Do you run a small business? If so, you are likely stressing about the different functions to scale it.
While many small business owners focus on their products/services and their marketing, they often overlook accounting.
Business accounting helps you assess your company’s progress. It helps you realize whether you can scale your company, or if there are issues that need to get addressed.
So how do you handle your small business’s accounting duties?
Here are the small business accounting tips you should know.
1. Let Someone Else Do It
The best option for small business accounting is to consider outsourced accounting.
There are firms that focus solely on handling bookkeeping, financial research, and analysis for small businesses. They’ll make sure to record your income and expenses and track the trends.
For example, if they notice that the gap between your income and expenses grows each month, they’ll alert you.
Many in-house accountants record the information without analyzing it further. They’ll also create reports and share them with you at least once per month. These reports will help you track your company’s progress.
You can also expect this firm to offer consultations on how to maximize your revenue and profits.
2. Keep All Receipts
Make sure you keep receipts of every earning and expense that your company incurs. This might sound obvious, but even forgetting to account for a few dollars can make a huge difference.
When it comes to getting tax refunds, you want to make sure you record each expense for deductions.
You also want to make sure you record every earning. If you don’t report your full income, you might get audited by the IRS.
It’s also wise to save your receipts in a safe. If you have digital receipts, keep them backed up on an external hard drive, as well as a cloud storage solution.
3. Focus on Labor Costs
Much of your company’s expenses will fall under labor costs. You also have to remember that if you miss making payments to your employees, you can be liable for lawsuits. This is one of the biggest challenges for small businesses and can lead to them closing down.
One of the most overlooked accounting tips is calculating the funds needed during each pay period. For example, let’s suppose you need to spend $1,000 each Friday on paying labor costs.
You want to calculate your balance at the end of each day to see if you’ll have the $1,000 by Friday. You’ll have to consider if you have additional funds for overtime payments, bonuses, and reimbursements.
You’ll also have to see if you have sufficient funds for payroll taxes.
4. Plan for Emergencies
Every small business accounting plan must prepare for financial emergencies.
For example, do you have the funds to replace damaged office equipment? If you need to rush into hiring additional staff, do you have the funds to pay them?
The first step is to assess the possible emergencies that your company might face. Next, you want to record the expenses associated with these emergencies.
You want to make sure that at the end of each month, you have these funds in your company’s bank account.
Let’s say you need $3,000 each month. This means that you need to have a spare $100 at the end of each day.
Before the day ends, calculate your funds for the day. If you regularly fall below $100, you want to plan how you’ll recover it. You might have to raise prices or cut costs.
Make sure, however, that you don’t neglect planning for emergencies. Without the $3,000, you might have to postpone your business operations or close shop altogether!
5. Inventory Records
Make sure you keep records in your spreadsheets on all your inventory and their associated costs. This includes office equipment, products, and other related items.
You want to include the price you paid for your inventory. Make sure to include any costs for repairs or renovation.
If these items get damaged or stolen, you might be able to claim the insurance on them. You’ll need accurate records of the financial burden you’ve taken by losing your inventory.
Inventory is also one of the biggest expenses you’ll have for your business. It’s wise to first record your inventory expenses before you add any income to your spreadsheets.
6. Cut Your Expenses
Make sure to do an analysis each quarter of how much you’ve spent on your company’s expenses. In an ideal situation, your expenses should remain flat or decrease at the end of the third month.
If you see a continuous increase, you want to figure out how to reduce your expenses. The first thing to try is cutting down on your office equipment and services.
For example, do you need to buy printer paper each month? You might spend $500 each month on this. Try to cut this down to $400 each month.
You want to consider what you can do to use less paper. Consider going completely digital and only using paper for emergencies.
What about software subscriptions? If you spend money each year on Microsoft Office, you might want to consider free alternatives. Many small businesses can survive by only using the free Google Suite.
Do you have a lot of expenses for your office? You might want to consider going fully or partially remote.
As a small business, you have to take small steps before you scale. While you might get tempted to rent the office space with a view of the city, this can probably wait!
Focus on only spending what you need to for at least one year. You also want to make sure you don’t cut employee pay to save on expenses.
It’s best to invest in people first, and worry about hardware and software later.
7. Predict Your Financial Future
Not only does this get overlooked by small business owners, but it seems impossible to them!
The point of predicting your financial future is to create a financial safety net for your company. This lets you prepare for future goals, such as scaling your company, launching new products, hiring more staff, etc.
Let’s say you have 10 employees and you wish to hire another 10 within 2 years. You have to first calculate how much more you’ll have to spend to hire these 10 new employees.
Let’s assume this amount is $100,000. Your next goal is to calculate how much profit you’ll need to accumulate within 2 years. Only once you earn these profits can you spend the required $100K to hire the employees.
Now, here’s where it gets tricky: what will be the challenges you might face within 2 years? In 2018, no business owner could have predicted having to shut down their business due to COVID-19. However, some businesses were so well-prepared that they managed to stay afloat in the midst of the pandemic.
Remote companies managed to stay afloat. Restaurants that offered delivery services also managed to stay afloat.
Your goal has to be to prepare for the worst. Assume there’ll be challenges in making more money for your company.
Find solutions on how to earn, save, and invest your funds to accomplish your future goals.
8. Keep Track of Invoices
Make sure your accounts spreadsheet has a separate tab for keeping track of invoices sent and received.
Every time you send an invoice, you should record this in one row in your account spreadsheet. Within this row, have a link to a PDF of your invoice.
You should have a cell that lists the status of the invoice. Your three options should be sent, received, and overdue. These can get created as a drop-down list within the cell.
Make sure you record the status of your invoice immediately. If you don’t receive your invoice within 3 business days, record it as overdue.
If it’s overdue, request an employee from your finance department to follow up with the vendor as soon as possible. As a small business, you cannot afford to receive late payments.
9. Set Funds Aside for Taxes, Savings, and Investments
You want to make sure you keep track of your company’s disposable income to see how much you can set aside. Your disposable income is your funds after all expenses get paid.
Let’s assume this is $3,000 per month for your company. You have to first calculate how much you’ll need to pay your taxes. Set this amount aside for your tax obligations.
In your accounts spreadsheet, write down the dollar amount you’ve set aside for your taxes. Let’s assume you owe $1,800 in taxes.
You now have $1,200 leftover from your disposable income. You have to then decide how much to put aside for your savings account and how much to invest.
Keep a written record of the distribution between your savings and investment funds at all times!
You’ll Succeed With These Small Business Accounting Tips
If you follow these small business accounting tips, you’ll have no problem managing your company’s funds and reaching your financial goals!
Start with the basics of keeping accurate records of all income and expenses. Be diligent in recording this information or outsource it to a small business accounting service.
As your business grows, you should look to cut your expenses, set aside funds, and plan ahead on how you’ll reach your goals.
Please share this guide with other small business owners. There’s more great entrepreneurship content on our website!