By mastering the basics of SMB accounting, you can set up your business for success. Proper accounting can help you ease the burden of tax season as well as help you understand the financial health of your business. Good accounting skills can even be of great use when you are planning for future growth.
If you want to be good at overseeing your business finances, you don’t necessarily have to be an accounting expert. This simple financial survival guide for small businesses will put you on the right track.
Register Your Business
Registering your business and getting the necessary licences are the first steps to setting up your venture. But, before you start applying for business licences, you need to choose the appropriate structure for your business. There are several different types of business structures you can choose from, including:
- Sole proprietorship: This is the most common business structure type. The registration process is affordable and simple, so this can be a good option for small business entrepreneurs. When your business is a sole proprietorship, you are the only owner of your unincorporated company.
There is no separation between your business and personal finances. When you file your personal income tax return, you also include your business taxes. However, as a sole proprietor, you are personally liable for your debts.
- Corporation: Setting up a corporation is expensive and time-consuming. It is the most complex business structure. But the benefits include greater legal protections and lower tax rates.
- LLC (Limited Liability Company): Combining features of a corporation and a sole proprietorship, an LLC can be a good choice for a small business. For instance, this structure gives you the flexibility of filling your taxes through a separate business filling or through your personal income tax.
- Partnership: This is a good option if you want to share ownership of the business. If you decide that forming a partnership is your best bet, make sure to have a formal partnership in place.
Open a Business Bank Account
Even if you decide to be a sole proprietor, also known as a sole trader, the separation of personal and business finances is key to successful small business financial management. You can easily complicate your accounting system, lose track of business expenses, and even run into legal trouble if you don’t keep your finances separate.
All you need is a business checking account and maybe even a savings account. There are a few factors you should consider when choosing a bank, such as transaction limits and small business banking fees. If you are considering applying for a business credit card, take time to research the interest rates.
Choose an Accounting Method
You have two options to choose from when it comes to accounting methods for small businesses. You’ll want to stay consistent with the method you have chosen. This way, filing your taxes will be much easier. The two methods are:
- Cash-based accounting: Of the two methods, this one is more straightforward. You need to recognize expenses when you pay them and record revenue when you receive it. Because of its relative simplicity, it’s the most popular option among fledgeling entrepreneurs.
- Accrual-basis accounting: You record your expenses when they’re incurred rather than when you pay for them, and you record your revenue when it’s confirmed.
Develop a Bookkeeping Method
It is key to adopt a consistent bookkeeping method. To make sure your books are in order, you need to track all the money coming in and going out. When it comes to bookkeeping methods, your options include:
- DIY bookkeeping: When you start out, you may be able to get away with tracking all your expenses using a spreadsheet. But you should look into other options as your business grows.
- Cloud-based solution: A cloud-based accounting solution can connect to your bank account and help you manage your bookkeeping online. It can automatically track all of your transactions.
- Part-time or in-house bookkeeper: When your business reaches a certain point of growth, it’s best to let a professional bookkeeper handle your books. This will allow you to fully focus on the core functions of your business.
Learn Your Tax Obligations
Your tax requirements will depend on the business structure you have chosen. As an entrepreneur, you’ll want to prepare for the following tax obligations:
- Self-employment tax: To cover your social security obligations, you need to pay the self-employment tax.
- Employment tax: In most countries, a business with employees should pay some form of employment tax. Generally, the employment tax contributes to your employees’ social security coverage.
- Sales tax: The sales tax system varies from state to state. A state imposes the sales tax on the purchaser, the seller, or the transaction itself. Research the sales tax system of your state and find how much sales tax you need to charge customers and when you need to submit it to the government.
Master Financial Reports
To be able to track how your business is performing, you need to master financial reporting. Financial reports can show you how to become more efficient as well as help you make informed decisions. The financial statements you should be familiar with include:
- Balance sheet: The balance sheet of a business shows what the business owns and owes on a single day.
- Income statement: An income statement displays the company’s revenue, net profit, gross profit, taxes paid, costs, administrative and selling expenses, in a logical and coherent manner.
- Cash flow statement: Your cash flow statement summarizes the amount of cash and cash equivalents that enter and leave your business.
Michael has been working in marketing for almost a decade and has worked with a huge range of clients, which has made him knowledgeable on many different subjects. He has recently rediscovered a passion for writing and hopes to make it a daily habit. You can read more of Michael’s work at Qeedle.