When you’re a small business owner you need to be on top of your game and always keep on top of your accounting so that you can see exactly where you are making your money and keep your business afloat. If you own a small business and are struggling or just want to know some basic tips on how to properly account for your company then you have come to the right place.
Below are eight accounting tips and tricks for small businesses:
You should set up a dedicated business bank account for checking and savings as this can save you many hours of wasted time tallying up deductible business expenses. If you maintain a dedicated business bank account and business credit card, it will help you to limit legal exposure to business debts if your business is a Limited Liability Company (LLC) or corporation.
You cannot deduct personal expenses on a business tax return usually but if you use property both for business and personal use then the time you use the property for a business can be deducted from expenses. This is the only case where you can deduct personal expenses though and the penalty for doing this outside of this case can be a fee of as high as 75% of the additional tax amount owed!
Using paper cheques and keeping invoices in folders is no longer effective and is an easy way to make your life a lot harder when it comes to accounting. Small businesses may be able to manage using these methods but when they start growing it would be effective to change to cloud accounting and technology to store information. Many of the top payment companies offer online invoicing and accounting solutions for businesses of any size and these can be used as platforms to operate in the cloud.
This means that you can access your finances anywhere and they can be backed up digitally so that they will never be fully lost even if physical copies are destroyed.
It is of utmost importance that your payment documentations are organised understandably and effectively. This must be done so that if there are adjustments for paying taxes under new laws, you can keep track of this information. This information being on hand could save you from so many nightmares.
This is something you should not be put off doing as there are constant changes to how pass-through income is going to be treated. In simple terms, you can cover your business and have peace of mind knowing that all your payment documentation is on hand when you need it.
If you own a small business, you should make sure to accurately record any loans, revenue from sales and any other sources so that you can keep an eye on your incoming cash flow. If you do not record this, you may accidentally underpay your tax which would lead to IRS penalties.
Keep a Reserve of Cash
No matter what business you run, you should always have a contingency plan in place. This is quite common for small business owners to put excess cash back into their business just in case a problem arises. This is a good habit to get into but only if you put a small portion of this excess cash into reserves.
According to experts, you should have at least three months of basic operating expenses (also known as a runway) on hand so that if anything is to happen, you can keep your business running until the issue is resolved. Having six months is an even better idea as well as checking your business reserves regularly to ensure that you can definitely stay afloat.
If you have less than three months of runway you should think about investing more excess money into your reserves.
Make sure that every week you take time out to get the necessary paperwork in order and avoid letting invoices and receipts pile up without being filed and accounted for. This will save you a lot of catching up as the tax season gets closer. As stated earlier, accounting software can save you time here and automatically categories income and expenses which means less work needs to be done.
Even if a business is going smoothly with no signs of dropping it is always best to look to the future to keep it that way. By making financial projections and reports you can estimate how well your company will be doing in the following years and help you to figure out where to invest and whether you’ll need to apply for any loans to stay afloat.
Forecasting future finance can be tough as you will need to figure out how your expenses can change because of natural forces like inflation as well as what your client’s decisions are. Revenue is similarly hard to predict as there are many factors such as price increases and the number of customers that marketing will generate each year. Gathering your accountants to discuss this and using accountant software are the best and most effective ways to develop and produce realistic financial projections that will help your business as they tend to keep up to date.
Follow Up on Invoices
Sometimes sending an invoice doesn’t always mean you get paid. To avoid overpaying taxes and wasting time looking through your revenue to find people who haven’t paid you, you should send invoices as soon as you finish a job to increase your chances of being paid straight away.
If this is not the case, you should follow up with polite reminders that you require payment before a specific deadline. You could even offer early payment discounts to give your clients more of an incentive to pay sooner rather than later and if they do pay later you gain a little interest.