Starting a small business is one way to pursue what you are passionate about as a career. Whether you want to design handmade jewelry or install performance modifications on sports cars, the basics of operating a small business are the same. You need to have a business plan, capital, and a means by which you can keep up with your finances. How to do accounting for small business may be the most crucial aspect to consider when you decide to start a small business.
Accounting and bookkeeping may seem like complicated tasks when it comes to keeping up with your business' income but are necessary for your business to succeed. As you begin your business, you may not have the ability to hire an accountant to handle the finances, but there are steps that you can take for implementing good accounting practices. Let's take a look at six steps that can help you keep your company's financials in check.
1. Bank Account
Once you have taken care of the legalities of starting a small business, you can open a new bank account specifically for your new company. This enables you to separate your business and personal transactions, making it less of a headache to keep up with what is what. Partnerships, LLCs, and corporations are required by law to have a separate account for their businesses.
Though a sole proprietor isn't bound by law to have a different account, having one can sure make other aspects of accounting a lot easier.
Having more than one bank account can help you separate funds. Starting a business checking account for income and expenses is necessary for everyday operations. A savings account allows you to prepare for and set aside money for taxes. Savings accounts can also provide you a place to keep emergency funds separate from the day to day working capital to cover unexpected expenses. LLCs and corporations must use a separate business credit card as a means of keeping business and personal assets from being blended. Small business owners may not be required to have a business credit card but can benefit from using one to build business credit.
When compared to personal checking and savings accounts, business checking and saving accounts tend to have higher fees. Shop around to find the best bank to suit your company's needs. When opening a business bank account, you typically have to be registered with your province or state and have a business name. The bank you are considering can inform you of any documentation that may be required.
2. Expense Tracking
Accurately tracking your company's expenses right from the beginning sets a strong foundation for your business to build upon financially. Accurately recording and verifying your costs lets you see how your business is growing, keep up with deductible expenses, build financial statements, prepare tax returns, and back up what is reported on your tax return.
A necessary part of tracking your expenses is to organize essential records and receipts. Account software for small business has come a long way in the last 20 years or so and can be a great asset for keeping your financial records in order. If you so choose, you could always keep hard copies of every record for your company's transactions, but this can become a storage issue as time goes by. It is a good habit to keep receipts for all of your business' expenses even though the IRS does not require receipts for anything under $75.00. Five of the most critical types of receipts to hold on to are:
- Business travel: Keeping all receipts related to your business travel can ensure that you are covered when preparing a tax return.
- Entertainment and meals: Business meetings in a restaurant or cafe should be documented with who attended and why.
- Gift receipts: Gifts from your business should be recorded. If you attend a game or concert with the recipient of the gift, it should be documented as entertainment.
- Business expenses for your vehicle: When using your vehicle for your business, you should document when, where, and why.
- Home office expenses: If you run your company from home, you can calculate the percentage of your home that is used for the business.
Small business bookkeeping is an integral part of the accounting process. Bookkeeping is the process by which you keep track of day to day transactions, categorize them, and reconcile bank statements. When you first start your company, you can choose from many different bookkeeping methods. A few bookkeeping options to choose from are taking care of it yourself, outsourcing to a bookkeeper part-time in your local area or through the cloud, or hiring a full-time accountant or bookkeeper when your business has grown enough to accommodate such an employee.
There are two bookkeeping methods you can choose. One is the cash method, which records expenses and revenues when they are actually paid or received. The other is the accrual method, where transactions are recorded in real-time. The accrual method requires payables and receivables to be tracked.
If you own a small business in America, and your company's revenue is less than $5 million, you can use the cash method. If your company make s more than $5 million, you are required to use the accrual method. Bookkeeping must be done accurately and adequately to ensure that your business remains healthy.
4. Accepting Payments
It's simple to take cash or check payments, but what about credit and debit cards? There are third party companies like PayPal that process credit and debit card payments from your customers. These types of payment processors typically have fees that apply to each transaction, reducing your overall profit margin. Another option would be a merchant account. This is a bank account that also enables you to accept credit and debit card payments from your customers. There are many different third-party payment processors to choose from based on your location and your small business' needs.
5. Is Your Company Going to Sell Imported Goods?
If your answer to this question is yes, you can benefit from researching import tax. Imported goods have taxes and duties that you should take into consideration when pricing your products for your customers. The United States imposes the fees associated with imported goods, and tools such as a duty calculator can help you estimate and plan for the costs you will incur when selling an imported product.
6. Tax Obligations
The structure of your small business will have a direct effect on your tax obligations. Those who are self-employed and their company is structured as a sole proprietorship, partnership, or LLC must include their business income in their personal tax return. Corporations are required to file separate tax returns, and the owner's income is categorized and taxed as an employee of the corporation. When you are self-employed, you should withhold taxes from your income to cover the taxes you will owe when tax season comes around.
When it comes to how to do accounting for a small business, there is a lot to learn. If you take the time to implement reliable accounting and bookkeeping methods within your small business model from the very beginning, you are increasing the chances for your business will succeed. There are many online resources that you can use to learn the ins and outs of accounting and bookkeeping. Get out there and create that business you have always wanted to work for and enjoy being your own boss.