6 Small Business Accounting Best Practices
Many small business owners find bookkeeping and accounting uninspiring, especially when they are starting and don’t have the budget to set up an accounting department. However, bookkeeping and accounting are crucial parts of the business without which you cannot reach your full potential. Up to date and accurate books will help you make sound spending decisions and forecast cash flows for smooth operations.
Below are six small business accounting best practices to improve your accounting knowledge so you can monitor your business’ financial status with less strain.
1. Separate Business & Personal Expenses
One of the greatest pitfalls for small businesses is mixing personal expenses with business expenses. Owners may find this harmless since they rely on the business income for their livelihood.
Nonetheless, doing this is wrong for a couple of reasons. It distorts the financial position of the business, which exposes it to liquidity issues. Again, the business ends up computing inaccurate tax liability, thereby risking punitive measures from the tax authorities.
Drawing money from your business is okay, but you should account for it as drawings and not business expenses. Similarly, separate your personal and business bank accounts for easy accounting of the incomes and expenditures flowing in and out.
2. Establish Your Accounting Method
There are two methods of accounting – cash and accrual method. It’s important to establish which of the two methods you prefer to use when accounting for your business revenues and expenses and stick to one.
The cash method involves recognizing revenues when you receive cash and recording expenses when you pay bills. Accrual method differs from the cash method in that you recognize revenue when you earn it, regardless of whether you have received cash or not. Likewise, you recognize expenses when you receive an invoice.
3. Invest in a Good Accounting Software
As much as keeping your books up to date is essential, doing so manually, can be cumbersome and unrealistic, especially if you have to do it yourself. By investing in good accounting software, you can automate most of the tasks and free up your time to concentrate on other aspects of your business.
Accounting software also helps minimize data entry errors for more accurate books. Moreover, you’re able to keep track of your expenses, which helps in regulating spending.
Some software allows linking up of bank accounts to automate payments. This allows you to pull reports and post them on your ledgers, or upload bank statements for easy and quick bank reconciliation.
4. Automate Payments
Automating payments for your small business is beneficial in many ways. In addition to freeing up your time, it helps you to make timely payment of bills and invoices. This eliminates the risk of penalties for late payment. It also improves your relationship with your suppliers, which may earn you more favorable credit terms in the future.
5. Prepare a Budget Every Fiscal Year
Running your small business without a budget is a risk. A budget helps regulate your spending in line with expected income. With a budget, you’re in a position to forecast a shortfall in working capital and arrange for credit or another alternative financing.
In a nutshell, budgeting gives you a clear picture of your anticipated cash flows so you can plan ahead. As a result, you avoid running into liquidity issues that may disrupt your business operations. To guarantee a smooth fiscal year, ensure you draw a budget at the beginning.
6. Understand Your Financial Statements
Understanding the different financial statements – cash flow statement, income statement, balance sheet, helps you get in touch with your business’ financial position. In return, the knowledge empowers you to make better business financial decisions.
Even if you’re outsourcing your bookkeeping and accounting, learning to read your financial statements is an excellent step towards building a strong financial foundation for your small business.
Why GeneralCents Accounting?
GeneralCents Accounting is your go-to business accounting solution. We help you take care of the complicated but all-important accounting tasks so you can focus on what you love.
Our team of fun and highly-professional experts is committed to helping small business owners scale the challenging ‘mountains’ of accounting and grow their business. With our practical business strategies, you’ll turn your business finances from stressed to blessed in thirty days.
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