According to the Bureau of Labor Statistics, about half of all businesses will close in their first five years of operations, and one of the most common reasons for closure is mishandling funds and running out of money.
Rather than malicious fraud or disastrously low sales, what usually leads to financial crisis comes down to small errors in bookkeeping that add up over time.
Most entrepreneurs arent experts in accounting, and most new businesses dont have the funds to have a dedicated accounting team, so mistakes are bound to happen, but keeping these five accounting tips in mind will help you keep them to a minimum, and keep your business thriving for years to come.
As a small business on of the best ways to outsource your accounting needs is by investing in a afforable Accounting software like ProfitBooks.
Apart from a afforable accounting software here are 5 accounting tips for entrepreneurs that can help them in the initial stage of their business.
Accousting is the most important aspect of a business.
1) Open a Business Account
One of the first things you need to do when starting a new business venture is to open a separate business bank account.
While it might seem more convenient to transact business through a personal bank account when youre first growing your business, this can lead to major complications when it comes to tax reporting and could leave your personal assets vulnerable if your business runs into financial or legal trouble.
Its also important to make sure your business and personal finances are completely separate.
It might seem like no big deal to use the business credit card on personal purchases every now and then, this can be considered embezzlement by the Department of Justice, and can lead to massive fines and legal troubles.
Youll want to make sure youre opening a business bank account, and not just another personal bank account for your business, as business bank accounts have extra protections and perks, like purchase protection for your clients, and give you an air of professionalism that will make your business more trustworthy.
While opening a business account requires a bit more documentation, like a business license and articles of incorporation, its a vital first step to keeping your business finances healthy and secure.
2) Prepare for Taxes Early
If youre used to having taxes automatically withheld from your paycheck and filing at tax time, the world of business and self-employment taxes can feel massively overwhelming.
One of the biggest differences between W2 (employee) and self-employment taxes is that, instead of being filed at the end of the year, self-employed workers are subject to estimated quarterly taxes, based on their estimated net income for that year.
To avoid being surprised with a huge bill every 3 months, youll want to set aside 30%-35% of your income to prepare for your upcoming payment. However, every state has different tax laws and guidelines, so make sure to look up your states requirements and possibly consult with a CPA.
Accounting software like ProfitBooks can automatically calculate your taxes for you, saving you time that might have been taking up crunching numbers, and helping you avoid some potentially costly errors at tax time.
early tax payment help small business a lot
3) Save for Big Expenses and Emergencies
As your business expands, it stands to reason that your business expenses will rise too. Youll most likely need to update software to handle more users, upgrade aging hardware, or expand your inventory.
You might have a handle on your day-to-day expenses, but not planning ahead for these major expenses can land your company in hot water.
You should also plan ahead for worst-case scenarios, like natural disasters, global pandemics or even personal family crises that could keep your business closed for weeks or even months.
Many financial advisors suggest saving at least three to six months worth of business expenses in reserve. This should be liquid cash that is easily accessible in a business savings account, so you can tap into it with little worry if disaster hits your business.
Its also recommended to have a target savings date in mind when it comes to upgrading technology, both to make saving easier, and to make sure your tech doesnt grow too old and cause problems for your business.
Say you want to upgrade your businesss phone systems in the next two years, and you estimate it will cost $2400, you can set aside $100 every month towards the new system, so that when the time comes to upgrade, you have the cash ready to go, and wont find yourself in debt or financial straits.
Of course, the exact amount of savings that is best is completely unique to your business, and having a solid picture of what your business looks like in its highest months and lowest months is necessary to calculate just how much your business needs to stay secure no matter what is thrown your way.
4) Keep Every Receipt
Keeping a detailed record of every transaction you make or receive is one of the most important things you can do to protect your business finances.
Having all of your receipts handy can help you make more accurate tax deductions and save more money when tax time rolls around.
They are also important to have if your business gets audited, to prove that any deductions are legitimate.
No receipt is too small. Even keeping a receipt from the gas station during a business trip can help you out while youre filing your taxes.
If youre groaning at the thought of binders full of crumpled receipts, never fear. As more and more transactions are digitized, saving receipts is as easy as downloading a file to your computer, and many accounting software, like ProfitBooks, offer secure places to store receipts and sort them by criteria like date or merchant.
5) Find the Right Software
If youre still using a spreadsheet for accounting, youre missing out on some major tools that can streamline your bookkeeping and save your business time and money.
Accounting software is designed to streamline your businesss finances and help even novices to the world of business and bookkeeping keep their business profitable and out of financial or legal trouble.
You dont have to pay premium prices for premium services, however. There is a wealth of powerful software for every type of business and at every price point.
If youre a freelancer, for instance, there are many great free bookkeeping apps equipped with powerful features to keep your finances in order. They can also help pay your invoices paid and they only do without the more complex paid features that youll probably never end up using.
However, if you have employees on the payroll, youll want to budget for accounting software that can reliably keep your team members paid on time.
Having the right accounting software is the most powerful tool your business can have to stay thriving, making it easy to have a complete picture of your companys financial health, while saving you massive amounts of time for a fraction of the cost of an accounting team.
Conclusion
Starting a new business venture is an exciting and potentially nerve-wracking time for any entrepreneur, and having to learn accounting on the fly can increase anxiety.
However, even if youre a complete novice at bookkeeping, organization and attention to detail can go a long way in keeping your business profitable.
Keeping these five accounting tips in mind as you expand your business will help you organize your finances with ease, and let you get back to the parts of being an entrepreneur that you love.
Please feel free to share your thoughts in the comments below.
FAQs
What is the importance of accounting for my small business?
Accounting is essential for small businesses as it helps in tracking and managing financial transactions, assessing the financial health of the business, making informed decisions, and meeting legal obligations. It provides insights into the business’s profitability, cash flow, and overall financial performance. Proper accounting enables small business owners to understand their revenue, expenses, and taxes, ensuring compliance and enabling effective financial planning.
Should I hire an accountant or can I handle accounting on my own?
The decision to hire an accountant or manage accounting yourself depends on various factors such as the complexity of your business, your accounting knowledge and skills, available time, and budget. While some small business owners prefer handling their own accounting to save costs, it can be time-consuming and challenging. Hiring a professional accountant can provide expertise, save time, and help avoid errors, ensuring accurate financial records, and enabling you to focus on your core business activities.
What financial records do I need to maintain for my small business?
To maintain accurate financial records, small business owners should keep track of key documents such as income and expense statements, invoices, receipts, bank statements, payroll records, and tax-related documents. These records help in tracking revenue, expenses, assets, liabilities, and equity. Additionally, it’s important to maintain a general ledger, which is a comprehensive record of all financial transactions, and reconcile bank accounts regularly to ensure accuracy.
How can I manage cash flow effectively for my small business?
Cash flow management is crucial for small businesses to maintain sufficient funds for day-to-day operations and meet financial obligations. To manage cash flow effectively, consider the following practices:
- Create a cash flow forecast to predict inflows and outflows.
- Monitor and control expenses to minimize unnecessary spending.
- Invoice promptly and follow up on overdue payments.
- Negotiate favorable payment terms with suppliers.
- Maintain a cash reserve for emergencies or unforeseen expenses.
- Consider working capital options like lines of credit or business loans if necessary.
What are the common tax obligations for small businesses?
Small businesses have several tax obligations that vary based on their structure (sole proprietorship, partnership, LLC, corporation) and location. Common tax obligations may include:
- Income taxes: Small businesses are generally required to report their income and pay taxes on their profits.
- Self-employment taxes: Sole proprietors and some business partners are responsible for paying self-employment taxes, which fund Social Security and Medicare.
- Payroll taxes: If you have employees, you must withhold and remit payroll taxes on their behalf.
- Sales taxes: Businesses involved in selling taxable goods or services may need to collect and remit sales taxes to the appropriate authorities.
- State and local taxes: Depending on your location, there may be additional taxes such as state income taxes, property taxes, or local business taxes.
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