing you. That means taking into consideration any overtime you’re paying out, perks you are paying for, benefits you are providing to employees, and any other related costs. It’s estimated that about 70% percent of a company’s total budget goes towards employees. Are you looking for ways to reduce those costs?

#12: Monitor for IRS Updates

Tax laws, at the local, state, county, and federal levels, can change year to year. It’s a good idea to keep close attention on those changes now, during the tax year. If you wait until tax time, there’s no opportunity to make adjustments and updates. On the other hand, if you are monitoring for changes now, especially during the pandemic, that’s going to give you time to make adjustments to help you minimize costs.

If you are working with an accountant, be sure he or she keeps you up to date on changing regulations that may impact the way you do business. This is something you should do on a consistent basis.

#13: Plan for the Big Expense

Something will happen that may require you to have a large amount of money on hand to cover the cost. That may be a repair, the need to cover unexpected revenue drops, or even the desire to grow. When you are planning for this, you have more control over what happens to your business when tough times hit.

Section 179, an IRS provision, allows you to deduct up to $1 million in equipment and business property in the year of purchase. If you have the money set aside to do so, you can not only get what you need in place, but you can also use it as a tax deduction in some cases.

#14: Build Financial Projections for the Coming Years

A lot of what we mentioned this far is based on the need for updating and modernizing your business’s accounting practices for the current year. However, financial projections for future years are also important. This allows you to consider factors that may impact your growth over time, such as the need for new equipment. It’s important to work with your accountant to consider your financials for the last few years and what is likely to happen in the years to come. Having some insight into your goals for two to three years from home can help you make decisions about where to invest throughout the year.

#15: Make and Record Donations

Donations are a good way to reduce taxes. There are many ways to do this – as long as you use a charitable organization. Be sure to obtain a receipt for any donation made so that you can, later, apply that to your business’s taxes, reducing what you owe.

#16: Be Sure to Collect Taxes at Sale Time

Donations are a good way to reduce taxes. There are many ways to do this – as long as you use a charitable organization. Be sure to obtain a receipt for any donation made so that you can, later, apply that to your business’s taxes, reducing what you owe.

#16: Be Sure to Collect Taxes at Sale Time

Avoid paying a hefty bill later by collecting taxes from all sales at the time the transaction happens. You do not need to worry about delayed tax payment penalties when you make this a consistent practice for your business. In short, you don’t want to fail to collect taxes in a timely manner and report them throughout the year to the IRS. It’s not worth the big fees you may have to pay.

#17: Set Up the Right Business Formation

There are various types of business formations or legal identities. Which is right for you isn’t just about how you run your business. There are tax implications as well. Work with your accountant as well as your business attorney to establish the right business structure, such as an LLC, corporation, or S-Corp based on which benefits your business structure the most in terms of taxes and liability risks.

#18: Create Accurate and Detailed Invoices

Gone are the days of simple paper invoices that provide very little information. Instead, make sure your invoice is accurate. That should include specific details about the transaction, a breakdown of the costs, and any added fees, taxes, or applicable charges. This type of detail can help ensure there’s no question about what was purchased. Your accountant may also be able to use this to better update your accounts receivable.

#19: Stay Up to Date on Tax Deadlines

It’s a good idea to set up quarterly payments for any taxes you owe to the government at any level. Most often, you should be paying quarterly taxes. There are also costs associated with self-employment taxes that may apply in your case. Generally, quarterly taxes are paid on April 15, June 15, Sept. 15, and Jan. 15th. In some situations, if you do not pay these taxes on time, you could end up with hefty fees to pay.

#20: Learn about Accounting and Tax Savings

One of the most important small business accounting tips to remember this one. If you want to take control of your finances, having a basic understanding of bookkeeping and taxes is important. It may help your business to make better decisions by having more accurate information about best practices and tax saving opportunities. You also want to be sure you choose a small business accountant course or tax course that is right for you.

There is no doubt that small business accounting is not easy to manage on your own. Having a system in place, such as those mentioned in this article, can help you to get your business on the right track moving forward. That can support your company’s long-term growth and creates better overall financial management.

Disclaimer: Please keep in mind that the content of this post is not intended as tax, accounting or legal advice. The information presented here is for informational and educational purposes only. Before engaging in any transaction, be sure to discuss these matters with a trained, licensed professional.

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