Accounting plays a vital role in businesses of every size. Still, it often becomes a low priority for small business owners, specifically, as they juggle all the other responsibilities of managing and maintaining day-to-day operations. However, accounting should never be treated as an afterthought.
Maintaining balanced books can help financially forecast months into the future and alert you to potential financial gaps. The right accounting insight could even help you save your business in case things get tough.
One reason accounting often gets put on the back burner for small businesses is that it’s tedious and intimidating. 40% of small business owners feel that financial management is the most challenging part of operating a business. When accounting mistakes occur, it can halt the growth of your small business and put you on shaky ground.
Suppose you’ve just launched or are about to launch your online store, congratulations! It takes uncommon passion and perseverance to get to where you are today.
However, as you know, business ownership is a constant flood of satisfying milestones coupled with expanding to-do lists. With your launch, you’ll need to get on top of the accounting tasks that come along with owning a store.
As your new business starts to make transactions, you must keep records. Your financial books are a place for you to review your business’s income and expenses. By keeping your books organised, you can take control of your finances and make smart decisions. You need to know how to set up accounting books for small businesses.
Many new business owners are daunted by the mere idea of bookkeeping and accounting. But in reality, both are pretty simple. Keep in mind that bookkeeping and accounting share two primary goals:
There is no requirement that your records be kept in any particular way. As long as your records accurately reflect your business’s income and expenses, the ATO will find them acceptable. (There is a requirement, however, that some companies use a certain method of crediting their accounts: the cash method or accrual method.Depending on the size of your business and amount of sales, you can create your own ledgers and reports, or rely on accounting software.
Few people start a new business so they can do paperwork. Spending time adding up receipts or pushing invoices around a desk is nobody’s idea of fun – unless you’re starting up as a bookkeeper or accountant!
Unfortunately, it’s a necessary evil and something you need to stay on top of in your new business. Being disorganised and putting off paperwork isn’t an option. They will fine you if you’re late getting essential information to them. And the longer you leave it, the worse the problem gets. So here’s what every small business owner needs to know about bookkeeping.
Being on top of your bookkeeping will also help you maintain a healthy cash flow within your business, and allow you to spot trends in your finances early on.
Being able to spot potential financial problems before they become critical is invaluable as you grow your business.
Bookkeeping is the process of keeping track of every financial transaction made by a business firm from the opening of the firm to the closing of the firm. Depending on the type of accounting system used by the business, each financial transaction is recorded based on supporting documentation. That documentation may be a receipt, an invoice, a purchase order, or some similar type of financial record showing that the transaction took place.
The bookkeeping transactions can be recorded by hand in a journal or using a spreadsheet program like Microsoft Excel. Most businesses now use specialised bookkeeping computer programs to keep books that show their financial transactions. Bookkeepers can use either single-entry or double-entry bookkeeping to record financial transactions. Bookkeepers have to understand the firm’s chart of accounts and how to use debits and credits to balance the books.
After you’ve legally registered your business, you’ll need somewhere to stash your business income. Having a separate bank account keeps records distinct and will make life easier come tax time. It also protects your personal assets in the unfortunate case of bankruptcy, lawsuits, or audits. And if you want funding down the line, from creditors and investors alike, strong business financial records can increase the likelihood of approvals.
Sole proprietors don’t legally need a different account, but it’s definitely recommended.
Start by opening up a business checking account, followed by any savings accounts that will help you organise funds and plan for taxes. For instance, set up a savings account and squirrel away a percentage of each payment as your self-employed tax withholding. A good rule of thumb is to put 25% of your income aside, though more conservative estimates for high earners might be closer to one third.
Next, you’ll want to consider a business credit card to start building credit. Credit is essential for securing funding in the future. Corporations are required to use a separate credit card to avoid commingling personal and business assets.
Before you talk to a bank about opening an account, do your homework. Shop around for business accounts and compare fee structures. Most business checking accounts have higher fees than personal banking, so pay close attention to what you’ll owe.
To open a business bank account, you’ll need a business name, and you might have to be registered with your state or province. Check with the individual bank for which documents to bring to the appointment.
Each of your business’s sales and purchases must be backed by some record containing the amount, the date, and other relevant information about that sale. You’ll use these to create summaries of your transactions.
From a legal point of view, your method of keeping receipts can range from slips kept in a cigar box to a sophisticated cash register hooked into a computer system. Practically, you’ll want to choose a design that fits your business needs. For example, a small service business that handles only relatively few jobs may get by with a bare-bones approach. But the more sales and expenditures your business makes, the better your receipt filing system needs to be.
Don’t throw receipts away! Whether it be a sale or a purchase, all your business transactions should be backed by official records that list the amount, date, and other key information. That way, you can put together summaries of your activity and report it properly when tax season comes around.
Remember that receipts don’t just include customer transactions. They can also apply to business meals, outings, and entertainment, work travel, vehicle expenses, gifts, and office-related purchases.
For tax purposes, make sure you log the purpose of the transaction: Was it a strategic planning meeting? A vendor appreciation package? A business trip? Have that information readily available, even if that means jotting it down on the back of the receipt.
As a small business owner, you might find that some of your expenses are partly for personal use and partly for your company, like cell phone bills, transportation costs, and home office purchases.
In each case, you can deduct the percentage that applies to your work. With thorough financial documentation, you’ll have the records you need to back up your claims.
To speed up and streamline the organisation process, try out different apps and software that can do most of the work for you when it comes to managing and organising your business.
Statistically, the longer you are in business, the higher your chances of a VAT or tax investigation. They’re normally nothing to worry about as long as you have a professional accountant on your side and all your paperwork to hand.
Get used to keeping a piece of paper for every transaction if you buy something online print off the invoice. It’s easier to collect paper as you go along, rather than try to find it years down the line.
Invoices and receipts are the backbones of a small business. If you are selling a tangible product, such as something that one might find in a shop or boutique, keep a copy of each receipt that your customers get for making a purchase. Likewise, if you are selling a more costly product for custom orders or if you are providing a service, generate and retain copies of invoices, and subsequently mark when the invoices have been paid. If you decide to use a computer-based system to keep a record of the company’s transactions, take advantage of that system’s ability to create and store electronic receipts and invoices. Otherwise, invest in a scanner so you can manually scan and save paper invoices and receipts on your computer.
A completed ledger is really nothing more than a summary of revenues, expenditures, and whatever else you’re keeping track of (entered from your receipts according to category and date). Later, you use these summaries to answer specific financial questions about your business, such as whether you’re making a profit and, if so, how much.
A ledger is a record of the inflow and outflow of money in the business. Use a ledger to record all of the transactions that your business makes. Document every sale you make, all the expenses you accrue and any bank fees or other costs. You can keep a ledger the old-fashioned way using pen and paper, or you can opt for a more sophisticated system like QuickBooks, Excel or FinancialForce.
Post receipts regularly. On some regular basis — like every day, once a week, or at least once a month — you should transfer the amounts from your receipts for sales and purchases into your ledger. This is called posting. How often you do this depends on how many sales and expenditures your business makes, and how detailed you want your books to be.
Your posting schedule depends on your sales numbers. Generally speaking, the more sales you do, the more often you should post to your ledger. A retail store, for instance, that does hundreds of sales amounting to thousands of dollars every day should post daily. With that volume of sales, it’s essential to see what’s happening every day and not to fall behind with the paperwork. To do this, the busy retailer should use a cash register that totals and posts the day’s sales to a computerised bookkeeping system at the push of a button.
A slower business, however, or one with just a few large transactions per month, such as a small website design shop, dog-sitting service, or swimming pool repair company, would probably be fine if it posted weekly or even monthly.
If possible, use accounting software. You can purchase an accounting software program that will generate its own ledgers as you enter your information (and then automatically generate the necessary financial reports from the same information). All but the tiniest new business are well advised to use an accounting software package to help keep their books. Micro-businesses can get by with personal finance software such as Quicken.
The final thing that small businesses must be aware of when managing their books is the responsibility to pay tax. Not only must you pay tax on revenue, but you also might be liable to pay tax on any services or products you buy from others. Keep all of your paperwork in line, so you are prepared to pay the ATO to come tax time.
Getting paid is the most exciting part of running a business. Managing your receivables isn’t quite as much fun. When an invoice is issued, you record a receivable, meaning you log that a customer owes you money. By checking this listing, you can easily see if a customer has an outstanding balance.
When the customer pays you, the amount should be applied to their invoice, and it should be marked as paid. However, when you are trying to keep up with a lot of orders, this is easier said than done. Customer deposits all too often are left to reconcile at a later date since there are never enough hours in the day. That means that when tax time comes around, you are left with a lot of customer deposits in your revenue account and a report of your receivables that don’t match.
The consequences here are that you waste hours updating your listing, you can overpay on your tax return, and you will have high debts. That is why you need to make it a point to keep track of your transaction as they happen. Apply for your customer’s payments monthly — it can save you tons of time on invoicing (and money) in the long run.
Tracking revenues and expenses should be a foundational element of your business. This will help you answer questions about your operations, prepare tax returns, and measure how you’re growing over time.
Right from the start, make sure you have a system in place for keeping track of all your transactions. Consolidating your receipts in one place will make the process that much simpler when it comes to building reports like balance sheets, making calculations, and measuring business growth. That’s why bookkeeping is a central part of running a business.
Set up a bookkeeping routine as soon as possible so that you can follow a consistent process every time. Whether that be organising paper receipts with folders or using accounting software and keeping your books 100% virtual, follow the same steps regularly to ensure that nothing slips through the cracks.
The more transactions you have, the more often you should update your records. While there are plenty of DIY options out there, you can also hire help.
On a regular basis, monitor your cash flow to get a solid understanding of how much capital you have available, how you’re spending it, and how to budget for any upcoming costs. Remember, it’s not just about revenue – your cash flow calculations will reveal how it compares to your expenses and what that really means for your day-to-day business.
Financial reports are important because they bring together several key pieces of financial information about your business. Think of it this way: while your income ledger may tell you that your business brought in a lot of money during the year, you won’t know if you turned a profit without measuring your income against your total expenses. And even comparing your monthly totals of income and expenses won’t tell you whether your credit customers are paying fast enough to keep adequate cash flowing through your business to pay your bills on time.
That’s why you need financial reports: to combine data from your ledgers and sculpt it into a shape that shows you the big picture of your business. The key reports you need to create regularly are a cash flow analysis, a profit and loss forecast, and a balance sheet. (Both QuickBooks and Quicken Home and Business, as well as other accounting software, can provide these regular reports.)
When you are starting, it’s tempting to leave your bookkeeping until the evenings. But if you’re tired, simple tasks will take longer, and you’re more likely to make mistakes.
If you need to tackle a job like this outside of working hours when you could be earning money, then consider getting up early one morning, or doing it on a Saturday morning. Make it a regular day to form a habit.
You may well find that using a suitable accounts software package takes much of the pain away. ByteStart’s Guide to Choosing the Right Online Accounts Software for Your Business will help you to understand what you should look for in an online accounts package.
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