Proper management of a business’s finances is an essential part of keeping small business alive. While it’s vital to have someone dedicated to this process, not all small business owners are accountants or bookkeepers by trade, making the initial steps seem daunting. In this blog post, we will share 6 small business accounting tips to keep your company on the right path. 

1. Keep business and personal accounts separate

The first small business accounting tips is to keep business and personal accounts separate. Although many entrepreneurs self-fund their businesses, keeping a clear distinction between business and personal funds is important to avoid potential accounting blunders. Here are some practical tips to achieve this:

Here are some tips for keeping business and personal accounts separate: 

• Establish a solid business structure (e.g., S corporation or LLC)
• Open a dedicated business checking account
• Obtain a business credit card for expenses
• Open a business savings account for emergencies or investments
• Keep meticulous records of any business usage of personal items

2. Choose an accounting structure

Deciding between cash-based and accrual-based accounting is a critical decision for a small business. Here is a brief primer on both methods:

• Cash-based accounting:  In cash-based accounting, sales and expenses are recorded only at the time of payment. This method is usually simpler for a startup or young business.
• Accrual-based accounting: In accrual accounting practice, income is reported when earned, not when cash is received. Expenses are documented when money is incurred, not actually paid. The accrual method encompasses a longer-term view of the business across multiple periods, and it’s the standard among larger companies and financial institutions.

3. Keep accurate business records

Recordkeeping is one of the most important responsibilities for a small business owner. Business owner can leverage accounting software to automate much of the recordkeeping process and digitally store financial records. Important records include:

• Gross receipts: Gross receipts are the costs you incur to operate your business, and records include cash register tapes, deposit information, receipts, invoices.
• Expenses: Expenses are the costs you incur to operate your business, and records include cancelled checks, cash register tape receipts, account statements, credit card receipts and statements.
• Fixed assets:  A fixed asset is a long-term tangible property or piece of equipment that a company owns and uses in its operations to generate income. Asset documents include purchase and sales invoices, real estate closing statements, cancelled checks, credit card receipts and statements.

4. Create profit-and-loss statements regularly

A Profit-and-Loss (P&L) statement is a vital tool summarizing income and expenses over a specific period. Though not legally required for small businesses, P&L statements offer valuable insights. Follow these steps to generate a P&L statement:

• Total up the revenue you generated in the quarter.
• Itemize your company’s expenses. Sort them into two categories: operating expenses and cost of goods sold (COGS).
• Subtract the total expenses from your gross profit to get your operating profit.
• Subtract interest and taxes from that operating profit, and you’ll know whether your business operated at a profit or a loss that quarter.

5. Develop a budget

Creating a budget is fundamental for financial planning and management. This includes coming up with revenue projections and a list of anticipated expenditures, and then comparing that budget to actual expenses and revenue.

According to a study conducted by The Federal Reserve Banks of Chicago and San Francisco, more than 60% of businesses with excellent financial health always built a budget and subsequently started a separate bank account for payroll. In contrast, less than 5% of businesses with poor financial health adopt these crucial financial planning and management practices.

6. Seek for professional guidance

Accounting and bookkeeping are vital business processes­­­ that you can easily outsource. In fact, more than two-thirds of small businesses pay an external tax professional/accountant to handle their taxes. There While there are many project management and accounting programs available online, professional bookkeepers help make sense of your financial activities and prevent avoidable financial burdens in the future by keeping the books straight, accurate and updated.

As a leading global corporate service provider, Healy Consultants is dedicated to support our multinational clients at every step. For more small business accounting tips or personalized advice, feel free to reach out to us via the provided hyperlink below. 

Healy Consultants Group provides a wide range of corporate services across the world. Email or WhatsApp us now to find out more about our services.