9 small business accounting tips

While some may prefer to delegate this task to a professional accountant, the reality for many small business owners is that hiring one isn’t always an option.

Precise accounting and bookkeeping are essential for keeping your business compliant and having a clear picture of your business’s financial health. That means you may have to tackle the books yourself.

1. Get an accounting software

Having an accounting software takes care of the tedious tasks associated with financial management, such as transaction recording and financial statement preparation. You’ll also get fewer errors and find yourself with more free time for high-level strategic planning.

When picking your tool, consider your business size, industry-specific needs, and the scalability of the solution. It’s important to choose a software that can grow with your business and accommodate any future complexities as your financial needs evolve.

2. Open a separate business bank account

Separating your personal and business finances is business advice 101. Having a separate bank account for your business expenses will help make financial reviews simpler and more accurate.

You’ll be able to track your profitability, understand your spending, and prepare for tax season without the headache of untangling personal expenses. Having this separation also helps you look more professional in front of your clients and suppliers.

3. Create a budget

Creating a budget is like having a financial game plan. It creates a clear picture of where your income is going and allows you to plan for future spending and savings.

Jot down your anticipated earnings and compare them to your regular expenses. This comparison will quickly show you how much room you have for additional spending or where you might need to tighten the belt. A good budget should be flexible though. Regular reviews and adjustments will keep you on top of your business’s finances.

4. Decide between cash or accrual accounting methods

The choice between cash or accrual accounting should depend on your business size, financial complexity and how detailed you want your reports to be.

Cash basis accounting records revenues and expenses only when money changes hands. It’s straightforward and gives a clear, immediate view of cash flow. This makes it suitable for businesses without complex inventory systems.

On the other hand, accrual accounting records transactions immediately as they occur, regardless of when payment is made or received. This is typically the recommended accounting method for business owners.

5. Keep meticulous business records

Every transaction, big or small, should be carefully documented. That includes keeping track of expenses incurred, getting receipts, and storing account statements, credit card receipts, documents that show proof of purchase, and many others. This habit supports effective decision-making and can help you maintain tax compliance.

This is where having an accounting software can be a lifesaver. Under IRS regulations, you will have to keep these records for up to three to seven years. A software can automate a huge chunk of the documentation process and keep your financial records safe online.

6. Keep accounting roles separate

By assigning different accounting tasks to different team members, businesses can ensure checks and balances are in place.

For example, the person handling invoices should not be the same person processing payments. That way, everyone is kept honest, and every dollar is tracked and accounted for by multiple experts.

7. Plan ahead for your business’s bigger buys

Big investments shouldn’t be spur-of-the-moment decisions. They should be part of your business’s broader financial strategy.

Review your business’s finances regularly to pinpoint the right time to make these investments. Understand when your business can handle big-ticket items without straining your cash flow.

Major investments are also good opportunities to build your business’s credit score. Having excellent credit could potentially offer several advantages, including better loan terms or lower interest rates. Plus, credit cards usually come with additional perks like cashback or travel points.

8. Stay on top of your business’s financial performance

To stay informed about how your business is doing financially, you’ll need a trio of financial documents — income statement, balance sheet, and cash flow statement.

Your income statement shows your profitability over a specific period. Your balance sheet provides an overview of  assets, liabilities, and equity. Meanwhile, your cash flow statement tracks the actual cash flowing in and out of your business.

Together, these statements help determine if your business can meet its current financial obligations and allow you to spot potential issues early on.

9. Have a financial forecast

A well-prepared financial forecast can help you predict upcoming income and expenses, allowing you to create a budget effectively. Financial forecasts can also help estimate cash flow. This allows you to make informed decisions on whether to tweak pricing or adjust production for better profitability.

Banks and investors will also analyze your financial forecast to determine your business’s potential for growth. Having a detailed forecast can reassure stakeholders of your business’s financial health and your ability to manage capital effectively. This makes it easier for your business to secure loans or investments.

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