5 Accounting Tips To Start Today
This popular quote says, “The people with the best advice are usually the ones who have been through the most.” For me, I like to say, “Learn from the mistakes I have made”. Both mean the same thing- learn from the experience of others who have made mistakes and figured out better ways to accomplish things in their business. So, if you are a small business owner or entrepreneur, and don’t know where to start on accounting, here are five basic accounting tips that you can start today.
- Separate Your Business From Your Personal
This is really an essential task and why I have put this as the number one tip on my list. Separate your business finances from your personal finances; do this today. You should have a business bank account (and if possible, business credit cards). In addition, a separate business account can really help you keep track of your business income, as well as ensure that you are spending appropriately. Make sure that you only use money from your business accounts to take care of business- related activities. Doing this can help ensure you are ready when it’s time to file your taxes. Be scrupulous in keeping your business transactions separate from your personal transactions so that your accountant and the IRS can see the difference.
2. Think Through Your Chart Of Accounts
You need to put some thought into your business’ chart of accounts, this is the infrastructure of your business; all the recording of assets, liabilities, revenues, and expenses depend on this chart. But think about the level of detail you will want on your reports, and base your chart of accounts on that.
For example: Do you really need to break out liability insurance, general insurance, professional insurance, etc. or could everything just fall under insurance? Do you need to separate out lights, heat, and phone expenses, or could they all be grouped as utilities? The answer to these questions depends on how you wish to review and analyze your expenses. Giving some thought to this upfront will help streamline your Chart of Accounts and avoid unnecessary clutter.
Similarly, if you pay rent for a building or piece of equipment, you might set up a “rent expense” account with sub-accounts for “building rent” and “equipment rent.” Spend the time before you begin to think through this process to save time later and to provide reports that make more sense to your business.
3. Keep Good Records, Stay Organized
Everyone in business must keep records. What can good record keeping do for you?
- Good record keeping can show whether your business is improving, which items are selling and what changes are needed. Good record keeping can be the difference between failure and success.
- Identify source of receipts: You will receive money or services from many sources. Your records can identify the source of your receipts. You need this information to separate business from non-business receipts and taxable from nontaxable income.
- You may forget expenses when you prepare your tax return unless you record them when they occur. Believe me you will need all the deductible expenses you can find.
- Records must support the income, expenses and credits you report on your tax returns. Generally, these are the same records you use to monitor your business and prepare your financial statements. You must keep your business records available at all times for inspection by the IRS and/or your State Department of Revenue. If the IRS or State Department of Revenue examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination and make the experience feel that much less painful.
4. Complete Monthly & Quarterly Reviews
As you begin to grow, you also learn to become more strategic in how you run and manage your business. If you won’t, your business won’t survive. As much as I am passionate about my work, passion without strategy won’t pay the bills. The reality is you have to strategize and make informed choices.
What you begin to look at in your monthly and quarterly reviews may depend on what stage you are in in your business. At the very least, you should always be looking at how much you are earning versus how much you are spending. Simply put, you need to have a positive cash flow in order to have a profitable business that allows you to pay yourself.
Here are some suggestions of what to look at during your quarterly review:
- How much revenue did your business make?
- How much of that revenue went back into the business?
- What did you spend money on?
- How much did you pay in taxes? What’s the rate?
- Review project goals. Did you launch anything this quarter? For example, a podcast?
- Social media strategy
- How can you increase revenue?
- Where can improvements be made?
I could go on and on depending on the business, but you’re starting to catch my drift. Simply put, these reviews are a good way to crunch some numbers, make sure you’re headed in the right direction, determine the next steps and make adjustments where need be. If you don’t have this information, then it’s easy to feel like you’re a chicken running around with your head cut off.
5. Don’t Be Afraid To Pull In An Expert
Accounting is an essential role that every business owner should be able to handle, and he/she should enlist the help of someone who can take care of this task if necessary. You don’t necessarily have to hire an accountant or in-house bookkeeper to do this for you. Many business owners outsource their bookkeeping needs instead. For many businesses, this is just a few hours a week, rather than a full-time commitment.
Here’s a look at some of the benefits of and considerations involved with hiring an external accounting service for your business.
- You’ll Get an Unbiased Financial Opinion
An external accounting service has nothing to do with your business. Its goal is to give you a clear insight into your business’s financial position, not to pat you on the back and tell you everything is going to be OK even when it’s not. A accounting service need only do the accounting work required to keep your business up and running and show you its financial strengths and weaknesses.
- You’ll Avoid Conflict of Interest
It can be risky for some businesses like partnerships to entrust the accounting to one of the owners. Accusations of misconduct could potentially ruin the business relationship, even when an error in record keeping is unintentional. An owner might find himself in the unfortunate position of having to make a choice between what is best for himself and what is best for the company. Using an independent accounting service avoids this pitfall and can boost confidence among the owners that all accounting statements are true, accurate and without bias.
- You’ll Lower Costs
One of the key components of running any business is keeping a firm grasp on the overall costs incurred. A business owner’s goal is to reduce the total costs of his operation, and one way to do this is to control the wages and salaries of workers — usually by employing fewer people.
The salary and benefits paid to an in-house bookkeeper can be significant. A business can run without a bookkeeper on staff if the business owner — or one of the business owners — collects invoices, payments, credit sales, and other pertinent financial information. He can then hand the necessary documentation over to the external bookkeeper for accounting purposes. The cost of outsourcing your accounting is typically significantly less than employing a full-time bookkeeper.
So start making positive changes to your accounting today: even one of these basic tips can put you and your business on the right track to success.