Starting a business is a serious matter. Entrepreneurs invest money, time, and effort in starting up a business, big or small. Small business owners usually get their capital through loans or bank credit. Thus, companies need to know how to monitor all their business transactions accurately.
To be able to do this, business owners need to have some knowledge of financial management. Below are six tips to help small businesses keep their companies on track using accounting and financial information:
1. Open a business bank account
Having a separate business bank account from a personal bank account is advisable. Even for a sole proprietorship, wherein a different business account is not required, it is prudent to get one. This is for easy tracking of income and expenses without mingling business and personal assets. Separating personal from company financial accounts can also make it easier for companies to compute taxes come year-end.
2. Monitor expenses
The Internal Revenue Service requires businesses to show proof of income and expenses for tax purposes. Remember that there are expenses of small companies that are tax deductible, including research expenses for business startup. However, a record of these expenses is required to lower the tax liabilities of a company. Thus, it is best to track, keep, and file the following documents for such reasons:
- Bank or credit card statements
- Proof of payments
- Financial statements
- Previous tax returns
Keeping an organized filing system for receipts is a must, even from the start of any business. Digital copies of receipts are accepted by the IRS, thus you can take advantage of cloud-based storage for scanned receipts. This will ensure that your receipt records are protected from possible theft and damage.
3. Stick to bookkeeping
Bookkeeping is a way of recording transactions, including categorizing and reconciling them daily. These records are used by accountants in the preparation of financial statements and subsequently make sound business decisions.
There are two based accounting and bookkeeping methods companies can adopt:
1. Cash basis method
This is when you record revenue and transactions each time they happen, whether the company pays for an expense or a customer pays a billed amount. It is ideal for small businesses to verify bank balances at any point in time.
2. Accrual Method
The accrual method is the method used by most businesses. This method has the advantage of matching up your expenses to your revenue, since you’re recording both revenues and transactions, even if no actual payment has yet been made. That means bad debts or refunds are recorded in advance, as well as when an invoice is issued to a customer. Companies have to regularly monitor and track accounts receivables and payables under this method.
Moreover, businesses may opt to choose from the following modes of bookkeeping services:
Doing it on your own
Small business owners who know how to do the bookkeeping themselves can save some money. There is also accounting and bookkeeping software available to assist small business owners in accomplishing this task.
For those who have no accounting and bookkeeping experience, it is wise to use the services of accountants and bookkeepers. Outsourcing these services can help you focus more on other business concerns and can also be cheaper than getting full-time employees.
You can also choose to hire full-time bookkeepers and accountants if your company has enough money to spend on their salaries.
4. Determine payment methods
Knowing how customers pay for a business product or service is a crucial factor in boosting sales. Small business owners usually prefer cash payment. However, in today’s digital age, most customers demand the convenience of online payment. A company may also opt to have credit card payment options for consumers who prefer cashless purchases.
5. Know and pay your taxes
Tax filing is an obligation of any individual or business. The tax obligations of companies depend on their legal structure. Small companies with limited liability, sole proprietorship, or partnership, declare income taxes in the personal tax returns of their owners. On the other hand, the income of corporations is taxed separately from company owners.
Be aware that as a business entity selling a product or service locally, sales tax needs to be collected. Different tax rules apply when a product needs to be shipped to another location and crosses national borders.
Tax accountants can help you prepare the estimated quarterly income tax, which you need to pay at the appropriate tax time. They can also review the profit and loss (P&L) of your business to determine your actual tax obligations. Ensure that you comply with existing tax laws within your area or state to avoid steep penalties and pressing legal issues.
6. Prepare financial reports
All businesses need to prepare financial statements. These statements include balance sheets, income statements, cash flow statements, and statements of shareholders’ equity. These financial reports give the whole picture of how a particular business is going. Financial reports are done monthly, quarterly, semi-annually, or annually.
Analyzing the figures in these reports can help companies see trends and reasons why sales are going up or down. This data assists owners in making significant decisions about how to run their businesses. It helps determine how much money small business owners have and whether they have enough assets to pay for liabilities.
Accountants can help you do much of the needed work in the preparation of financial statements. Don’t forget these reports will be the basis of the taxes you will be paying each year. Thus, well-prepared financial reports more or less make a truthful representation of a company’s financial condition.
As a small business entity, you need to be flexible. There is no single guiding principle that can be applied to all. With this in mind, regularly revisit and re-evaluate the small business accounting methods you adopt. There might be a need to update or revise these methods to catch up with market demands and requirements.
As the saying goes, “numbers do not lie.” The figures you have in your financial and accounting reports tell you the status of your company. Having these numbers available and knowing how to use them can make you a successful small business owner.