Top 5 Accounting Tips for Small Businesses and Startups
SEO meta description: There are many misconceptions about what accountants do and how they can help your startup. In this article, we will go through the top 5 accounting tips for small businesses and startups. Read more here.
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Many small businesses do not have a strong understanding of accounting at a time when it is more important than ever to understand all the intricacies of this field. Making mistakes in this area can be costly, so you do not want to cut any corners.
Small firms and start-ups rely heavily on the effective handling of their finances and the presence of a dedicated individual in charge of this process.
Here are some excellent accounting tips that can help your small business or startup.
5 accounting tips for small businesses and startups
If you are a small business or startup, you may have heard that accounting is one of the most important aspects of running a successful business.
In fact, you can’t run a business without good accounting. But with so little time to focus on your business and a mess of financial statements and reports, you may wonder what the most important things are to focus on and where to get started.
1. Create a budget.
One of the initial phases in developing a company plan is generating revenue estimates and a list of anticipated expenses, followed by a comparison of this budget with actual expenses and income.
According to a survey conducted by the Federal Reserve Banks of Chicago and San Francisco, over sixty percent of enterprises with great financial health always develop a budget and afterwards open a separate bank account for payroll. Less than 5% of companies with bad financial health used these two techniques for financial planning and management.
2. Keep personal and business expenses separate.
After getting an Employer Identification Number, or EIN, one of the initial actions a small business should take is to open a business bank account (sole proprietors can use social security numbers). The advantages of business bank accounts over personal ones include:
– Facilitating the tracking and justification of business expenses for tax deductions.
– Providing personal liability protection by keeping business and personal funds separate.
– Providing the option of a line of credit that the business can use to bridge temporary financial shortages.
A business must open a checking account, a savings account, a credit card account, and a merchant services account in order to accept credit and debit card transactions from clients.
3. Maintain accurate business records.
Keeping accurate records is one of the most essential obligations of a small business owner. Accounting software can digitally store financial records and automate a significant portion of the recordkeeping process. This makes it easier to document the amount, time, location, and business purpose of a transaction for tax deduction purposes.
The IRS requires that records be kept for at least three years, although accountants advocate maintaining them for seven years. IRS Publication 583 provides a comprehensive list of the records a firm must keep.
However, there are a handful that stand out for small enterprises and startups:
Gross revenue
Gross receipts are the income you receive from your business, and the corresponding records consist of cash register tapes, deposit information (cash and credit sales), receipt books, invoices, and Forms 1099-MISC.
Expenses
Expenses are the costs incurred in the operation of your business, and records include canceled checks or other papers confirming proof of payment/electronic funds transferred, cash register tape receipts, account statements, credit card receipts and statements, and invoices.
Receipt scanners simplify the digitization of receipts and invoices for convenient tracking by automatically mapping their contents to predefined accounting software categories. Accounting software may have its own mobile app or support a third-party app that enables employees or business owners to scan receipts using the camera on their smartphones. These applications employ optical character recognition technology to convert text to machine-readable code.
Fixed assets
Fixed assets must be recorded in order to calculate annual depreciation and gain or loss upon sale. Purchase and sales invoices; real estate closing statements; canceled checks or other documents identifying payee, amount, and evidence of payment/electronic funds transfer; credit card receipts, statements, and invoices. Costs associated with the acquisition of intangible assets with a finite lifespan are amortized. Other types of assets, like current assets or intangible assets with an unknown useful life, are neither depreciated nor amortized.
4. Maintain an accurate record keeping system.
If the books are not kept up to date, neither the owners nor the employees of the firm will have an accurate view of the company’s financial status.
One technique to ensure that the books are always up-to-date is to automate the process of capturing receipts and invoices. Creating a link between your accounting software and your bank accounts is another essential step.
But some accounting software has a plug-in that can get information from your bank account and automatically get daily bank transactions and statement files.
Credit card and bank statements can be downloaded by businesses and imported manually as CSV (Excel) files. It is possible for the company to establish the matching rules that will be used in their system to reconcile the statements, which makes the process of reconciling the statements very simple.
Some accounting software has a direct connection to banks. This means that business owners can handle and finish all banking tasks within the accounting system without also having to log in to their bank’s online banking page.
5. Seek professional assistance with tax preparation.
According to the National Small Business Association, one out of every three small firms reports spending more than forty hours a year on federal taxes.
So, it shouldn’t be a surprise that about two-thirds of small businesses hire a tax professional or accountant from outside the company to handle their tax preparation.
The fact that the expenses you incur in having your company’s tax return prepared by a third party are tax deductible provides a sole proprietor with even further opportunities for financial savings.
Key takeaway
Keeping track of your business finances can be a daunting task, but it is a necessary evil that every business needs to do. The most important thing is to have a system in place, so that you’re able to keep track of your income and expenses!