Accounting Tips for Small Business Owners

Accounting and bookkeeping tasks make up a considerable part of your workload. 


Whether you are taking care of bills, organizing tax documents or monthly expenses, proper organization of your accounting back-office is vital for a successful small business to keep thriving.  


Discover our carefully selected accounting and bookkeeping advice in this blog, designed to assist you in effectively managing your business finances, avoiding cash flow problems, preparing for possible audits, so that you can focus on growing your small business.

Accounting tricks and tips for running your small business or startup 

Accurate bookkeeping is essential for small business owners to maintain organized records of their company’s financial transactions, including expenses, sales, liabilities and assets.  This is information that you will need to make good decisions.  For example: should you invest in new equipment?


Three types of accounting reports that one should be familiar with are balance sheets, income statements and cash flows. 


Small business owners can gain valuable insights into their financial position through various reports, each capturing distinct values. The balance sheet offers a snapshot of what the company owns and owes, this should be an overview of their financial status at any given moment and is broken down into 3 major categories – Assets, liabilities, and capital.


Financial assets


Assets have the potential to lower expense and boost revenue, these include inventory, real estate, accounts receivable and cash. These assets should be arranged based on the order of liquidity. Which means how easy it is to sell or convert an asset into cash. 


Accounts receivable are considered assets because this is what consumers owe to a company. They will be converted into cash when the customer pays for goods or services collected. 


Financial liabilities


Financial liabilities means what businesses owe to creditors and vendors. This includes accounts payable, wages, mortgages, and income tax from employees. 


Accounts payable are classified as a liability on a balance sheet and are categorized as current liabilities because they are settled within a period of less than 90 days. 

Maintaining accounts payable highly influences the companies cash flow


Shareholder’s equity

Shareholder equity is the amount that would be returned to shareholders if all the company’s assets were liquidated and all its debt repaid. Shareholders equity is calculated by total assets minus liabilities. 


Step 001 Understand your business structure 

First and foremost we recommend doing your research on a sound business structure when establishing your company’s LLC . Your business structure plays a significant role in determining the appropriate corporate structure for accounting purposes. 

Sole proprietors: Sole proprietors are businesses with only one owner and minimal setup requirements. However, a drawback is that there is no legal separation between the owner and the company, making the owner personally liable for any debts or obligations of the business. Choosing to elect S corporation tax status may seem straightforward, but it may not always be the optimal decision. While it can lead to substantial tax saving for certain LLc owners, for others, it may introduce unnecessary compilations and expenses without offering any tangible advantages. 

Partnerships allow for the equal sharing of a company ownership among multiple individuals when conducting business together. Each partner plays a role in determining the success of failure of the business, and their specific responsibilities are defined in the partnership agreement 

A Limited Liability Corporation operates similarly to a sole proprietorship, but it is not liable for its business debts. Additionally, an LLC allows for the option of having a sole proprietor or multiple partners, offering flexibility when it comes to filing business taxes. 

Corporation or C corp: A legal entity with an intricate framework, it is recognized as a separate entity from the owner for tax purposes. Despite its complexity and cost, the business structure offers advantages such as enhanced legal protection and reduced corporate taxes.  

Step 002 Open business bank account as soon as possible

One of the very first steps you should do as a business owner is open up a business bank account. You don’t want to use your personal funds for business purchases and expenses. Having separate transactions provides a clear view of your cash flow, eliminating the need to decipher individual and business transactions, ultimately saving you time. 

Remember to prioritize this once you have a social security number, or an Employer Identification Number (EIN)

Step 003 Cash-based accounting or Accrual-based accounting

When establishing an accounting system for small business owners, it is essential to decide on the method of recording financial transactions and typically depends on the size of your business. 


There are two options available for recording revenue and expenses – Cash based accounting and accrual accounting. 

Cash based accounting Cash accounting is often favored by small businesses due to its simplicity in maintenance. Cash accounting operates differently and only records revenues and expenses for when payments are made or received. 


Accrual accounting Accrual accounting when the income or expense is recorded when the  transaction occurs, rather than when the payment is received. While accrual accounting offers a more comprehensive understanding of business, it may not accurately reflect cash flow. However, it does offer a more realistic perspective on long-term income and expenses.

Step 004 Keep a close watch on all business transactions & expenses

Successfully managing a small business involves managing your financial assets. The way you handle and monitor your business expenses can determine the fate of your business, either leading it to thrive or causing it to fail


Keeping a detailed record of all expenses is essential to ensure that your company can take advantage of the tax write-offs and deductions available to it. 


Begin by recording all expenditure, and subsequently categorize them into suitable groups such as payments for bills, suppliers, administrative costs, or miscellaneous expenses. 


Step 005 Develop a budget 

Many small business owners stumble along not knowing how well their business is actually doing, only to be surprised at the end of the year.  Understanding how to effectively handle your finances is crucial for the prosperity of your business, and a fundamental step towards achieving this is by establishing a budget. By creating a budget, you will be able to monitor your income and expenses, to understand whether you are on track to meet your business goals.  By comparing actual performance to budget, can allow you to continuously course correct by making data based decisions.  Budgets are also a useful planning tool, to let you know when you can afford that new piece of equipment.


Step 006 Use accounting software

Use professional accounting software.  This can be a game changer for small businesses.  If you use professional accounting software, you will find it easier to get a loan (yes banks care that you run a professional operation),  and much less hassle at tax time.  One often overlooked reason to use professional software, is if you ever plan to sell your business, you will need to show great recordkeeping, or be prepared to take a discount on the sale price.  We recommend either Xero or Quickbooks, which are both reasonably priced professional accounting systems.

QuickBooks is the most well-known small business accounting software. Offering the convenience of automatically reconciling your bank statements, generating professional invoices with automatic payment reminders, aiding in inventory and vendor management, and providing numerous other features to assist you. Quickbooks is feature rich, but it is also expensive.

Xero is a professional accounting system with a rapidly growing user base.  It is favored by small businesses, because it has everything you need, and nothing you don’t.  It is also substantially less expensive than Quickbooks.   This is software that you can grow with, we have clients doing >$30MM of sales all tracked through Xero. Stay on top of your accounting tasks with a powerful mobile app allowing you to snap picture of expense receipts on the go.


Step 007 Consider a tax accountant and bookkeeper.

While it’s important to understand the basic principles of accounting as an entrepreneur, it can also be beneficial to collaborate with an accountant and can greatly contribute to the profitability of small businesses. Accountants can advise you on legal tax strategies to make sure you are not paying more than you need to at tax time.  Whether you can take advantage of the R&D Tax credit or other programs, the savings can be substantial.


An accountant should act as a trusted advisor and can help to advise on capital structure and ways to save on services such as interest expense, payroll and working capital.  Most startups, begin with a single employee:  you.  Outsourcing at a small scale is challenging. However, the crucial factor to consider is whether spending your time bookkeeping is the most efficient use of your most valuable resource: time. Once you have established yourself one of the first things you should outsource is your bookkeeping.


In conclusion

These steps should help you as you navigate through the exciting startup period.  While you will find yourself wearing many hats, establishing a relationship with a trusted bookkeeper can really help you to make better decisions and focus on the core of your business.

Please contact us to set up a free consultation with no obligation.

Published On: April 10th, 2024 / Categories: Accounting /