Small Business Accounting for Non-Accountants – Plan Your Year
Accounting for a small business can be downright overwhelming if you're a small business owner without an accounting background.
Sound familiar? Your worry-free days are just ahead. I'm sharing some practical tips and advice on small business accounting specifically designed to help non-accountants effectively plan each day, week, month, quarter, and year.
What Is Business Accounting?
Business accounting, often referred to as bookkeeping, is the process of recording, analyzing, and interpreting financial information related to a business—in this case, a small business. It involves keeping track of crucial information to provide a clear picture of the business's financial health for more informed decision-making and planning for the future.
The Basics of Business Accounting
Knowing these basic key terms and concepts can help you become highly effective at accounting, without forcing you to go back to school:
Revenue
Revenue refers to the income generated from the sale of products or services.
Expenses
These are costs incurred in running the business.
Assets
These are the resources the business owns—typically cash, inventory, and property or equipment.
Liabilities
These are debts or obligations of the business, including loans, accounts payable, and accrued expenses.
Equity
Equity represents the owner's interest in the business. Equity is calculated by subtracting liabilities from assets.
Accounts Payable (AP)
AP involves issuing, monitoring, analyzing, and reporting all operating and capital cost payments to suppliers, vendors, or other parties.
Accounts Receivable (AR)
AR is the opposite of AP. Accounts receivable involves invoicing customers, monitoring, analyzing, collecting, and reporting all amounts billed.
Asset Management
Asset management refers to tracking a business's tangible or intangible assets, location, usage, value, and performance. Tangible assets include property, furniture, or equipment, while intangible assets include intellectual rights, trademarks, or patents.
Bank Reconciliations
This is the process of comparing a company's financial records to bank statements to ensure every transaction is accounted for and to identify and explain any discrepancies.
Budgeting & Forecasting
Budgeting is part of strategic planning. It involves — as you’d expect, the creation of a realistic budget to guide a business, then using it to compare expenditures being contemplated and made.
Forecasting is more of a high-level activity. It's the process of projecting future business outcomes using experience and data.
Cash Flow Management
This is the process of monitoring, analyzing, and optimizing a company's cash inflows minus outflows to determine the remaining cash available.
Document Management
Document management involves storing, tracking, and retrieving physical or electronic financial documents.
Financial Analysis
Financial analysis examines a business's financial statements and other financial data to evaluate its financial performance and overall health at a given point.
Financial Reporting
This involves compiling monthly, quarterly, or annual data for financial reports to provide key stakeholders with a comprehensive review of business performance for improved decision-making.
Payroll
Payroll is a process for calculating and paying employees and contractors for work completed in a previous time frame. This is usually an automated process based on input.
Tax Planning
Tax planning involves examining business finances, identifying ways to optimize revenue, and minimizing the amount of business tax, sales tax, or even income tax paid to the Internal Revenue Service (IRS).
I will warn you, though, it is usually necessary to consult a Certified Public Accountant (CPA) on accounting principles or standards as needed.
Daily Accounting Tasks
Accounting may seem daunting, but breaking it down into daily, weekly, monthly, and annual tasks can make it more manageable. Let's start with the daily accounting tasks that you should consider:
1. Record Daily Transactions
All financial transactions should be recorded daily, including sales, expenses, and other financial activities. Maintaining accurate records will enable you to track your cash flow and identify discrepancies or issues.
2. Review Bank Balances
It's a good idea to check business bank account balances regularly to stay on top of cash flow. Nothing crazy, just pop in to make sure everything's cool here.
Weekly Accounting Tasks
Specific accounting tasks can be completed weekly. Here are the basic ones:
1. Review Sales and Expenses
Take the time to review your sales and expenses for the week. This will help you identify trends or patterns and assess the business's overall financial performance.
2. Update Cash Flow Projections
Updating cash flow projections is crucial for managing your business's liquidity. By projecting your expected cash inflows and outflows for the upcoming weeks, you can anticipate any potential cash flow issues and take proactive measures to address them.
3. Follow up on Outstanding Invoices
Following up with your customers or clients is important to ensure timely payment if you have outstanding invoices. This will help improve your cash flow and minimize the risk of bad debts.
Your exact business is likely going to have a handful of other tasks that you need to complete but this covers the basics.
Monthly Accounting Tasks
Maintaining consistent monthly accounting tasks helps you quickly meet your financial responsibilities so that financial decisions can be made without delays.
1. Bank Reconciliation
Reconcile your bank statements with your accounting records to identify any discrepancies. This process ensures that you’re recording transactions correctly and that all are accounted for, which helps catch errors or potentially fraudulent activity.
This is often called the month-end close process and, trust me, staying on top of it is going to save you many headaches down the road.
2. Accounts Payable and Receivable
Review and update your accounts payable and accounts receivable records. Pay any outstanding bills and follow up on overdue payments from customers. This assists in maintaining positive relationships with vendors and proper cash flow management.
3. Inventory Management
Does your business have inventory? If so, you should conduct a monthly inventory count or set up an automatic tracking system to ensure accuracy. Adjust your inventory records to reflect the actual quantities on hand to prevent stock outs, overstocking, and financial discrepancies.
4. Expense Tracking
Review and categorize your business expenses, either manually or auto-magically. Confirm that all costs, including receipts and invoices, are appropriately recorded. This lets you track spending patterns, identify cost-saving opportunities, and analyze your profitability.
5. Financial Reporting
Generate monthly financial statements, including an income statement, balance sheet, and cash flow statement. Analyze these reports to understand your business's financial performance and make informed decisions for the future.
Annual Accounting Tasks
Finally, you have annual accounting tasks. These are generally focused on compliance, evaluating your business's performance, and planning for the future.
1. Tax Preparation
Gather all necessary financial documents and prepare your business tax returns ahead of tax time. This includes income statements, expense records, payroll information, and other relevant documents. Filing business taxes accurately and timely during tax season is crucial to avoid penalties and maintain compliance.
2. Financial Audit
Conduct an annual financial audit to systematically review your business's chart of accounts and financial records. This involves thoroughly examining your business transactions and internal controls. An audit helps identify errors, fraud, or areas for improvement in your accounting processes.
3. Budgeting
Set aside time each year to create a budget for your business. Review your financial performance, analyze industry trends, and set realistic goals for the upcoming year. A well-planned budget provides a roadmap for financial success and helps you allocate resources effectively.
4. Business Valuation
Okay, this one is only really valuable if you're wanting to sell the business, shares in it, or pat yourself on the back for a year's worth of hard work. It's when you tally up your revenue, expenses, and attach the proper multiples to it to see how much your work is worth.
With all of that out of the way, it's time for the big question: What can you do to make this less of a massive headache?
The Best Tools to Make Things Easier
As an accountant—or non-accountant, there are supplementary accounting tools that you can leverage to automate tasks, improve efficiency, and provide valuable insights into your financials. Here are some worth looking at:
Accounting Software
Using small business accounting software, like Quickbooks Online, FreshBooks, or Xero, can significantly simplify your accounting processes. These software solutions offer features such as automated data entry, invoicing, expense tracking, and financial reporting. Choose an accounting system that aligns with your business needs and budget.
Receipt Scanning Apps
Receipt scanning apps allow you to digitize your receipts and automatically extract relevant information. This saves time and reduces the risk of losing important receipts. These apps can also integrate with accounting software for seamless expense tracking.
Payroll Software
Using payroll services and software can streamline your payroll processes. These tools automate calculations, handle tax withholdings, and generate pay stubs. They also ensure compliance with labor laws and save time on manual calculations.
Expense Management Tools
Expense management tools help you track and manage business expenses. They allow you to set spending limits, categorize expenses, and generate expense reports. These tools provide better control over your costs and simplify the reimbursement process.
Incorporating these supplementary financial accounting tools into your business can save time, reduce errors, and gain valuable financial insights. You may also want to consider outsourcing some of your accounting functions or bookkeeping services. If you're thinking about it, evaluate external accounting service providers carefully.
My Top Tips for Success
Ah, yes, the part where we talk about covering your... behind.
Over the years, I've made my share of mistakes—and I have a few tips that I think are worth sharing.
1. Stay Organized
Staying organized means keeping all financial documents, such as receipts, invoices, and bank statements, easily accessible for accurate, supportable record-keeping. You will be asked for these at some point.
2. Consistently Track Expenses
Develop a system for consistently tracking and categorizing your business expenses to identify tax deductions, analyze spending patterns, and maintain accurate financial records.
3. Backup your Data
Regularly back up your accounting data to prevent loss of important financial information. Use secure cloud storage or external hard drives to ensure your data is protected and easily recoverable in case of a system failure or data loss.
4. Consult an Accountant
Consider consulting an accountant to discuss accounting methods like cash or accrual basis, clarify complex accounting matters, and get clear on tax obligations.
They can provide expert advice, help with tax planning, and ensure business activities and records comply with financial regulations.
5. Leverage Accounting Software
One of the most important things to consider is implementing accounting software for its processes, accuracy, automation, and reporting. It does almost all the heavy lifting for you so you can spend time on more high-value work.
It's time to be in the know!
Whether you’re a sole proprietor or small business, understanding the basics and key areas and following these tips can help you avoid common accounting mistakes, maintain accurate records, and be in the know.
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