Many small business owners don’t have the trade to be accountants. Regardless of their background in product development, and HR management, small business owners need to be able to understand the basics of accounting. So here are offered best accounting tips for your business.
Small business accounting can be very simple, which is a good thing. Three accounting priorities are available for companies that have one state of operation and a simple business structure.
- Make sure their revenues are greater than their expenses
- Make sure they keep their books clean
- Be responsible for their taxes
Top 11 Small Business Accounting Tips
Even though small business accounting is not for everyone, it can be difficult for those with no financial background. These 11 accounting tips will help you stay on the right track.
1. Keep business and personal accounts separate
Mixing personal and business funds is one of the most costly accounting mistakes small business owners can make. Entrepreneurs often invest their own startup funds, but business income and expenses should be kept separate from personal funds.
A sound business structure is the best way to go. Your company should be a separate legal entity such as an S-corporation or LLC. As your financial hub, open a business checking account and start earning a monthly salary. Open a business savings or business credit account to save money for unexpected expenses. Keep track of any personal items used by your business.
2. Classify workers correctly
There are two options when it comes to building a team: contractors or employees. According to the IRS, employees are those who have financial and behavioral control as well as long-term business relationships. Contractors are those who work on a project basis for your company and have full control over their schedules and business decisions.
Misclassifying workers is a serious offense. In addition to the $50 per W-2 form fee that the employer must pay, employers also have to pay fees of 1.5% on wages and 40% for FICA taxes it did not withhold from employees. Employers must also pay 100% FICA taxes it would have paid per employee. The IRS could fine the employer up to $1,000 per worker if it believes that the misclassification was intentional.
3. Before you hire, calculate the total labor cost.
Know your options when you hire employees. You’ll be responsible for more than their wages. Minimum of once per month you’ll need to raise the funds necessary for their benefits as well as payroll taxes. These costs add up quicker than small business owners realize. According to an OnPay survey, only 43% are confident of those who do their own payroll. In their ability to pay employees on time. despite being payroll professionals. Rest are either too busy or behind in their books.
Do not put yourself in a position where you have to reduce compensation after hiring. Your workers will feel cheated even if your benefits and wages were generous in the beginning. Low turnover is a problem for small businesses, particularly when it comes to their first hires.
4. Regularly create profit and loss statements
Profit and loss statements are a standard accounting tool that summarises your company’s income and expenses over a given period. Public companies must publish them once per quarter. Even though they are not required by law for small businesses, P&L statements can be a great way to determine if you are on track to reach your financial goals.
These steps will help you generate a P&L Statement.
- Add up all the revenue that you have generated during the quarter.
- List all expenses in your company. These expenses can be divided into two groups: operating expenses (OPE) and cost of goods sold(COGS).
- To calculate your operating profit, subtract the total expenses from your gross profits.
- Add interest and taxes to that operating profit and you will know if your business was profitable or loss that quarter.
Individual P&L statements can be valuable Quarter-by-quarter comparisons are Even more important. Are you seeing an increase in operating expenses? Is your profit shrinking, despite your sales figures going up? These insights can be gleaned by comparing P&L statements.
5. Always get a receipt
Tax deductions can be claimed for a large portion of the company’s expenses. Bench’s bookkeeping service lists 16 categories where expenses can be deducted fully or partially. These expenses include meals with clients and rent for office space. To claim these expenses, however, you will need receipts to track and verify.
Small business owners forget to get receipts for donations. While certain structures such as partnerships and LLCs can’t claim donations to charities as business expenses for their businesses, the owners often can. In-kind donation recipients should be able to provide written confirmation of time spent. You can also use documentation to prove the fair market value for any property donations.
6. Pay attention to accounts receivable.
While it is important to keep track of accounts payable, they are not as crucial as accounts receivables. The company cannot continue operating if there isn’t enough money coming in. Every month, check the amount and percentage of outstanding revenue. In general, 10% to 15% should not be passed due on your accounts receivables. Reach out to these clients weekly. Do not send them to collections as a last-minute decision, especially if they are people you would like to work with in the future. You can’t make them work for it.
A solution is to impose penalties for late payments. You can set a monthly finance fee of either 1% or 2.5% of the principal. For example, if you decided to charge 2% for a $5,000 initial charge, then you would add $100 per month to your invoice if it isn’t paid. This is a legal requirement that you inform clients in advance. The threat of penalty is enough to discourage poor payment habits.
7. Invoice accurately and regularly.
Invoicing is an essential part of running a business it can be cumbersome and time-consuming. Invoicing can also be time-consuming and costly if you make errors. This could impact your ability to get paid. It is therefore crucial to send accurate and consistent invoices.
Invoices should be detailed and include specific details about transactions. You should also send them promptly to increase your chances of being paid, you should follow up by sending reminders via email or text. Keep accurate and detailed records of all invoices. You can spot customers who don’t pay on time and reward those who do.
8. Keep on top of tax deadlines
Taxes are paid once a year by an individual. However, most small businesses must file estimated quarterly taxes payments. Quarterly payments can be made for self-employment tax and self-employment tax. (This includes Medicare and Social Security taxes).Income tax on profits earned by your company
These steps will help you decide if quarterly taxes are necessary.
- Add your federal income tax withholding to the amount of federal taxes that you expect to owe this year. You don’t have to make quarterly payments if this figure is lower than $1,000
- Multiply the federal tax amount you expect to owe by 0.9. Quarterly payments are not necessary if you have withheld less than that amount.
- Compare your federal income tax total from last year to your withholding amount. You don’t have to pay quarterly taxes if it is less than that amount.
Here’s the schedule for estimated tax payments if you need them.
- First quarter: April 15
- Second quarter: June 15
- Third quarter: Sept. 15
- Fourth quarter: Jan. 15, 2022
Also read: Top 10 Payroll Software For Small Business
9. Set (and stick to) your own payment terms
Large companies often pay on net-60 and even net-90 terms. This means that funds are transferred within two to three months of receiving an invoice. You can manage your cash flow in a small business by following the same procedure. Consistency is key. Pay on net-30 terms. At the time of service, make it clear that vendors can expect you to pay within 30 days. Do not pay too early or your vendor will demand the same. Don’t make late payments or they might not be interested in working with you again.
10. Bring in the experts instead of DIY accounting
Although business owners love to manage all aspects of their businesses, it is sometimes a good idea to delegate certain functions and processes – such as bookkeeping and accounting – to experts. Hiring a professional can help you reduce accounting errors and keep your accounting records up-to-date. This will save you time and help you to be more efficient. A CPA can help you review your books and identify ways to reduce costs and increase spending in growth areas.
11. Use accounting software
Many small businesses used to find accounting software expensive. However, you can now access robust software without paying a monthly fee. Accounting software has become increasingly simple to use, and offers small business owners a lot of services and features, including sales tracking, budgeting and inventory management, financial statements, and payroll.
Cloud-based accounting software is often able to integrate with other accounting software, such as business software. It can automate processes and accurately track and balance your books. Data sharing across applications can reduce errors, and save time in manually entering data into your accounting software.