For many business owners, managing finances is the scariest aspect of owning a business. If you don’t know how to keep your finances in order, you could run into dire financial difficulties.
Fortunately, ace money management skills can be learned, even if you’ve never balanced a checkbook before. Here are a few of the top must-know small business accounting tips you should refer to regularly.
1. Keep accurate records
When you own a startup, you need to learn how to do accounting and record keeping for small business. Most of your day-to-day accounting details can be easily tracked online via your credit card and banking records. However, it’s important to keep all this information compiled in one location so you can review it at a glance.
Many business owners invest in software that makes it easier to do bookkeeping for small business. Invest in software that allows you to track the money flow and has an integrated invoice feature. Your accountant will thank you when the time comes to file your taxes.
2. Open a business bank account
When you mix personal and professional finances, the results can be disastrous. One of the first steps you should take when starting a new business is opening a new bank account under your business‘s name.
Keeping your personal and professional finances completely separate makes tracking the flow of money a breeze. Plus, having a separate bank account also makes your life much easier when tax filing season rolls around.
If your company is a sole proprietorship, you aren’t legally required to open a separate bank account for your business, but it is still strongly recommended that you do so. Before you can open a business account, you need a business name, and it must be registered with your state or province.
3. Keep all your receipts
You might think it’s unnecessary to keep receipts since practically every purchase is electronically. However, sales slips contain dates and expense details that can be very helpful for future reference.
Don’t make the mistake of just tossing all your receipts into a single folder. Instead, organize them based on category.
When tax filing season rolls around, this will make things much easier for you and help you make accurate deductions. It will also help you keep track of where most of your money is going so you can cut back in specific areas in the future.
4. Learn how to invoice accurately
For most new business owners invoicing is an unfamiliar concept, but it’s necessary to record specific details about various transactions. They also prompt clients to make payments on time. Accurate invoicing can help you keep track of clients who consistently fail to pay within the agreed-upon period and can help you stay organized.
Never add to an invoice after it has been finalized and never create multiple versions of the same invoice. Making changes to an invoice after submitting to a customer will only confuse you, your clients and your accountant. It will also make the accounts receivable process chaotic and inefficient.
5. Create profit and loss statements
Profit and loss statements can give you snapshots of the financial health of your business. A P&L statement summarizes the expenses, costs and revenues your business incurs during specific dates. It can reveal relevant information about your company’s ability to generate profit and is also commonly referred to as an income statement, statement of financial results or statement of operations.
Before you can prepare a profit and loss statement, you’ll need to compile the following information:
- Petty cash transactions and all other activities accompanied by receipts
- Records for all purchases you’ve made with your business credit cards and business checking account
- Information for returns, discounts and any price reductions you’ve offered customers
- All sources of income, including credit card payments, checks and cash paid to your business
For each different item listed above, include the information for the total year as well as the quarterly amount. Then, you’ll need to follow the process of creating your profit and loss income statement.
6. Get receipts for donations
If you frequently donate to charity and fail to get receipts for your contributions, it’s time to change your habits. You could receive tax benefits for all money and donations given to charitable organizations, but you need to have receipts to deduct them from your taxes.
7. Collect taxes at the time of sale
Always collect taxes at the time of sale to avoid paying a hefty lump tax sum at year’s end. You also won’t need to worry about incurring delayed tax payment penalties if you collect or apply them at the time of sale.
Whether you’re a math genius or your accounting skills could use a little help, anyone can learn how to manage their business finances. Follow these simple accounting tips to get your business finances in order and avoid common tax mistakes.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.