While you may be tempted to devote all of your attention to managing business operations and providing good customer service, learning proper accounting practices are crucial for small business success. Whether bookkeeping is done in-house with an online accounting system or by a hired professional, it’s important that your books are kept up-to-date and accurate. Smart bookkeeping skills help avoid trouble with the IRS, give a more accurate glimpse into financials, and help you manage your business better. In this article, we'll cover five important small business accounting lessons.
Lesson One: Maintaining Financial Statements
Every business owner should maintain a profit-and-loss statement, cash flow statement, and balance sheet to monitor finances and overall business performance. The profit-and-loss statement records the money coming in (revenue), going out (expenses), and the net profits over a period of time. Profit-and-loss statements help business owners determine if they're making or losing money, how much money is made or lost, and what products or services sell better than others. The cash flow statement works like a checkbook register—it captures money made, your expenses, and the remaining balance, but shows what profits are actually cash. Knowing how much cash your company has is vital. A business that's profitable in the books may still fail if there isn't enough cash left over to pay bills and debts. A balance sheet is an abstract of your business financials. It populates your assets, what you owe in debts and liabilities, and how much your business is worth.
Lesson Two: Setting Up Accounts Payable and Receivable
In addition to keeping accurate financial records, organize your finances even further with separate bookkeeping accounts. Keep track of what you owe and who owes you with accounts payable and receivable. Accounts payable is the money the business pays toward bills, loans, and other expenses. Accounts receivable tracks the money your customers pay for your goods and services. The U.S. Small Business Administration (SBA) recommends keeping detailed records of customer information, invoice numbers, transaction dates, amounts, terms, and if goods or services were paid in full or pending payment.
Lesson Three: Inventory Watch
Careful inventory management is one of the most effective ways to prevent loss from theft and waste. Maintain detailed records of how much product you have, when it was purchased, when it expires, and how much it cost. Up-to-date inventory records also help track sales trends so you'll know how much product to order the next time you're due for a restock.
Lesson Four: Employee and Payroll Management
Bringing on even just one employee—whether it's a family member or an outside hire—requires you to pay payroll taxes and fill out important paperwork. The Form W-4 (Withholding Allowance Certification) and I-9 (Employment Eligibility Verification) are among the forms you'll be responsible for maintaining—along with employer matching, unemployment, and workers’ compensation. When it comes to paying your employees, an article from SCORE suggests keeping a separate payroll account. It's critical that this account is accurate in order to meet tax and other government reporting requirements.
Lesson Five: Separate Business and Personal Expenses
We’ve stressed before the importance of keeping business and personal accounts separate. Differentiating your expenses is one of the easiest steps toward success for your small business. Opening a business account will streamline the expenses incurred by your company into one banking statement, alleviating some of the stress of bookkeeping. In the event the IRS audits your business, it also shows that you don't muddle your business operations with personal spending.
Small business accounting is a continual learning process. With dedication to careful bookkeeping habits, you'll soon find a method that works best for you and your company.