Small businesses face challenges every single day. They need to get more customers and keep them coming back.
They have to get the word out about their business, manage employees, and put out fires throughout the day. Somewhere on that massive to-do list is to manage business finances.
This is often the last thing that business owners want to do. If that sounds familiar, you have your reasons to avoid business accounting.
It’s scary to look at your numbers. You don’t want to cut back on expenses. You don’t want to know how bad it really is.
Managing money is the most important part of running a business. Don’t let fear rule you.
Take charge of your business finances and read this guide to learn how to handle business accounting step-by-step.
1. Pick Accounting Software
About 18% of small businesses don’t use accounting software. The key to small business accounting is organization.
You don’t want to rely on spreadsheets or notebooks. They both require a lot of data entry, which leaves too much room for costly errors.
Small business accounting software is a simple solution to help you manage your accounting. It makes tax time a lot easier and you can always look at your software suite for an accurate reflection of your business finances.
What should you look for in accounting software? Look at your business needs. You might need a simple solution for one person, or you need a full suite to run payroll.
Look for solutions that have automation features and integrate with other software platforms. The big thing to look for is how much time you can save by using the software suite.
2. Set Up Your Chart of Accounts
A chart of accounts helps you organize your income, liabilities, and expenses. It’s a category structure for your financial transactions.
When you import your transactions into your accounting software, you have to assign a category to those expenses. This helps tremendously with reporting because you know exactly where your money is going.
The first step to create your chart of accounts is to have five main categories: assets, liabilities, revenue, expenses, and equity.
You’ll then set up your subcategories as necessary. For instance, under expenses, you’ll have rent, advertising, and office supplies.
The software suite probably has a chart of accounts set up. You should review it and add subcategories that are appropriate for your business. If you’re not sure, then check with your CPA for help.
3. Know Your Tax Responsibilities
This is the area of business accounting that’s the most frustrating. Tax laws are difficult to understand. You can face fines and penalties for simple mistakes.
Your federal tax responsibility depends on your business structure and the type of business. A sole-proprietor has to pay 15.3% in self-employment taxes, whereas a sole-proprietor taxed as an S-corporation has a different situation.
S-corp owners are taxed on their income distributions. They pay income taxes on their personal returns. They don’t have to pay self-employment taxes on their income.
If you have employees, you need to pay payroll taxes. If you miss the payroll tax deadline by a day, a penalty will be assessed.
You have to withhold money from your employees’ checks for Medicare and Social Security. This comes out to 7.65%. You have to match the amount withheld and send those funds to the IRS.
State and local taxes depend on where your business is located. Some states have a flat tax rate, which makes it easy to calculate.
Local taxes are easy to miss. You have to check with your municipality to find out if you’re responsible for any local taxes or not.
Do you have to collect and pay sales taxes? If your business has a physical location and you do business locally, yes. That is, unless you’re in one of the few states that don’t have a sales tax.
If you don’t, then it doesn’t become clear. For online businesses that sell to people within that state, you should collect sales taxes. Always check with a CPA for clarity.
4. Learn the Most Important Reports
Do you have a healthy business? You might think that if you generate a million dollars in revenue each year, that’s a successful small business.
What you’re missing is whether or not you’re profitable. A million-dollar business can still spend a million dollars, get deep in debt, and struggle financially.
You don’t want to find yourself in that situation. You need to know which financial reports are the most important to your business.
The profit and loss statement is a general report that small businesses use. You track your income and expenses to see if your business turned a profit or not. It’s also used to project profits so you can make strategic decisions months in advance.
The balance sheet is another important report. This adds up your liabilities, assets, and equity to give you an idea where things stand at a certain moment.
What if you want to find ways to increase revenue? Your sales figures can tell you a number of things.
You can find the average customer order amount. If it’s low, you and your team can come up with ways to increase the order value.
5. Have a Cash Management System
The key to a healthy business is effective cash management. That starts by having separate bank accounts for your business and personal income and expenses.
Even if you’re a sole proprietor and your taxes are treated the same on your personal returns, you should have a separate business account.
You don’t want to combine expenses or have some personal expenses and other expenses mixed up with your business expenses.
Your personal account is attached to your bookkeeping software. Your personal expenses get uploaded and will make reporting and cash management difficult.
The second part of having a cash management system is to put cash aside. This is where most business owners fail to manage cash.
They struggle for months and barely get by. Then a big month comes along and they start spending as though their lives depended on it.
A cash management system ensures that there’s enough money for the owners, operating expenses, and emergency expenses. Your business is in a better position to survive lean times and pandemic shutdowns because you took care of your financials.
There are different strategies that you can use. A cash management strategy in the book Profit First suggests you take a small percentage and set it aside for profit and allocate funds to taxes and owners.
Other strategies have you pay the owners first and use what’s left to manage the business.
6. Create a Bookkeeping and Payroll System
Small business owners love to look at their bank accounts and make decisions based on what’s in the bank at that moment. They also spend too much time working on their books.
Payroll taxes take business owners about five hours every pay period. You don’t want to spend that much time on payroll taxes, on top of all of your bookkeeping tasks.
A bookkeeping system helps you automate what you can and have a set schedule for what can’t be automated. How much you can automate depends on your software and your comfort level letting your software do a lot of the work.
You should have a set policy for employees to turn in time cards, so you can process payroll the next day. Run payroll every two weeks instead of every week to save time.
Set aside time to reconcile your books and do it consistently. Most business owners spend a few minutes each week looking over the transactions and reconciling.
7. Revisit and Refine Your Systems
Small business accounting isn’t a static thing where you set it and forget about it. You have to observe what works for your business and what doesn’t.
Take the time to review your systems on a quarterly basis. You’ll be able to see if you need to spend more time on collections calls or less time on payroll. Make adjustments so your systems continue to support your business.
You may get to the point where you need to get assistance to do your books. Bookkeeping services for small business are affordable and save you a tremendous amount of time when it matters most.
Good bookkeeping services handle the day-to-day operations of business finance.
Don’t Be Afraid of Business Accounting
As a business owner, you have a responsibility to run your business as best you can. Business accounting cannot be taken lightly or put at the bottom of your to-do list.
This guide gave you all of the steps to help you manage your business finances. It’s not hard once you have an organized system in place and understand your tax responsibilities.
You’ll be able to enjoy company profits and have less money stress. For more business insights, check out the other articles on this site.