Starting a small business can be exciting. It’s a chance to be your own boss and do exactly what you want to for a living. Small businesses sometimes grow into larger ones and can be lucrative for their owners. Of course, it takes a lot of hard work and attention to detail. You have to know your customers and provide quality products and services that meet their needs. Marketing is also essential. It’s hard to bring in new customers if people don’t know about you.
Then there is the money side of business. It may not be the most fun, but it is one of the most necessary aspects. You’ve got to keep track of expenses, income and profits. Records have got to be accurate to stay successful and for tax purposes. It can seem overwhelming but here are some basics of small business accounting.
Do It Yourself or Hire a Pro?
Even for a small business, accounting can be complex. There are tax laws that may allow you to save money. If you’re not aware of them you can’t take advantage of them. It may be best to find an auditor. A professional accountant can take the time and stress of bookkeeping off your hands. An auditor will have the tools and software at their disposal and know the best tax plan for your business. There is great peace of mind in giving a business task to an expert and allowing yourself to focus on the other aspects of running a successful, profitable business.
Hiring an accountant will add an extra business expense. That may or may not fit with your budget. You may also feel confident in being able to take care of your own books. It is certainly worth a try. Before you start, there are some basics you should know.
Separate Bank Account
Step one in setting up your business bookkeeping system is opening a separate bank account for your business. Mixing business and personal finances is a big mistake that can cause many complex problems. You will then need to choose from two basic methods of keeping track of cash flow. Cash-basis or accrual basis.
The cash-basis method is the easier of the two to use. It can only be used by businesses that deal exclusively in cash. A record is made of each expense as it is paid for and revenues only after a customer has made payment. This system does not record expenses or income paid using a credit account. It is also not recognized as a generally accepted accounting principle either nationally or internationally.
The accrual basis system of accounting is much more commonly used by businesses. Under this system, you record expenses as they come in and income when a sale is made. You don’t wait for money to change hands. This requires two entries for each transaction. One for when it was billed, and one for when it was paid. This extra detail allows the use of credit accounts and gives a more thorough record of your financial transactions. This is helpful in many regards including filing taxes. One of the best ways to streamline your small business’ finances is to set up a direct debit system. This allows you to automatically withdraw payments from your customers’ bank accounts on a set schedule. Direct debit software makes it easy to set up and manage your direct debit payments.
You should have a separate chart for each of your customers as well as each of your vendors. This makes it much easier to track down an individual transaction and can be used to see trends and exactly where your money goes each month. It can be an invaluable tool in maintaining and growing your business.
Decide on How You Will Be Paid
You also need to determine the system you will use for customer payment. For many small businesses, payment is expected upon delivery of goods or services. If you have bigger, corporate customers, you may wish to invoice them and give them a period of time, perhaps 30 days to make payment. For some customers, you may wish to extend credit. Just be cautious when doing so.
Careful and accurate accounting is essential for any small business. If you decide to do it yourself, be sure to choose the method that works best for your business and keep careful records. Otherwise, hire a professional account. They are worth the added expense and can save you money in the long run.