From the blog 7 Fundamentals of Business Accounting Every Business Owner Should Know
Are some small business owners bluffing their way through accounting?
According to Clutch, 45% of small businesses do not have an accountant or bookkeeper on staff.
Granted, some small business owners undoubtedly possess enough business accounting knowledge to keep their finances in order. But probably not all of them. Which begs the question, how many get lost in the numbers and tax jargon?
Frankly, your business finances are too important. You can’t afford to just roll the dice on this. However, there is some good news.
“Business accounting can seem overwhelming at first, but with the right resources and tracking, you can guide your business to success,” says CPA Marina Babaian. She’s the founder and CEO of Mbridge Consulting Group, which provides accounting, payroll and business management services for startups, small businesses and midsize businesses.
In other words, help is available.
In this guide, we’ll lay out the 7 fundamentals of business accounting every small business owner should know.
1. Know What You Don’t Know
Tracy Noga is a CPA and an associate professor of accountancy at Bentley University in Waltham, Massachusetts. She stresses it’s critical to be aware of your limitations when it comes to business accounting. If your DIY accounting abilities are shaky, you should look at hiring an accounting professional, she says.
89% of SMB owners attribute a part of their success to their accountant, according to data from Intuit, a provider of business and financial software.
2. Nail Down Your Profit
Every business owner needs to be able to calculate profit.
In tandem with understanding your profitability, you should be able to read a balance sheet, Noga adds. A balance sheet summarizes what you own (assets), what you owe (liabilities), and what the shareholders’ equity is. If you are applying for a business loan, a lender will want to look at your balance sheet.
Aside from the balance sheet, Logan Allec, CPA and owner of Money Done Right, says you should understand your profit-and-loss (P&L) statement, cash flow statement and owner’s equity statement. You should also know how all of these are tied to one other.
“You could have the best accounting system in the world, but if you as a business owner don’t know how to read and understand the output of this system, then it won’t do you much good,” Allec says.
3. Invest in Technology
Noga advises all small businesses to use accounting software, such as Intuit’s QuickBooks. These programs make it far easier to organize your finances. The software should sync with your business checking, savings and credit card accounts in order to produce reports that summarize your business’ performance, she says.
According to Clutch, 53% of small businesses use some sort of accounting software.
Noga warns against relying on Excel spreadsheets or old-fashioned paper and pencil to manage your finances, as there is too much room for error with these methods. Alarmingly, the same Clutch survey shows one-fourth of small businesses still keep their financial records on paper.
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4. Get a Handle on Cash Versus Accrual Accounting
There are two general approaches to accounting. You need to pick one and stick to it.
As Allec explains, under the cash method of accounting, income and expenses are recorded as cash comes in and goes out. Under the accrual method, however, income is recorded as it is earned, and expenses are recorded to match the corresponding income.
“These are two different kinds of books,” Allec says, “and if you sit on a lot of receivables for a long period of time, it’s important for you to understand the cash versus accrual methods of accounting and the purposes of each.”
5. Pass off the Payroll
Even if you employ just one person, contract with an outside company to manage your business payroll, Noga suggests.
“The amount of paperwork and compliance that is required on the federal and state level is overwhelming to try to do payroll for yourself,” she says.
Paying a monthly tab for payroll services is “worth every penny,” Noga adds.
6. Don’t Mix Business and Pleasure
Business and personal expenses should be kept separate, Noga says.
There are multiple reasons why this is a good idea. However, one reason stands out. Mixing these two types of expenses can lead to an inaccurate view of your business finances, which can lead to trouble with the IRS. You don’t want that.
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7. Hire a Bookkeeper
Ian Bouchett is the Director of Revenue Operations at Reconciled, an online bookkeeping and accounting service for entrepreneurs and small businesses. He recommends hiring a bookkeeper or bookkeeping firm as soon as financially feasible after launching a business.
“It’s a lot easier and much cheaper to get your books right from day one than it is to clean them up retroactively,” Bouchett says.
While a CPA can perform bookkeeping, a CPA typically charges much more than a bookkeeper does, according to both Bouchett and Noga. Accountants are “way too qualified” to do bookkeeping, Noga says.
What’s the difference between a bookkeeper and an accountant?
Among a bookkeeper’s typical duties include recording financial transactions, reconciling bank statements, creating financial statements, sending invoices and paying bills. Meanwhile, tasks performed by an accountant include gauging the financial health of a business, preparing mandatory statements and reports, providing strategic planning, and advising about tax decisions.
It’s important to note that not all accountants are CPAs. A CPA (certified public accountant) must pass an exam and meet certain work requirements becoming licensed.
“When you pair a good bookkeeper with a CPA, you get the best price with better outcomes, too,” Bouchett says.
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