You’ve finally gone and started that business you’ve been dreaming about for years. The revenue and expenses have started flowing in and you’re not quite sure what to do next with that shoebox (or inbox) full of receipts you’ve been collecting. If you don’t have something in place already, it’s time to get a solid accounting system in place.
According to the U.S. Small Business Administration, 50 percent of small businesses fail within the first five years and the main reasons for failure revolve around poor financial management. But you don’t just want to avoid failure, you want your business to thrive — and making that happen requires a well-managed accounting system that lets you easily keep track of your revenue and expenses while providing metrics you can use to measure the health and growth of your business.
Proper accounting will also help avoid issues with the IRS during tax time and help you comply with all the various regulations around business financial management.
With a lengthy to-do list on your desk already, the thought of setting up your accounting system might seem pretty daunting, especially if you’re not quite sure where to start and what to do. But setting up your accounting system is something you need to do to succeed, so let’s look at the basic steps you need to take to get off to a good start.
Separate business from personal
The first step is go to a bank and open a business account. Even if you’re a sole proprietor, conducting business transactions in your personal account is not only unprofessional, it will make keeping track of your business finances a confusing affair and will lead to a nightmare at tax time.
If your business is set up as a limited liability company (LLC) or corporation, then having a business account isn’t an option — it’s a necessity — because your business is an entity unto itself and its books have to be kept separately from any personal accounts.
Cash or accrual accounting?
One of the foundational decisions you’ll need to make when setting up your business accounting is which accounting method to use – cash or accrual.
In cash accounting, transactions are recorded only when funds actually change hands — including when you take a payment or pay an expense. For example, if you provide services to someone in November but don’t receive payment for those services until January, the income is recorded in January’s books.
Accrual accounting involves recording the transactions as soon as they occur, when the service is provided or the expense occurs. So income from services rendered in November would go into November’s books, even though you won’t actually get paid until January.
If your sales are less than $5 million per year, you can use either of these accounting methods and whichever method you choose depends on what works best for your business. Accrual accounting is better at showing the changes in business income and debts, but it doesn’t show cash reserves well, which can lead to cash flow problems. Cash accounting is better at showing how much cash you have but doesn’t do well when it comes to seeing the long-term picture.
Choose your accounting platform
When it comes to choosing the tools for keeping track of your accounts, you’re in luck. Never in history has there been so many user-friendly and low-cost programs and services for small business accounting.
At the top of the list of accounting programs you might want to consider are Xero and Quickbooks Online. They both offer functions such as invoicing, accepting payments, sales and expense tracking through a link to your bank account, payroll and more.
With so many options out there, you might wonder which one is right for you? Here are some things to keep in mind when choosing your accounting service:
- Is it easy to use with features that simplify your accounting?
- Does it integrate well with other tools you use, such as your online and/or bricks & mortar store?
- Will it connect with your bank account to seamlessly record transactions?
- How secure is your data?
- Do they offer good customer support along with tutorials and other training opportunities?
- How much does the service cost?
Picking an accounting platform is not a choice to be made lightly, because you’ll not only be relying on it for the important task of keeping track of your financials, but also because once you get invested in a platform it’s a lot of work to switch. The good news is that both Xero and Quickbooks integrate with your Bigcommerce online store in just a few clicks.
Keep organized records and balance your books
No matter which platform you choose for your business accounting and how well it keeps track of your business transactions, you need to keep your own records of all your business transactions and file them in an organized manner. These are your source documents and the foundation of your accounting.
A simple filing system (whether on your computer, via hard copy or both) is to set up folders for each month of your fiscal year, with sub-folders inside to separate income receipts from expense receipts.
At the very least, all money that goes into and out of your business account needs to be recorded in your accounting platform and your records need to match up with your bank account each month. You also need to make sure you record all money received by your business for any reason (except for loans and investment funds) – whether it went through your bank account or not – as well as any sales tax collected.
Finally, you’ll need to do your monthly, quarterly and yearly accounting processes, which include balancing accounts, producing reports and meeting any federal and state tax requirements.
Bring in the professionals
If accounting still makes you shudder then you might consider working with a professional bookkeeper to keep track of your day-to-day business accounting needs. You’ll need to find a qualified accountant to file your taxes at the end of the year and you can start by asking for recommendations from business owners that you know in your local area.
While paying professionals will of course cost you money up front, they will give you more time to on making your business more profitable and ultimately save you money in the long run by keeping your financial house in good order and helping you avoid tax problems – providing you hire qualified professionals who come with good references and clearly set out your expectations.
Get some training
If you do decide to DIY, it’s a good idea to get some basic training in accounting procedures so you can get started on the right foot and avoid the common pitfalls many business owners encounter.
Most cloud accounting software providers offer tutorials and training in their products as part of their support to customers or as an additional service you can pay for, which can be worth the money. A basic small business accounting course through continuing education at a local community college or similar service, however, would provide you with a more thorough knowledge of the basic accounting procedures you need to run your business.
Whether you choose to go it on your own or work with professionals, it’s always a good idea to have a solid understanding of business accounting practices. They will help you interpret the financial data from your business more effectively and allow you to make better decisions that can help you grow and prosper into the future.
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