Every small business owner knows there’s no shortage of details and tasks to consider when managing your company. Bookkeeping is one of these necessary chores.
While you might be able to manage by keeping your own books in the beginning, things will start to get messy as your company grows. Implementing good accounting practices early on will allow you to focus on growing your business and not worry about paperwork.
Here are five expert accounting tips you should follow to ensure the success of your small business.
Record Income Accurately
Revenue from sales, money from investors, and loans are very easy to lose track of once your business gets going. Not keeping tabs on all your incoming cash flow can cause you to underpay your taxes, leading to hefty IRS penalties and fees for incorrect tax filing.
Small businesses can create cash flow statements to gauge the timing of the money coming in against the money going out. You could also hire accounting services to help you automate the process.
Separate All of Your Expenses
Setting up a separate bank account for your business can alleviate the confusion of mixing personal expenses with business transactions. A sole proprietor can simply use their Social Security number to open a business account, while business owners with employees can use their employer identification number (EIN).
This makes it much easier to collect and track business expenses for tax deductions. It will also ensure that your personal credit score doesn’t get affected by your business’s finances.
Choose an Accounting Method
As a business owner, you need to decide whether your company will use a cash or accrual accounting method. Cash-based accounting is easier for startups as it only records sales and expenses at the time of payment.
Accrual accounting on the hand is more complicated. This involves documenting revenue and expenses as they occur, which ensures no time lag between incurring a cost and paying it. Knowing about accounting standards like the International Financial Reporting Standards (IFRS) or the Generally Accepted Accounting Principles (GAAP) is also crucial.
Understand Sales Tax Laws
If a business has a physical presence in the state, like a store, warehouse, or office, they generally have to collect sales tax. Depending on how they sell, either directly or through a fulfillment service like Amazon, online sellers in most states may or may not have to collect sales tax as well.
That is why it’s important for small business owners, especially those in the e-commerce industry, to talk with a tax attorney or accountant and create a program to meet the state laws regarding sales tax.
Create Financial Projections for the Future
Financial projections and reports like a general profit and loss statement, can help you figure out where your business is headed in the following years. Even if your business seems to be financially stable at the moment, there’s no telling when things could go bad.
But that’s not all, financial projections can also make it clear where to invest your business revenue and whether you’ll need a business loan in the near future. Take the time to develop realistic a financial forecast with your accountant or by using accounting software.