Accounting isn't the most glamorous part of running a small business. Most entrepreneurs would rather spend their time developing their product line or growing their client base. But accounting is important.
Without it, your business will never reach its full potential. A lack of adequate accounting could even create legal problems that could easily have been avoided.
The purpose of accounting is two-fold:
- First, a basic small business accounting system generates a record of the receipts and expenditures of your business' day to day activities. This data is vital for the completion of your annual tax returns and other legal documents. It will also be required by lenders when you apply for a small business loan.
- Second, small business accounting provides you - the entrepreneur - with a valuable tool for assessing and analyzing your business' performance. With just a little practice, you will begin to notice trends that highlight your business' strengths and weaknesses. This information will help you make informed decisions about how to improve your bottom line.
The good news is that legally you are not required to maintain your financial records in any specific manner, as long as the records accurately reflect your business' income and expenses. Most businesses maintain their records in a ledger, which is simply a record of sales receipts and expenditures
The process of transferring individual receipts and expenditures to a ledger is called posting. How often you post to your ledger usually depends on the volume of receipts and expenditures you need to record. Many businesses find it necessary to post to their ledger on a daily basis. However, you should plan to update your ledger on a weekly, or at least monthly basis.
Once you have posted your receipts and expenditures to the ledger, you can begin to compile financial reports for your business. The most common types of reports for small businesses are income & expense reports, cash flow reports, and a balance sheet.
The balance sheet is an itemization of your business' assets (cash, inventories, accounts receivables, etc.) and liabilities (loans, debts, accounts payable). If done properly, a good balance sheet will provide an accurate snapshot of where you actually stand because accounts payable and accounts receivable items do not usually show up on in your receipts and expenditures ledger.
In a perfect world, your business would employ a bookkeeper to keep track of your finances. But since most entrepreneurs can't afford to employ a bookkeeper (at least not initially), here are a couple of tips to help take the headache out of doing it yourself.
- Tip #1: Consult an accountant. You're probably thinking the last thing you need is another expense. But unless you know how to do income tax reporting yourself, you're going to need to find an accountant eventually anyway. By consulting an accountant to help set up your accounting system, you can save time and money when it comes time to prepare our income taxes, especially if you use the same accountant for both jobs.
Related article: Choosing a Small Business Accountant
- Tip #2: Purchase accounting software. One of the best things you can do for your business is to purchase small business accounting software. There are several affordable programs such as QuickBooks and Peachtree that not only keep track of your receipts and expenditures, but automatically translate them into quality financial reports as well.