For some people, launching a small business venture is the stuff dreams are made of. Unfortunately, making a company a success requires more than a bright idea and a whole lot of determination. While these things are important, developing top-notch accounting practices are vital too. To increase your odds of making your startup viable for the long-term, consider adhering to the following simple tips.
1. Select Your Accounting Method
If accounting isn't your strong suit, selecting an accounting method for your small business might initially seem like a daunting task. However, U.S. companies only utilize either one of two bases of accounting: cash or accrual. The difference between the two is the time when revenues and expenses are recognized. Under the cash method of accounting, revenues are only recognized when cash is received while expenses are only recorded when cash is paid. For instance, rent expense would be recognized when you pay your landlord the amount of cash due each month.
With the accrual basis of accounting, revenues are recognized when they're earned, and expenses are recorded when they're incurred even if cash hasn't been received or paid. For example, revenues would be recorded for credit sales at the time merchandise is delivered to the customer. The Internal Revenue Service requires certain types of companies, including publicly held ones, to use the accrual method. If you have a choice between the two, select the method that fits your type of small business best. Consulting with an accounting professional can also be helpful for this decision.
2. Keep Business and Personal Expenses Separate
When launching a startup, it might be tempting to mix business and personal expenses. But, in the long run, you may benefit immensely from having a business account and a personal account. If you need to turn over your financial documents to an expert in the future, doing this will make the process easier.
3. Automate Your Payments and Invoices
To improve efficiency and decrease human error, automate your payments and invoices. Investing in innovative accounting software is essential. By doing so, you'll have a world of sophisticated, enlightening data at your fingertips at all times. Investing in cloud-based accounting software will allow you to access your financial information from work, home, a favorite restaurant, at the soccer field, or anywhere else.
4. Develop a Budget and Stick to It
When starting a small business, spending can get out of hand quickly. Unfortunately, as you try to establish your company, cash might be hard to come by. Therefore, you should develop a budget and stick to it. Decide where you want all of your money to go and spend it accordingly.
5. Track Each Business Expense
In the day-to-day grind, entrepreneurs can easily forget to record each business expense. When this happens, you lose all sense of where and how quickly your money is leaving the business. You forgo the ability to monitor the health of your business or prepare accurate financial statements. You also risk losing the ability to record deductible expenses on your tax return, or even prepare a tax return. While it may be more appealing to record revenues, keeping track of expenses is just as important.
6. Monitor Accounts Receivable
Accepting only cash payments from customers can put you at an extreme disadvantage. But, failing to monitor accounts receivable can also doom your chances of enjoying small business success. If you don't track your accounts receivable, you likely won't know if you've billed a credit customer or received a payment from one. To stay on top of your accounts receivable, strive to send an invoice to clients as quickly as possible. This will help prevent clients from conveniently forgetting they owe you money. Also, consider confirming the receipt of invoices a few days after they are sent. Extend credit terms for as little time as possible without risking a decrease in sales. To effectively monitor accounts receivable, you also should document everything. For example, keep copies of invoices, document conversations with clients, and write down the terms you agree upon with customers.
7. Hire a Reputable Accountant
Cultivating basic accounting knowledge can be beneficial for entrepreneurs. However, taking the time and energy to learn anything beyond that might not be practical or desirable. Hiring a reputable accountant will free up your time to do what you do best: run a successful small business. When searching for the right accountant, look for someone knowledgeable with the applicable forms and regulations pertaining to your type of business in your state.
Accounting might not be the most exciting aspect of small business ownership, but it's a crucial one. If you want to put your startup on the map, consider following the aforementioned smart accounting practices.
Frank Jenkins, CPA writes for CountingWorks, an accounting news and advice website. Reach him at [email protected].
About Frank Jenkins Jr
Frank Jenkins Jr. CPA is the managing partner of Adams, Jenkins & Cheatham, a CPA practice based in Midlothian, VA. Frank specializes in Consulting services, tax planning, audit & assurances. "I genuinely care about our clients because I have a personal connection with them." He is active in the community and belongs to the AICPA and the VSCPA.
