Table of Contents
- Introduction
- What is Small Business Accounting?
- Bookkeeping 101
- How to Do Accounting for Your Small Business
- Best Small Business Accounting Software
- Conclusion
- Small Business Accounting FAQ
Introduction
Launching a small business is exciting, but it comes with embarking on some less thrilling yet critical tasks—including accounting. Proper accounting from the outset is essential for maintaining financial health and encouraging growth. Whether you're managing your finances yourself or hiring professionals, understanding the fundamentals of small-business accounting can be a game-changer. This blog post will delve into the core elements of small-business accounting, from setting up accounts to choosing the best software, ensuring you have a solid foundation for your business's success.
What is Small Business Accounting?
Small-business accounting encompasses a variety of financial processes that measure, process, and communicate the fiscal health of a business. This includes managing taxes, payroll, acquisitions, and inventory. Proper accounting is essential for monitoring financial activities, ensuring compliance, and fostering growth.
Bookkeeping 101
Bookkeeping forms the backbone of your accounting system and involves day-to-day recording of transactions, categorizing them, and reconciling bank statements. It's something you can either learn to manage yourself or choose to outsource. Understanding the basics can still be beneficial as it helps you comprehend the financial flow within your business.
How to Do Accounting for Your Small Business
1. Open a Small-Business Bank Account
Opening a small-business bank account is crucial for separating your personal and business finances. This separation protects your personal assets in the unfortunate event of bankruptcy or lawsuits. Additionally, maintaining strong business financial records can enhance your chances of securing funding from creditors or investors.
Begin with a checking account and consider opening savings accounts for organizing cash flow and planning for taxes. Legal entities like LLCs, partnerships, and corporations are required to have separate business bank accounts, whereas sole proprietors are advised to do so for better financial management.
2. Develop a Small Business Accounting System
This system will include bookkeeping (recording daily transactions) and accounting (analyzing this data). You'll need to decide between the cash and accrual accounting methods. U.S. businesses with revenues under $5 million can use cash-based accounting, while higher earners or Canadian businesses must use the accrual method.
3. Track Your Small Business Expenses
Effective expense tracking is the cornerstone of solid bookkeeping. This involves organizing receipts and documents, either manually or through services like Shoeboxed. Proper expense tracking is crucial for building financial statements, preparing tax returns, and substantiating deductions.
There are five primary types of receipts to focus on:
- Home Office Expenses: If you're operating from home, you can deduct a portion of your home expenses.
- Partially Used Expenses: Track mixed-use expenses like phone and internet usage for both personal and business purposes.
- Transportation and Mileage: Deduct gas mileage and related transportation costs.
4. Set up a Small Business Payroll System
When it’s time to hire employees or contractors, you’ll need an efficient payroll system to handle compensation and tax withholdings. For employees, establish a payroll schedule and ensure tax compliance. Many accounting software options come with payroll features, simplifying this process.
5. Investigate Import Tax
If your business involves importing goods, you'll need to account for taxes and duties. Use a duty calculator for fee estimations and visit relevant governmental websites for detailed import tax information.
6. Determine How You’ll Get Paid
Setting up reliable payment methods is crucial as sales start rolling in. Shopify Payments is an excellent choice for North American Shopify users. Alternatively, you can choose third-party processors depending on your needs.
7. Establish Sales Tax Procedures
Sales tax can be complicated, especially when selling across different states or countries. U.S. businesses need to determine if they operate in an origin-based or destination-based state. Canadian businesses, on the other hand, need to consider Goods and Services Tax (GST) and Harmonized Sales Tax (HST). It's essential to understand your obligations to stay compliant.
8. Determine Your Tax Obligations
Your tax obligations depend on your business structure. Sole proprietors and partnerships usually report business income on personal tax returns, while corporations are taxed separately. Consulting a tax professional can be invaluable for clarity and accuracy.
9. Calculate Gross Margin
Understanding your gross margin is key to improving profitability. Gross margin is calculated as follows:
[ \text{Gross Margin (%)} = \frac{\text{Revenue - COGS}}{\text{Revenue}} ]
Knowing this percentage helps you determine your net profit and areas for cost reduction.
10. Apply for Small-Business Funding
Sometimes you’ll need additional capital for expansion or sustaining operations. Securing a loan often requires detailed financial statements. Online platforms like Shopify Capital offer easy access to funding based on your store’s previous sales.
11. Find High-Quality Accounting Partners
Partnering with tax professionals and accountants who understand Generally Accepted Accounting Principles (GAAP) can provide additional insight and control over your finances. These experts can help plan for growth and ensure compliance.
12. Periodically Reevaluate Your Methods
As your business grows, your accounting needs will evolve. Initially, a simple spreadsheet might suffice, but more advanced software will become necessary over time. Continually reevaluate your process to ensure it's efficient and cost-effective.
Best Small Business Accounting Software
Choosing the right accounting software can streamline your financial management. Here are some options:
Xero
Xero is a cloud-based software ideal for small businesses, offering features like cash flow visibility and financial health reports. Its accessibility from any device makes it a versatile choice.
QuickBooks Online
Developed by Intuit, QuickBooks Online allows for comprehensive tracking of income and expenses, inventory management, and seamless integration with Shopify.
Wave
Wave offers a web-based solution tailored for small businesses, featuring real-time transaction visibility and detailed financial reporting.
FreshBooks
FreshBooks is known for its user-friendly interface, offering essential features like expense management and basic bookkeeping, perfect for smaller operations.
Conclusion
Proper accounting is fundamental to the success of a small business. Whether you're starting or scaling your operation, understanding these accounting basics and choosing the right tools can significantly impact your financial stability and growth. Always be proactive about your accounting practices, and don’t hesitate to seek professional help when needed. Keep these tips in mind, and you'll be well on your way to managing your business's finances like a pro.
Small Business Accounting FAQ
How do I do accounting for my small business?
You can set up basic small business accounting records in a spreadsheet, though this can be time-consuming and error-prone. Using a comprehensive accounting software is advisable for efficiency and accuracy.
How much should I pay an accountant for my small business?
Costs vary significantly. In-house accountants earn an average of over $70,000 annually, while outsourced services can range from a few hundred to several thousand dollars per month, depending on your needs.
What does an accountant do for small business owners?
Accountants handle various financial tasks, including preparing financial reports, managing tax obligations, and offering strategic financial advice.
What does a bookkeeper do for a small business?
Bookkeepers manage ongoing administrative duties like recording financial transactions, categorizing expenses, and reconciling bank statements.
By understanding and implementing these key accounting practices, you pave the way for your small business's long-term success.
