This article is contributed by Kelly Reed.
No matter what small business you own, you must stay on top of your bookkeeping and accounting. This involves tracking your organization’s expenses, collecting client payments, and monitoring and evaluating financial reports. If you fail to manage your accounting, you could incur obstacles and issues that slow down your business growth or halt it altogether. Cash flow problems are the main reason for the failure of around 82% of small businesses. Read on for four actionable accounting tips to help set your small business for success.
1. Separate your business and personal finances
It can be challenging to separate your personal and business expenses, especially when you run a sole proprietorship. This wastes a lot of time as you categorize and reconcile transactions, especially when tallying deductible business expenses. For this reason, you should consider opening a separate business bank account. The following are some of the benefits of having separate business and personal bank accounts:
- Protection from personal liability by keeping private funds separate from business finances
- Provide a clear audit trail
- Lowers confusion and stress during tax deadlines
- Better organization and management of business activities
2. Automate processes
Most bookkeeping and accounting activities, including paying employee salaries every month, following up on invoices, recording utility expenses in a central location, tracking invoices, and calculating mileage payments, are time-consuming and repetitive. Why not invest in accounting software for small businesses to make your life easier? Accounting software can help you send invoices, generate financial reports, and track expenses automatically, enabling you to save time. They also facilitate accounting accuracy by reducing human errors.
3. Keep business receipts
Although bookkeeping and accounting systems do not require receipts to identify transactions, the IRS may need proof of business-related purchases when filing for tax deductions. For instance, you could claim back various domestic bills if you run your business from home.
Consider creating a file folder for each supplier where you could place paper receipts for each transaction. Alternatively, scan each transaction receipt and attach the electronic copies to the transaction entries within your accounting software. Investing in receipt scanner apps that scan, sort, and read receipts can also help keep business-related receipts.
4. Select an accounting method
Be sure to choose a set of rules that govern when and how to report business expenses and income. This ensures a consistent accounting structure for tax obligation reasons. Below are the accounting methods you could choose from:
- Accrual-based accounting: In an accrual-based accounting structure, businesses report income when earned and not when they receive cash. Expenses are also recorded when money is incurred, not when paid. This accounting method suits larger companies with inventory, investors, and shareholders.
- Cash-based accounting: In cash basis accounting, organizations record revenue as soon as they receive payment. Expenses are also registered as soon as the company disburses payment. Cash.-based accounting structure is perfect for small businesses without inventory.
Endnote
Accounting is tedious, time-consuming, and complex. Be sure to separate business and personal expenses, automate processes, choose an accounting structure, and keep receipts to make your company more financially organized, profitable, and tax-ready.
About the author: Kelly Reed began writing as a professional on his personal blog and then discovered his true calling, which is writing about technology, News, Home Improvement, Business and in general. He is a technical writer, author and blogger since 2010.
