9 Small Business Accounting Best Practices to Consider
If you want to be successful in business, you’re going to have to learn how to keep the books in order. According to the Small Business Administration, learning accounting is important for business owners because sound financial information enables them to make informed business decisions.
Don’t be left in dark about your company’s money situation. Use these nine accounting best practices to help get your bookkeeping on the right track.
1. Determine your accounting method.
There are accounting two methods: cash and accrual. Accrual accounting is a method in which a business puts transactions on the books as soon as the transaction is made. Cash accounting — the more common of the two methods, according to the SBA — occurs when a business records transactions once payments have been received or made. Each method has advantages and disadvantages.
According to the SBA website, cash accounting is more straightforward and better for cash flow management, but provides less long-term clarity than accrual accounting. Accrual accounting can provide a clearer picture of your financial state because it simultaneously records expenses related to an item — and the revenue the item brought in. Accrual accounting can be deceiving, though, and it’s more complex to manage. In general, the larger and more complex the business, the more useful accrual accounting is, because its snapshots provide business owners with better management decision-making tools.
2. Track all expenses.
If you’re just starting out in business you might be able to keep track of your expenses and accounts payable on a simple spreadsheet. As your business grows, you’ll likely need more complex and accurate accounting methods, or you might choose to use software, such as QuickBooks. According to the SBA, you should include the following line items on your spreadsheet: supplier/biller’s name, account number, expense type, date invoice was received and amount owed. In addition, it’s important to keep all receipts, credit card statements and incoming bills in your accounting system to ensure you’re properly managing cash flow.
3. Maintain accurate records.
Your business can easily fail if you aren’t keeping accurate, up-to-date accounting records. These records help guide tax filings and decision-making, and are key documents for lenders or investors deciding whether they should invest in a business. The IRS recommends using a journal to record each transaction and a ledger containing the totals from the journal, which you should organized into different accounts. Whether you store your information in journals and ledgers or via electronic records, the IRS suggests you maintain the following for a small business: daily and monthly summary of cash receipts, check disbursements journal, business checkbook, depreciation worksheet and employee compensation records. It’s best to record transactions on a daily basis for the most accurate accounting.
4. Keep business finances separate.
It can be very easy to mingle business finances with personal bookkeeping, especially for a very small business that’s just starting out. Business owners, however, should resist the temptation to do that if they want a clear picture of their business finances. Keeping your personal and business finances separate will make it easier to track cash flow, maintain accurate records for tax filing, forecast long-term financial performance for your business and ultimately allow you to provide evidence of that performance for a lender or investor. For some business structures, such as LLCs or corporations, mingling business and personal finances could result in the kind of personal liability you were seeking to avoid by choosing such structures.
5. Perform monthly accounting reviews.
As a small business owner, it’s important to make time for monthly reviews — by you or your accountant — of your accounts payable and receivable, and to check your invoices to determine what has been sent or needs to be sent. According to the National Federation of Independent Businesses (NFIB), you should balance your books at least once a month. In fact, the more frequently you or your accountant handles these small business accounting tasks, the less arduous they become.
6. Limit accounts receivable.
As consulting firm Deloitte points out, no company intends to adopt weak accounts receivable policies, but unfortunately, such policies happen frequently. Companies don’t follow up with customers when accounts are past due, they override credit and end up with bad debt or they fail to keep accurate billing records. The cost of such failures can be high. A business might even wind up having to go into debt at a high APR because of cash flow issues brought on by poor accounts receivable management. There are some strategies for limiting issues with accounts receivable, including: finding ways to take delivery upon payment of your services, setting clear and consistent credit policies, requiring a portion of payment upfront and making sure your billing is accurate. Deloitte suggests applying payments to the proper invoice the day they’re received.
7. Automate when possible.
Business owners should stay on top of the numbers, but that doesn’t mean they should spend all their time on mundane bookkeeping task, such as payroll and invoice processing. Software programs, such as like QuickBooks Payroll and Gusto, can be major time savers by automating some of those processes for you.
8. Backup financial records.
Whether businesses store records on the cloud, as a hard copy ledger or on a paper spreadsheet, it is crucial to back the information up to protect against obvious physical threats, but also against cyberattacks, such as ransomware.
9. Consider hiring professional help.
As your business grows, at some point it will be time to hire a bookkeeper or consult with a CPA — or both. You will likely benefit from doing this in more ways than simply saving time. A professional accountant can serve as an adviser and consultant when it comes to determining the best financial practices for your business.
Remember, getting professional help doesn’t mean you’re off the hook for minding the financial details of your company. But professional expertise can be very valuable when it comes to complicated taxes and financial matters.