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Of all the hats you wear as a business owner, finance and accounting expert can be the most difficult to get right. Even if you are starting a solo venture (hey, freelancers and consultants!) there’s still accounting that must done. And you want to make sure you do it right.
So whether you’re a newbie looking to learn the basics or need a quick refresher course, let’s look at what elements go into successful accounting for small businesses.
Accounting for small businesses is the documenting, tracking, and evaluation of the financial health of a business. This includes recording all cash in and out of a company, in the form of expenses and revenue. Proper accounting can prepare a business for tax season, growth opportunities, and help navigate external and internal factors that could affect a business’s profitability.
Accounting is often used to be an all-inclusive term that refers to the overall financial management of your small business. However, if you need to hire a bookkeeper or an accountant, it’s important to understand the difference between the two so you can get the help you need.
Bookkeeping is the systematic recording and organization of financial transactions, including income and expenses, in a structured manner. It involves the day-to-day tasks of recording financial data in ledgers or accounting software. The goal of bookkeeping is to have accurate information for an accountant or business owner to determine the financial health of the business.
Accounting goes beyond bookkeeping and involves interpreting, analyzing, and summarizing the financial data provided by the bookkeeping system. It includes more in-depth financial analysis and reporting, creating budgets, and making strategic decisions based on data. The goal of accounting is to provide insights into the financial health of a business to drive business decisions.
As you start learning about small business accounting, there’s a fair amount of new terminology. These ten terms are just the starting point for understanding the finances that drive your business.
The total income generated by your business from sales or services provided to clients or customers.
The costs incurred by your business–such as rent, utilities, subscriptions, supplies, and salaries.
Total revenue – total expenses = profit. This is what is left after covering all your costs for running your business.
Valuable resources owned by your business. This can include cash, inventory, equipment, and accounts receivable.
Debts or obligations your business owes to others. Including loans, debt, accounts payable, and other expenses.
Also referred to as owner’s equity or shareholders’ equity. Represents the owner’s claim to the assets of the business. You can calculate your equity by: assets – liabilities= equity. This is essentially the net worth of your business.
Also referred to as a profit and loss statement. This shows your business’s revenue, expenses, and net profit or loss over a specific period of time. (Typically a month, quarter, or year)
A balance sheet gives you a snapshot of your financial position at a specific point in time. It lists assets, liabilities, and equity to show the overall health of your business.
This is the movement of money in and out of your business. If it is positive, then you have more money coming in than you have going out. If it’s negative, then you are paying more than you are earning.
Accounts payable is the amount of money your business owes to other businesses, suppliers, or vendors. Accounts Receivable are amounts of money that customers and clients owe you for products or services they’ve purchased.
Setting yourself up for success with bookkeeping and accounting for your small business can save you from major headaches. You’ll be better able to make crucial decisions, sail through tax season, and reduce stress when it comes to managing your business.
Separating your personal and professional money is especially important as a small business owner. The first step in doing that is getting a business bank account. Business bank accounts are almost always free and have functions that you won’t find in a personal bank account. They’ll issue you a debit card for your account so you can start making purchases for your small business right away.
In the case of an exceptionally small business, you may be able to get away with doing your bookkeeping on an old-school spreadsheet, but you’ll be missing out on the many features and reporting abilities that come with using bookkeeping software.
As you look for a bookkeeping software solution, be mindful of your budget and what functions might be most important to you. A simplified bookkeeping software like Less Accounting is perfect for a small business owner who wants to avoid the costs and over-complexity of bookkeeping software like QuickBooks.
There are two types of accounting to choose from: cash basis and accrual. Your bookkeeping software may help you determine which one is right for you.
Cash Basis Accounting:
When to Choose Each:
Small business owners often start with cash basis just because it’s simpler. You can always transition to accrual accounting as you grow and your financial transactions become more complex. It just depends on your business’s specific needs, size, and financial goals.
These three main financial reports to effectively manage your finances and make informed decisions. These reports provide valuable insights into your financial health and performance. Regularly reviewing and understanding these reports can help small businesses maintain financial stability and plan for future growth.
One of the best tips we can give you to have a positive experience with your small business accounting is to stay consistent. Neglected bookkeeping is one of the biggest ways to tie up or stall your business’s progress. So as you learn what you need to do, be sure to consistently block out time on your calendar to check these tasks off your list.
The exact frequency of when you do these tasks is going to depend on your business’s needs. What’s important is that you keep a regular pulse on the financial health of your business and build consistent habits that help your business grow.
This is just an introduction to successfully managing your small business accounting. If you can stay organized and consistent, you can stay in charge of your business’s bookkeeping. However, if things start slipping through the cracks and tasks pile up, outsourcing your bookkeeping could give you back both time and money to focus on your business.
Partner with Less Accounting for simplified bookkeeping for busy business owners. You’ll gain the one-on-one customer service you need and a solid understanding of bookkeeping at a price that suits your business.