When you opened your small business, it wasn’t because you wanted to spend all your time doing small business accounting (unless you’re an accountant!) You’re too busy finding new clients, learning new skills, and generally doing your job.
But whatever your business, you can’t avoid accounting. You need to keep track of your income, expenses, invoices, and receipts, to stay out of debt and out of trouble with the tax authorities. Without basic accounting for small business, you won’t know whether you’re losing money, or making a profit.
Do I Need a Small Business Tax Accountant?
At times you may wonder “How much is an accountant for a small business?” The average hourly fee for an accountant is between $40 to $50, but that can change depending on where you live. The average small business ends up spending between $1,000 and $5,000 per year on accounting.
Depending on your tax situation, it can be worth it to pay the cost of an accountant for small business. But even when you hire small business tax accountants, you need to understand basic accounting for small business owners.
How to Do Accounting for Small Business
Small business accounting is easier when you set it up correctly from the beginning. Here are the basic steps you need to take to keep control over accounting for your small business.
1. Open a business account
Even if your business has a very small amount of revenue, you need to separate your business finances from your personal ones. Open up a business account, and use that one for all your business expenses and income. It makes it much simpler to keep track of profit and loss.
2. Keep records of every transaction
No matter what happens, you need to record it as part of your cash flow management. Keep a copy of every single receipt, invoice, check, and tax document that comes in or out of your business, for at least 3 years. You don’t have to keep the original paper version; just scan it and keep the image safe on a secure cloud storage site like Dropbox.
3. Learn the language
Sometimes, it can seem like accountants speak a different language. Find out what words like deduction, cash flow, liability, and expenditure mean. Learn what “tax obligations” means, and what your tax obligations are. The more you understand about small business accounting, the easier it will be.
4. Know your deadlines
Avoid last-minute panic over tax return dates. Give yourself plenty of time to get organized by finding out your deadlines well in advance.
The Different Accounting Methods for Small Business
There are 2 main methods of accounting:
- Cash-based accounting
- Accrual accounting
Cash-based accounting is the simpler option. It’s the method that most small businesses and sole proprietors use. Cash-based accounting means that you report your income and deduct expenses when they are paid.
Accrual accounting is a little more complicated. With accrual accounting, you have to report income and expenses whenever they happen, even if that’s not when they are paid. Accrual accounting is better for large businesses that often do big jobs, where it can take several months for you to get paid in full.
For example, imagine you own a construction contractors’ business.
- In September 2017, you begin a huge project which takes 4 months to complete.
- You send in your bill for the final amount in December, but the client doesn’t pay up until January 2018.
- With cash-based accounting, you’d report the expense in January, when your client paid the bill.
- With accrual accounting, you’d report it in December, when you sent your invoice.
You can usually choose which type of accounting you prefer. Sometimes the IRS insists that you use accrual accounting, like if you have an inventory to sell products.
Small Business Accounting Software
If you’re struggling with small business accounting, don’t panic. Small business accounting software can make it easier without paying for an accountant. Here are some of the best accounting tools for small business owners.
- Intuit QuickBooks helps you track income and expenses, create and send estimates and invoices, calculate tax, and capture and organize receipts. The monthly fee begins at $7 per user. QuickBooks Plus even manages timetracking and payroll.
- Wave is mostly free. Use it to create and send invoices and receive payment. It syncs with your bank account, so your bookkeeping will always be up to date.
- Xero is ideal if you’re on the go. It lets you create and send invoices and purchase orders, prepare a financial report, and track inventory from your phone. Xero connects with your bank account, and prices begin at $9/month.
- Sage 50Cloud is another all-round accounting tool. Sage lets you send invoices, track payments, record expenses, and it helps prepare your tax returns. Prices begin at $46.83/month.
- Kashoo makes it easy to track expenses, create and send invoices, and produce reports. You can also use it to accept credit card payments, and it syncs with your bank account. Kashoo fees begin at $16.65/month.
Small Business Accounting Tips
Try these small business accounting tips to keep your small business running smoothly:
- Plan ahead for major purchases. There are some big costs that you have to pay on a regular basis, like your tax return or replacing expensive equipment. Build these costs into your monthly business budget, so that you won’t dent your cash flow when it’s time to make those payments.
- Do the books regularly. Small business bookkeeping is easier when you do it every week or every month, instead of leaving it all for the end of the quarter or the year.
- Avoid unnecessary expenses. You don’t want to have to pay for an avoidable mistake or careless accident. Follow all the safety regulations for your business, and make sure to buy the right business insurance for your business needs.
- Allow for seasonal cash flow. Every business has busier times, and quiet times. Put some money away in the busy times, so that you won’t stress when you have less work.
With these small business accounting tips and tools, plus a little organization, you can stay in control of your small business finances.