Table of Contents
- Introduction
- Learn How to Manage Your Books
- Open a Bank Account
- Track Your Expenses
- Develop a Bookkeeping System
- Set Up a Payroll System
- Investigate Import Tax
- Determine How You’ll Get Paid
- Establish Sales Tax Procedures
- Determine Your Tax Obligations
- Calculate Gross Margin
- Apply for Funding
- Find High-Quality Accounting Partners
- Periodically Reevaluate Your Methods
- Best Small Business Accounting Software
- Conclusion
- Small Business Accounting FAQ
Introduction
Starting a small business can be both exhilarating and overwhelming. You've crossed significant milestones—launching your store, making your first sale, and maybe even fulfilling your first order. But there's one crucial area that can make or break your ventures—accounting. Effective accounting practices are paramount for sustaining and scaling your business. This guide aims to walk you through the essential accounting steps to ensure you're well-prepared for financial success.
Learn How to Manage Your Books
When running a business, bookkeeping is unavoidable. Today, numerous tools and resources can help you handle your finances effectively. Even if you decide to outsource bookkeeping in the future, understanding the basics is beneficial and can save you money.
Open a Bank Account
The first step toward organized small business finances is opening a separate bank account. This not only simplifies tax filing but also protects your personal assets. For entities like LLCs, partnerships, and corporations, separate accounts are mandatory. Sole proprietors aren't legally required to have separate business accounts, but it’s wise to do so. Additionally, consider obtaining a business credit card to build your business credit, essential for securing future funding.
Before you open an account, research different banks' fee structures. Business bank accounts often have higher fees, so it's crucial to compare options. Be prepared to provide your business name and registration documents when opening the account.
Track Your Expenses
Effective expense tracking forms the foundation of robust bookkeeping. Accurate tracking enables you to monitor business growth, prepare tax returns, and legitimize your financial statements. Start by organizing receipts and other records. You can use simple methods like a dedicated file or opt for digital tools and services like Shoeboxed.
You need to pay special attention to five types of receipts:
- Business Meals and Entertainment: Record the date, amount, and business purpose.
- Transportation and Travel: Keep a log of your business miles and purpose of each trip.
- Purchases and Supplies: Maintain records of every business-related purchase.
- Utilities and Rent: Deduct portions of home utilities used for business, if applicable.
- Miscellaneous: Record any other expenses related to running your business.
Develop a Bookkeeping System
Understanding the difference between bookkeeping and accounting can guide your business practices effectively. Bookkeeping entails the day-to-day recording and categorizing of transactions, while accounting involves analyzing these records to build financial statements.
Your bookkeeping system can be manual, like spreadsheet-based, or advanced, using software like QuickBooks or Xero. Determine whether you'll use cash-based or accrual accounting; small businesses with revenue under $5 million can choose either, although corporations are usually required to use accrual accounting.
Set Up a Payroll System
As your business grows, so may your need for extra hands. Determine if your new hires are employees or independent contractors. For employees, set up a payroll system to ensure correct tax withholding. For independent contractors, track payments rigorously and be prepared to file necessary forms like 1099s at year-end.
Investigate Import Tax
If your business model involves importing goods, familiarize yourself with import taxes and duties to avoid unexpected costs. Use duty calculators to estimate fees and incorporate these into your pricing strategy to maintain profitability.
Determine How You’ll Get Paid
Setting up a reliable payment gateway is crucial for incoming transactions. Options include Shopify Payments for Shopify users, which simplifies the process. Alternatively, third-party payment processors like PayPal, Stripe, or Square offer solutions, though each comes with varying fee structures. Choose one that aligns with your business model and customer base.
Establish Sales Tax Procedures
Navigating sales tax, especially in ecommerce, can be complex due to different regulations across states and countries. Determine if you operate in an origin-based or destination-based state. The former charges sales tax based on your business location, while the latter follows the buyer's location. For international sales, US-based businesses don’t need to charge sales tax. Stay updated with your accountant to ensure compliance.
Determine Your Tax Obligations
Tax obligations vary based on your business structure. Sole proprietors and partnerships report business income on personal tax returns, while corporations file separately. Understanding and meeting quarterly or installment tax requirements can prevent large year-end tax burdens.
Calculate Gross Margin
Calculating your gross margin is crucial for assessing profitability. Gross Margin = (Revenue – COGS) / Revenue. Understanding this metric helps you make informed pricing and investment decisions, vital for long-term sustainability.
Apply for Funding
Financial challenges and growth opportunities often require external funding. Be it through loans, investors, or lines of credit, securing funds necessitates reliable financial statements. Calculate the return on investment (ROI) before committing to debt; use business loan calculators for accuracy.
Find High-Quality Accounting Partners
Hiring accounting professionals can provide valuable insights and strategic advice. Experts can guide you through advanced financial planning, ensuring your business remains financially on track.
Periodically Reevaluate Your Methods
As your business evolves, so should your bookkeeping and accounting methods. Transition from spreadsheets to advanced software like QuickBooks or Bench when manual processes become cumbersome. Regular reassessment keeps your accounting lean and efficient.
Best Small Business Accounting Software
Various accounting software options are tailored for small businesses, each offering unique features:
Xero
A cloud-based system that provides visibility into your financial health from any device. Xero’s advanced features help track cash flows and transactions.
QuickBooks Online
This software by Intuit offers expense tracking, income reporting, and inventory automation. You can integrate it with Shopify for seamless management.
Wave
Wave links your bank and PayPal accounts, providing real-time business transaction data. It can generate detailed financial reports.
FreshBooks
Ideal for expense management and invoicing, FreshBooks simplifies accounting tasks with a user-friendly interface.
Conclusion
Understanding and managing your small business's finances is key to long-term success. From opening a bank account to implementing an efficient bookkeeping system, each step plays a crucial role in your business's health. As you grow, continuously reevaluate your methods and adapt to new tools and strategies to keep your accounting streamlined and effective.
Small Business Accounting FAQ
How do I do accounting for my small business? You can start with a simple spreadsheet, but accounting software is recommended for accurate and efficient tracking of expenses and income.
How much should I pay an accountant for my small business? Accountant fees vary widely. In-house accountants in the US earn an average annual salary of $70,000. Outsourcing can range from a few hundred dollars to thousands per month, depending on service complexity.
What does an accountant do for a small business? Accountants prepare financial statements, file taxes, analyze financial data, and offer strategic advice to optimize your business's financial health.
What does a bookkeeper do for a small business? Bookkeepers manage daily financial transactions, maintain financial records, handle invoices, and ensure accuracy in ledgers.
By following these foundational steps, you'll set your small business on a path to financial stability and growth.
