More Helpful Accounting Tips for Small Business
Our Director of Accounting and Operations, CJ Moya, weighs in with his accounting tips and best practices.
Keep Your Personal and Business Finances Separate
Rather than your income and other funds being thrown into a personal account, being a business owner means some business-based finances will combine with your personal funds.
The last thing anybody wants is to sit down and search through every single shopping list or personal transaction to find that one piece of business. This can also become expensive and near impossible for a contract accountant to sort through. To keep it all hassle-free, take the simple step of opening a new bank account for all your business transactions.
That way, you’re more organized. Your personal finances stay personal and your business finances stay in your business account. No more wasting time and money shuffling through endless transactions.
Keep All of Your Receipts
Now that you have a separate business account, make sure you keep all your business-related receipts. This will help you track your expenses and are needed for your tax returns. You will need to hold on to these records in case you get audited for at least three years and up to seven depending on your tax situation. To find out how long you should keep your records click here.
Create and Use Profit and Loss Statements
A profit and loss (P&L) statement summarizes the expenses, costs and revenues of your business during a specific time. Preparing a P&L and reviewing it regularly will give you insight into areas of the business where you are making money (or losing money). It will also inform you on where you spend your money which can help you determine where you may be able to cut costs.
A P&L is also a great tool to help with things like budgeting and tax preparation. The great thing is that with the accounting software available, you can literally run a P&L report with the touch of a button.
A detailed and realistic budget is one of the most important tools for guiding your business and providing the information necessary to operate within your means, handle upcoming challenges, and ultimately turn a profit. Without a budget, it can be like shooting in the dark. A solid budget identifies currently available capital, estimates expenditures, and anticipates revenues. You should continually refer to your business’ budget as a way of measuring performance against expectations. Combining past trends with realistic forecasts for the fiscal year, a budget provides a detailed view of assets, realistic revenue expectations, and how those balance against your anticipated expenses.
Budget for Taxes
Hopefully you are rolling in the big bucks and made a profit but remember not all the money is yours, as you’ll need to hand some over to the IRS. A good rule to follow is that you budget for taxes as you go along. I recommend opening a savings account and setting aside about a quarter of your net profits (which you will find at the bottom of your P&L), so that you can easily pay off your tax bill without any worries and enjoy the rest of your profit.
Remember that the majority of small businesses will also have to make estimated quarterly tax payments. To find out if you need to, and how to make them check out this great article by Nerdwallet.
Don’t Confuse Profit and Cash Flow
To find out whether you made a profit, or had a loss for the year, look at the bottom line in your P&L report. But you must understand that the bottom line does not tell you cash flow. Don’t ever assume that making profit increases cash by the same amount.
Cash flow is the lifeblood of an organization. It pays salaries, buys supplies, and makes investments in infrastructure. The goal of any business should be to make more money than it spends. If you’re doing so, you’re on your way to profitability. Where you can run into trouble, though, is when your spending outpaces your income over a short period of time, stressing your cash flow. Be sure to keep a watchful eye over your business account to ensure you have enough funds to cover upcoming expenses.
Reconcile Your Accounts Monthly
By reconciling your accounts, you are proving that the transactions involved in your account belong in that account, not in another account, and that those transactions are valid. You will also gain a better understanding of the inner workings of your business which will help manage your cash flow. Most importantly, reconciling your accounts proves that you are maintaining an open and honest business, and will help protect you from fraudulent activity.