In order for a small business to be both successful and sustainable, getting started requires important legal activities, lots of planning, and many other necessary tasks. One of the very first and most crucial steps in preparing for and managing your small business is setting up a trusted accounting and bookkeeping system. The National Federation of Independent Businesses (NFIB) reports that over 25 percent of failed businesses attribute their collapse to accounting difficulties. Don’t let your business be one of them. Use this helpful checklist to get your business finances and records in order.
Take Care of Legal Tasks
A US Small Business Administration (SBA) article recommends that you should decide early on what kind of ownership is best for your business:
- Sole Proprietorship
- S Corp
- Limited Liability Company (LLC)
Once you’ve decided what kind of ownership is right for your business, there are a few important steps to take:
- Register your business with your state government.
- Contact the IRS to get a tax identification number and Employer Identification Number (EIN).
- Enlist for state and local taxes.
- Obtain any necessary business licenses and required permits.
Determine Your Accounting Method
Your accounting method depends on how the business operates and how transactions occur. There are two major accounting options—cash accounting and accrual accounting. You’ll need to decide which one will work best for your business.
- Cash Accounting – Income and payments are recorded only once they are received. Most small businesses use this accounting method.
- Accrual Accounting – Transactions are recorded as soon as they occur. This method provides more up-to-date accounting information, but is best suited for businesses with large cash reserves.
Set Up Business Accounts
Keeping your personal accounts and business accounts separate is a smart move for small businesses. Not only does it keep your books in order, but you’ll also avoid tax trouble and unnecessary accounting expenses. In the event your business faces hard financial times or a lawsuit, you won’t have to deplete your personal savings to cover the cost.
Taking out a loan or a credit card in your business name builds a solid credit profile for your business. A line of credit will help with your bookkeeping, as well as give you proof of business expenses to show the IRS if you’re ever audited.
Nail Down Logistics
Logistics can be a complicated step that requires ongoing modification as your business develops. As you get started, identify:
- The process of your transactions;
- How customers are invoiced; and
- How and when they’re paying for their product or service.
Depending on your accounting experience, you can manually calculate and record this information, but generally the best and most accurate way to keep track of your finances is with accounting software. Keep in mind, as soon as you choose your accounting software, you’ll want to set a data input schedule as well.
Maintain Good Habits
Failing to properly record your transactions can hurt your business. Keep an eye on unpaid bills and follow up on invoices if payments are not received. According to an article in Entrepreneur, properly tracking your business expenses is not only good for recordkeeping, but prevents you from missing out on tax write-offs.
Setting up a bank account and credit line for your company helps keep all of your business expenses in one place, making them easy to document. Recording deposits correctly also helps during tax season. This will help you avoid paying taxes on money that isn’t income generated by your business.
Getting your business started and helping to make it a success largely depends on careful planning and accurate recordkeeping. Be prepared and you’ll have fewer accounting hiccups—and possible financial headaches—down the road.