Unless your small business is an accounting firm, most owners lack a comprehensive background in small business accounting. However, owners must learn some of the nuts and bolts to keep business running smoothly.
The good news is this can be relatively simple. Most smaller companies need to prioritize three basic accounting functions: ensure that revenue exceeds expenses, keep the books clean, and pay appropriate taxes. More complicated functions can be learned or augmented with outside professional assistance.
While many small business owners opt to save the time, effort, and risk by outsourcing their accounting needs, it’s important for those who want to handle it themselves to know the basics of small business accounting.
KEEP PERSONAL AND PROFESSIONAL ACCOUNTS SEPARATE
A common misstep small business owners can make is to mix their business and personal funds. Although plenty of entrepreneurs contribute personal funds to start a new business, once the venture gets rolling, it’s essential that business revenue and expenses must be separate from personal ones.
The best solution is to start with a sound business structure. Establish your company as a distinct legal entity, such as an S corporation or limited liability company (LLC). Open a business checking account as your financial hub, get a business credit card for expenses you can’t or don’t want to pay cash for, and open a business savings account as a rainy day or investment fund.
Having a dedicated business bank account for checking and savings saves you precious man-hours when it’s time to tally up deductible business expenses. From the start, get used to using different bank accounts for business and personal purchases. If you’re contributing capital to you business out of your personal assets, make sure you clearly document the contribution.
Maintaining a dedicated business bank account and business credit card will also help you limit legal exposure to business debts if you have a limited liability company (LLC) or corporation.
TRACK ALL EXPENSES
Each business-related expense needs to be labeled, categorized, and tracked to manage cash-flow and maximize tax credits and write-offs. Without keeping a close accounting of your spending, unexpected expenses (equipment repair, software upgrades, etc.) can prove catastrophic for a small business.
Use business credit cards for all purchases and track and organize your expenses digitally. When cash is your only option, you can file digital copies of receipts with accounting software. Your chosen accounting method will impact when and how to record expenses and income.
Larger unforeseen expenses have a way of popping up during slower business periods, so plan ahead to avoid calamity. An IRS provision called Section 179 allows small and medium-sized companies to deduct qualified business property and equipment during the year of purchase, so even if an expense puts pressure on you in the short-term, you may benefit from tax breaks later.
MANAGE LABOR COSTS & CLASSIFICATIONS
If you own a small business that requires the service of employees, you will be responsible for more than just their wages. Paying for employees, including yourself, can often account for as much as 70% of a business’s total budget. Keep track of overtime, benefits, PTO, and other forms of compensation ahead of new hires so you don’t risk the quagmire of over-promising and under-delivering, which can lead to high employee turnover. Accounting software or outside professional services can help you track your payroll and payroll taxes, which have different rules and deadlines than income taxes.
It is also essential that you classify your workers accurately. Contractors are workers who contribute to your company on a project or limited-time basis and retain control over their own schedules and business decisions. Employees are workers you have long-term behavioral and financial control over as their singular source of income. The penalties for misclassifying workers can be steep. If the IRS believes the misclassification was intentional, the employer could be fined or even face imprisonment.
ORGANIZE INVOICES & ACCOUNTS RECEIVABLE
Invoicing is a necessary part of owning a business, and if it is not managed in a timely and organized manner, it can quickly become confusing and detrimental to your bottom line. Your invoices should be clear, detailed, and distributed in a timely manner to allow both your company and your clients the ability to accurately complete a business transaction.
While accounts payable are also important, nothing dictates a company’s survival quite like accounts receivable. If money isn’t coming in when it’s supposed to, an operation can become bogged down with playing catch-up. This is another reason why tracking invoices is essential. Set a day or time each month to review the percentage and total amount of outstanding revenue. Generally speaking, no more than 10-15% of your accounts receivable should be past due. Reach out to those clients. Give them generous yet firm deadlines before sending them to collections, especially if you hope to retain their business in the future.
KEEP ON TOP OF TAXES
As individuals, we are familiar with paying taxes once a year. In small business accounting, different rules often apply, including the detail and frequency with which taxes need to be filed. The key to staying on top of your taxes is to accomplish smaller, manageable tasks year-round.
Strategic tax planning allows a small business to create a plan that minimizes the amount of taxes to be paid in any given period. Having an organized tax plan also means that you will stay on top of any changes or updates to tax laws and how they affect your business. You should start planning formal tax-strategy sessions in the middle of each tax year to allow ample time to solidify a plan. Every business owner should have a basic understanding of applicable tax code provisions and work with a certified public accountant (CPA) whenever possible to implement a customized strategy and avoid penalties.
Outsourcing to experts is especially handy around tax management. While you, a small business owner, may not be expected to be an expert on all things tax-related, you will be on the hook for any mistakes in filing, whether intentional or not. Mistakes can lead to audits and penalties, all of which can be avoided through employing the services of qualified professionals who are trained in tax law and stay informed on changing rules and deadlines.
OUTSOURCE WITH THE EXPERTS
Outsourced accounting professionals can help you manage payroll, track expenses and income, handle tax filings and payments, and much more. Founded in 2008, Payroll Vault is committed to serving as a comprehensive solution to all your payroll-related small business accounting needs. Focused on cutting edge accounting technology and increased efficiency, Payroll Vault tackles all the compliance-driven payroll tasks to help your business run smoothly. Our dedicated professionals work closely with you to fully understand your business needs and support improvement and long-term success.
Find out how Payroll Vault can work for your business and request a quote here.