Accounting is one part of running a business that most small business owners can’t stand. And with tax season just around the corner, it’s a necessary evil that they have to deal with.
According to Finances Online, 21% of small and medium-sized business owners are not knowledgeable enough about accounting, and they still use traditional pen-and-paper to track their finances.
In this blog post, we’ve got 10 tips to help with your small business accounting and make you better equipped to deal with your finances.
What is Accounting?
It is the process of recording financial information and analyzing it to assist decision-making and planning.
Accounting is responsible for interpreting, classifying, analyzing, reporting, and summarizing financial data. These include:
- Showing whether you made a profit or experienced a loss (aka income statement)
- Listing your company assets, liabilities, and equities on a particular date (aka balance sheet)
- Reporting money generated and money spent in a specific period of time (aka cash flow statement)
Accounting is not just a business practice; it is a management tool. Tracking company income and expenditure helps you make business decisions by providing relevant financial information to your investors, management, and government.
8 Small Business Accounting Tips
Successful small businesses are careful about how they manage their money. You have to be careful about how you budget and make decisions about expenses. It’s not always easy, but there are some smart things small businesses can do to control their finances.
1. Separate Work and Personal Finances
Don’t mix business with pleasure!
You have to categorize transactions that are work-related and for private use into different categories. Start by having a dedicated business bank account and a different bank account for personal finances.
After you register and fully set up your small business in the Philippines, your income needs a designated bank account. From there, you can view all of your transactions that are exclusively business-related.
Here’s what you can do:
- Do your research. Before opening any accounts, look at different banks and compare different package pricing. Business accounts tend to cost more than personal banking, so take those into consideration.
- A business bank account requires an official business name that is registered where you are situated. Ask the banks you’re interested in for the required documents to apply before setting any appointments.
- Once you have the program of your choice, open a checking and savings account at that bank.
- Having multiple savings accounts help to organize funds and plan taxes for different purposes.
- Determine the need for a business credit card to start building credit (when your small business grows, you’ll be legally required to have a business credit card to separate from personal assets).
It’s worth noting that while small businesses are usually sole proprietorships and don’t legally require a business bank account, we still highly recommend that you have one. Especially when the aim is to eventually grow into a big LLC, partnership, or corporation, having a separate account for your company will be required by law.
2. Categorize Your Accounts Like a Pro
Having a business bank account is one thing, but when it comes to actual accounting, there are a lot more “accounts” (or books) involved, each serving its own purpose.
The following are the 10 accounts for small businesses that you should pay attention to and track:
- Cash – business transactions that involve collecting receipts and disbursements
- Accounts Receivable – aka invoices, or records of money expected to come from customers
- Inventory – recorded number of unsold products
- Accounts Payable – outgoing bills to maintain the business like rent, internet, phone, electricity, and water
- Loans Payable – due dates and payments of money borrowed for expenses required to operate your business
- Sales – aka incoming revenue, this is the amount of money that you have received from your “Accounts Receivable”
- Purchases – raw materials or goods used for your business. This account is used to calculate your company’s gross profit (Revenue – Cost Of Goods Sold = Gross Profit)
- Payroll Expenses – considered as the biggest cost, this is the money you pay your employees every period
- Owners Equity – aka net assets, or the amount that the business owner has once liabilities are deducted from assets
- Retained Earnings – company profit that is reinvested in the business, so it appears like the running total that the company has retained since it began.
3. Track Your Expenses
As we suggested in the previous point, there are at least 10 accounts that even small businesses need to keep track of, which is why it’s crucial that your accounting department dedicate the time to performing regular checkups.
There are 2 ways to record expenses—cash and accrual basis.
Cash basis is a bookkeeping method of recording revenue and expenses when receipts or payments are made.
Whereas, an accrual basis records revenue and expenses when the transaction occurs, with or without the payment being made. This method requires tracking receivables and payables.
Follow these accounting tips to ensure that all of your accounts (or books) are up-to-date and accurate:
- Check your transactions daily and do a thorough inspection weekly to total your figures.
- Maintain your inventory up-to-date by recording incoming and outgoing transactions as they come and go.
- Keeping receipts (both online and printed) and organizing them in a folder with labels or if you want to go paperless, have them scanned to your computer and added to your accounting database.
- Track expenses through online banking and credit card records.
- Follow-up with banks if there are any bounced checks,
- Or with customers with pending and overdue invoices.
4. Create Accurate Invoices
Accurate invoicing is about writing specific transaction details for clients to make their payments on time. These go to your “Accounts Receivable” book, where you can track business cash flow and late payments.
Improve your invoices by:
- Using templates suitable for your business type
- Add the correct information (company, customer, and bank), pricing, mode of payment, payment plan, and most of all, deadlines
- Considering digital payment providers and going digital with your mode of payment to reduce paper receipts and keep organized.
- Avoid multiple versions of the invoice once it has been finalized between you and your customer. Otherwise, you may end up confused with keeping records in accounting.
5. Specify Your Mode of Payment
When you start making sales, make it simple for your customers to make the purchase.
Here are some examples of modes of payment and their advantages:
- Cash – common and direct, payment using bills and coins in exchange for a printed receipt, can be transferred and deposited in the bank or sent through remittance.
- Check (or cheque) – a bank order to release a specified amount of money to the person mentioned in the cheque. This is the safest because carrying cash is not required.
- Digital – the use of e-Wallet applications or platforms are usually integrated with bank accounts or prepaid to deposit money. This is the most convenient since no physical exchange needs to be done and transactions are recorded within the system. We’ve previously talked about how to set up PayPal, but there are other options available such as GCash, DragonPay, Coins.ph, PayMaya, and PayMongo.
6. Invest in Accounting Software
If you’re looking to cut costs and you know the ropes of accounting, then consider putting your money into cloud-based accounting software.
- Automate your transactions by syncing software with your bank account
- Cloud-based saves backups to avoid data loss
- No more pen-and-paper or offline spreadsheets
- File tax returns online and more accurately (compared to traditional accounting)
- Manage inventory electronically
- View summary reports of your income statement and balance sheets
- Choose between different software packages or have one customized to your needs
7. Review Your Records Every Quarter
Besides tracking your expenses, you should look at all of your records in-depth at the end of each quarter. You can do this yourself or with the help of your accountant and/or accounting software.
The review should provide the following information:
- Trends in growing or declining sales
- Year-over-year revenue
- Late customer payments
These will be used to create forecasts for your small business’s future financial projection, whether it’s time for an upgrade or to cut costs in equipment, office space, etc.
8. Monitor Your Employees
Keep tabs on your employees on your “payroll expenses” account.
Considering labor costs as the biggest expense in your small business, save yourself the hassle of underpaying and overpaying your staff.
Technology provides the solution to traditional operations, including:
- Cloud-based time-tracking software for employees to clock in and out of the office, using their smartphones, tablets, and computers.
- Track employee activity such as overtime, tardies, leaves, etc. based on the online Bundy clock.
- Record income accurately for every employee since all their activities are recorded in the system.
- Integrate accounting software into your tracking and payroll system.
- Distribution of salary can be made easier since your business bank account is connected to your payroll system.
- Automate mandatory deductions and record taxable income, where applicable, through online payslips.
Accounting may not be the most exciting aspect of running a small business, but it is certainly one of the most critical. By following the accounting tips outlined in this blog, you can stay on top of your financial records and ensure that your small business stays financially healthy.
From keeping detailed records and separating business and personal finances to taking advantage of technology and seeking professional help when needed, these tips can help you streamline your accounting processes and avoid costly mistakes.
Remember, a sound accounting system is the foundation of a successful business, so don’t overlook its importance.
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