Maintaining your profitable brand or service when starting a business takes a special kind of entrepreneurial prowess. If you are a small-business owner, you are probably accustomed to doing everything on your own. You stay out of delegating or adding additional costs to your business when you think you can take care of a task, let alone hire another employee to take care of the accounting for your venture.
Bookkeeping is essential if you want to keep your small business in the long run. Primarily, you need to have a clear picture of your business’s financial position. From the money you spent investing, the cash you have on hand, and the liabilities you have to pay, understanding the state of your business’s finances helps you make better decisions and strategies for the future.
This list of small business accounting steps will give you the confidence to know how to set up your accounting books.
- Have a separate business account
Before making any transactions, make sure that you properly identify your personal and business finances. Mixing personal and business funds will not only allow thoughtless spending decisions but may also lead you to overlook important business transactions.
Before opening a business bank account, take time to do your research. Look for banking institutions and compare banking fees. Most business accounts have higher balance requirements and fees, so be wary of those. Also, check what documents do you need to provide so you can prepare them beforehand.
Having a separate bank account for business keeps financial records distinct and will make it easy for you and your bookkeeper to track how money is being spent. It will also avoid common financial mismanagement such as overspending and inaccurate tax filings. Ensure that only business accounts are used for business-related costs.
- Select a bookkeeping system
Once you set up your business account, you have to select a bookkeeping system. Bookkeeping mistakes could threaten your business and cost you unnecessary expenses. You don’t want to look at your bank statements and wonder where all the money was spent. For this reason, having a system to account for your business’s transactions is crucial.
You can do the traditional manual recording of transactions by using software or Excel spreadsheets. Accounting software is a good option if you want to systematize your accounting process and save money by having an accountant do it for you. While this can be the cheapest solution for small-business owners, it is the most time-consuming option since you have to do everything on your own on top of managing your business.
On the other hand, if you have enough budget, you also have the option to hire or outsource a bookkeeper. Hiring an accountant frees you from keeping track of your books. It may cost you a bit but the value of the headspace it will give you would be beneficial for you to focus on more important tasks for your business. An accountant will be responsible for keeping track of financial transactions, compile financial statements, and provide you insights into the business’s financial status. When working with an accountant, it is also important to have open communication. Let them know if you don’t understand the technical terminologies being used in the financial statements. Have a good relationship with them. They should be guiding you with financial analytics and give you bookkeeping tips that you can count on.
- Choose an accounting method
Another factor to consider when setting up your books is choosing an accounting method. Take note that once you choose your accounting method, you must follow it persistently. Conventionally, accounting regulations do not allow changing accounting methods frequently unless you file and obtain permission from the revenue governing body of your state.
The two most commonly used methods are cash basis where you recognize income when you receive payment then recognize the expense when it is paid, and accrual method which requires more accounting knowledge given that you must record income when the transaction took place with or without the transfer of money then, record expenses once you are billed. It is better to consult your accountant when agreeing on which accounting method should you use in your business. Once this is covered, you are ready to move on to the next item on your setting-up-accounting-book to-do list.
- Keep track of expenses
When you get overwhelmed in managing your small business, there are times that you might overlook where your money goes. Accurate expense tracking is one of the foundations of solid bookkeeping. Well-documented expenses keep your books in order and will be a huge help when you need to file for taxes.
Establish a system for organizing receipts and important accounting records to monitor your business expenses. This will provide you a deeper understanding of your one-time and recurring expenses and help you support your financial statements which will come in handy when preparing tax returns.
- Decide how your business will get paid
Your business growth relies greatly on paying customers. Once you open your business you need a way to accept payments. One of the best ways to boost your sales is to offer a variety of payment options such as cash, check, credit card, and mobile payments.
While it is tempting to accept any payment type, you should know the advantages and disadvantages of each type of payment method. If you want to accept credit cards, you might want to use a third-party payment channel. Checks on the other hand could be a potential risk to your business since it is easy to fabricate a check and it might take time for a business to identify if it is fake. Also consider mobile payments which are revolutionizing businesses and customer experience where customers only need to tap their phone or scan a code to make the payment. To make sure you get paid for your products and services, establish a clear payment policy.
- Commit to a schedule
All your efforts in setting up an accounting book will go down the drain if you can’t commit to keeping it up to date. The last thing you want to do is allowing piles of unrecorded transactions that can lead to accounting errors and unnecessary stress.
Commit to a schedule at least once a week to record all financial transactions including sales, invoices from suppliers, and bill payments. Make it also a priority to balance and close your books regularly. Communicate this with your bookkeeper so you are always aligned with your business goals.
About the Author
Arleen Atienza has been writing for several organizations and individuals in the past six years. Her educational background in Psychology and professional experience in corporate enable her to approach a wide range of topics including finance, business, beauty, health and wellness, and law, to name a few.
As a full disclosure, my business partner and spouse is a QuickBooks bookkeeper. If you own a business in the east Twin Cities metro, and need accounting and bookkeeping help, Cheri would be happy to look at your situation and help. You can contact Cheri at email@example.com