Eight Small Business Accounting Tips Every Small Business Should Use

When you dreamed of becoming an entrepreneur, you probably didn’t include the hours required to keep on top of bookkeeping and other financial tasks. These hours of work, though not quite a joy for most small business owners, are a key part of successfully running a business. The good news is that there are a few steps you can take to keep the books in order easily. Take these steps to help simplify your processes and ease financial stress.

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1. Keep personal and business expenses separate

A big financial mistake is to use your personal checking account for business expenses. Doing so may seem simple at first, but over time it complicates things. It makes it difficult to separate out which expenses are which, and you need to know your business expenses so you can properly file your taxes.

If you’re ever audited by the IRS, having your expenses combined will create a logistical nightmare. To avoid headaches, open a business checking account. In addition to helping out at tax time, this step can help you build strong business credit as well.

2. Always request (and keep) receipts

Your accounting records should show more than your small business income and expenses. They should also include digital or paper receipts for each expense. This way, come tax season, you can back up any tax-deductible expenses with a paper trail. If the IRS ever audits your company, this paper trail can make the difference between proving your compliance and paying a hefty fine.

Obtaining and storing receipts is also important for reimbursing any employees who use their personal money to pay for business expenses. Sure, it’s common advice for small business owners to separate their personal and business expenses, but most employees won’t have business credit cards. Having your employees get receipts for these expenses and filing them with you ensures that your team is reimbursed appropriately.

3. Track all business expenses

This important step helps you monitor business growth and determine what expenses you need to report on your tax return. You should track the following:

  • Meals and entertainment
  • Out of town business travel
  • Vehicle related expenses
  • Gift receipts
  • Home office receipts

If you haven’t done so already, there are countless benefits to tracking expenses by making your business paperless. “Shoebox Accounting” aka throwing everything in a box and sorting it out later, can be confusing and a huge time waster. Create digital records of receipts and important documents. Here are a few tools to help you go paperless:

Expensing programs shouldn’t be your only financial software. Small business accounting software such as QuickBooks, Xero, and Wave substantially streamline all your income and expense tracking. These platforms track your income and expenses while helping you generate and send invoices, create financial statements, and identify deductions come tax-filing time. They save you time while minimizing human error, making for robust small business accounting.

4. Stick to a budget

It’s simple mathematics yet 29% of businesses fail because they run out of cash. A business budget takes time and effort to set up but it’s key to running a profitable small business. You don’t have to do it yourself either – that’s where business financial planners come in. These experts can help you assess your business finances to plan for long-term cash flow and stability.

If you do choose to create your budget all by yourself, fortunately, there are many resources to make the process faster and easier than you thought possible. Check out Small Business Budget Templates for Download.

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5. Make sure to properly classify your employees

As accounting goes, the people who work for you generally fall into one of two categories: employees or contractors. These classifications have ramifications for not just your employees’ tax returns but your own. That’s because you don’t deduct income taxes from contractor paychecks, whereas you do exactly this for employees.

Proper accounting lessens the chances of you accidentally withholding taxes from a contractor or not doing so for an employee, resulting in fewer potential problems with tax authorities. It also helps you keep track of all your employee W-2 and contractor 1099-MISC forms, which the IRS requires you to distribute and file during tax season. Plus, accidentally paying taxes for contractors means spending money you should’ve kept.

6. Consistently create profit and loss statements

Although not necessarily a small business accounting tip directly related to recording income and expenses, creating profit and loss statements is important for accounting analysis. These documents, also known as income statements, detail your company’s financial performance during a specified period. In doing so, they help you calculate your company’s pre-tax income.

This income figure is a big deal. Its value determines how well or poorly your company is performing compared to your budget or financial forecasts. The details of your income statement also show why your company is lagging behind or exceeding the goals you’ve set. If you’re underperforming, you can use this information to adjust your strategy before your business runs out of money.

You can also use an income statement to obtain more money for your business. Investors, banks, and other lenders often ask for income statements as part of their application process. To get more funding, you’ll need to know how your financial practices are currently working in (or against) your favor.

7. Prepare for the unexpected

Unforeseen expenses can come up for even the most organized business owner. No matter if you’re just starting out or have been around for years, you must be prepared. Here are a few types of unexpected business expenses you might face.

  • Equipment and Technology
  • Employee Costs
  • Legal fees
  • Shrinkage (caused by employee theft, shoplifting or administrative errors).

Be sure to regularly contribute to a business savings account by building it into your budget.

8. Consider hiring a professional

Finally, if you’re struggling to keep all of your financial balls in the air, consider bringing in reinforcements.

The successful businessman Richard Branson says, “If you really want to grow as an entrepreneur, you’ve got to learn to delegate.”

Accounting is that one area where delegation is essential. You might be losing money without a solid professional in place. However, you should hire accountants carefully. Keep the following considerations in mind as you look for the right fit:

  • Whether the accountant has experience with small businesses like yours. An accountant who specializes in turning mega-corporation accounts receivables into cash might struggle to handle all your small business accounting needs. Likewise, an accountant who works with medical practices operates in a world of jargon and procedures irrelevant to most other types of businesses. Instead, choose an expert with experience that fits your industry and size.
  • Which services the accountant offers. Most accountants will keep your books and file your taxes, but not all accountants act in consulting capacities. If you’re looking for an accountant who can act as a budgeting and planning partner, non-consulting accountants might not fit the bill. Likewise, if you fear an IRS audit, only use certified public accountants (CPAs) or enrolled agents (EAs). Note that EAs can represent you in IRS administrative queries, but only CPAs can do so in court.
  • What you’ll pay for accounting services. To make sure you’re not getting a bad deal, you should obtain quotes from a wide variety of accountants. Don’t choose any accountants or firms whose prices are outliers compared to other quotes you receive. Expect the combined cost of your third-party help and your accounting software to cost up to $5,000 per year.

For additional advice on what to do if you’ve decided to forgo DIY and hire a professional, review this post on the SmartBiz Small Business Blog: How to Hire an Accountant for Your Small Business.

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