Entrepreneurs operating startups or small businesses wear many hats, trying to maintain efficiency while growing the company.
Accounting proves to be a daily obligation that’s taxing for these business owners, many of whom lack financial expertise. Visit https://blog.hubspot.com/sales/accounting-101 for accounting basics for your small business.
While you may wonder if this aspect of business is worth your time, it is important to have a grasp of your finances for critical decision-making and to prevent the potential for expensive mistakes. You can better manage your company’s accounts when you become familiar with bookkeeping basics.
The Fundamentals of Small Business Accounting
Accounting for startups and small businesses involves:
- Managing and tracking financial transactions.
- Documenting expenses and income.
- Tracking liabilities and assets.
- Preparing financial statements.
Because a small company is limited in resources, accounting is critical, though it’s essential for any size business. Here are tips on effectively managing your small business accounting.
Maintain separate business accounts
Business accounts should be separate from other accounts you have for several reasons. Primarily, this allows you to constantly monitor company finances to determine if the business is succeeding. It’s challenging to discern the status when you can’t distinguish a transaction as a business expense or other.
That’s also a problem when business funds are used for personal expenses or more funds are going out than are coming in. However, this can only be detected when the business account is separate. This means having not only a distinct bank account for the company but also a specific credit card.
When separate, violating business tax laws will be of no concern, and there will be a limit to your personal liability when legal situations arise regarding business situations. With this account separated, keeping track of all expenses is essential to take advantage of potential deductions.
Hold on to receipts
Most people don’t give a second thought to tossing the receipt when making a fast stop for business materials. If these supplies will be included as a tax deduction, that receipt will be needed to complete the returns. The IRS requires these in order to take advantage of tax deductions.
That doesn’t mean holding onto the hard copy, which will ultimately fade. You can snap a photo, document the details, and categorize the expense. The process is simple: keep track of expenses and integrate those when preparing financial statements.
Record keeping
Accounting can be complex, but it proves more difficult when detailed records are unavailable to reconcile the books. All expenses, including receipts and invoices, should be well organized to allow a straightforward process.
If it’s your preference, it can be simplified with hard copies in separate file folders to be secured in a locked cabinet. You can also keep your startup paper-free using software like Rippling and Paycor to efficiently organize and manage your expenses.
Car mileage or expenses
Small business owners can accumulate tax deductions or reimbursements by monitoring mileage and expenses associated with business transportation. The records must be impeccable and include the trip’s purpose, miles used, and travel date.
For those who travel frequently, technology makes record-keeping more manageable. You’ll find apps that help log mileage by linking to your mobile GPS system. A company, however, won’t be responsible for personal travel expenses. This is another component of keeping the business separate from all other accounts.
Tax obligations
Business leaders are impacted each year by tax obligations and are often caught off guard. Minimally, you should be setting aside roughly 30 percent of your income to prepare for quarterly or annual taxes. Not being duly prepared can have consequences of penalties and fines.
The recommendation is to designate a portion of your income for deposit to prevent overspending and ensure adequate preparation throughout the year.
Small business owners are usually inundated with responsibilities, which makes it easy to forget tax deadlines. It can help to set an alert to remind you when it gets close. View here for small business accounting mistakes.
Assess financial records
Financial reports can only benefit you if they are put to good use. A small business should routinely and thoroughly assess these statements in detail. Lenders review these to determine eligibility for financing. You want to be a step ahead by recognizing the red flags they’re looking for.
The receipts and funds in the bank should match at the end of each day. Monitoring these transactions each day will allow you to catch discrepancies, fraud, and unexpected charges before a major problem develops.
Aside from daily transactions, monthly reports must be reviewed, primarily cash flow, profit/loss, and balance sheets. These give you insight into your company’s financial health.
Final Thought
Sound accounting processes will ensure your small business runs efficiently and seamlessly and is profitable. If finances are an overwhelming concept that creates undue stress, consider accounting software. It will help you stay organized and readily manage your company finances.