Key Takeaways:
- Small business accounting is the process of gathering and evaluating business financial data, preparing reports, and preparing for taxes
- Key concepts include assets versus liabilities, accounts payable and receivable, balance sheets and income statements, and tax preparation processes
- Top three small business accounting challenges:
- Tracking expenses
- Managing inventory
- Keeping up with receipts
- Ways to free yourself of these challenges:
- Hire a tax accountant
- Stay on top of taxes all year
- Plan for unexpected expenses
- Prioritize cash flow management
- Understand payroll requirements
- Use relevant software
- Avoid doing everything yourself
No small business is free from the worries and stresses of financial management. You have to keep records clean and organized, make sure taxes are paid and filed on time, and continually analyze and forecast business performance.
Cash flow problems are hard to avoid when there aren’t processes in place to effectively track expenses, manage inventory, or keep up with receipts. These oversights build up and create financial headaches for the business.
A better approach requires implementing best practices and enlisting the help of a tax professional. This guide will cover everything from the basics to common challenges to solutions for dealing with them.
What Is Small Business Accounting?
Many moving parts comprise the financial structure of a business. Small business accounting is concerned with gathering and evaluating information, like performance data, income, profit, and expenses, and creating financial reports and statements. These tasks are crucial for keeping tabs on cash flow and the health of the business, but they’re also required to accurately report and pay taxes quarterly or annually.
The two main types of accounting that small businesses use are accrual basis and cash basis. Accrual basis involves a method where the business recognizes its income and expenses when the transaction happens, not when it receives the payment. Cash basis occurs when the business records a transaction when money is received or an expense payment is made instead of at the point of sale.
The size of a business, its structure, and its financial goals may determine whether or not the business owner takes on financial tasks, uses a software, or hires an accountant. For instance, a sole proprietorship may be able to handle these tasks since they might be simpler, while a business with several employees or more complex cash flow transactions may hire a tax professional to perform these duties.
Concepts in Small Business Accounting
Accounting should be a top priority for small businesses. Analyzing cash flow and business performance as well as preparing for taxes ensure the business is sustainable and compliant. Let’s walk through the key areas of small business accounting to further understand what small businesses need to manage:
Accounts Payable
Any money the business owes to creditors or vendors.
Accounts Receivable
Money owed to the business by customers or clients for services or products already delivered.
Assets
Valuable property owned by the business, including cash, vehicles, real estate, equipment, machinery, inventory, and accounts receivable.
Balance Sheet
A summary of the business’s assets, liabilities, and shareholders’ equity for a given period. It provides valuable information about how the business currently stands from a financial perspective.
Cash Flow
The flow of money in and out of a business. Maintaining positive cash flow means the business has more revenue than expenses.
Income Statement
A summary of profits and losses, which includes revenue, expenses, and net profit for a given period. This report helps businesses assess profitability and cash flow.
Liabilities
Obligations or debts the business incurs, such as loans, taxes, employee wages, and accounts payable.
Tax Preparation
A component of accounting that is concerned with analyzing and preparing taxes to stay compliant with laws, filing returns, and paying income tax.
Staying on top of all these accounting areas can be time consuming, confusing, and even stressful. Putting better practices in place for compliance and organization can help. Another solution is to work with a tax professional who can do it all for you.
Top 3 Small Business Accounting Challenges
Small businesses have many accounting challenges, especially when it’s a new business or it’s growing rapidly. Small business owners often face more issues than larger companies because they don’t have the knowledge or manpower to give accounting the attention it needs.
Problems with cash flow can arise quickly when there aren’t proper processes in place for reporting, analysis, or tax preparation. Three challenges in particular are common for small business owners:
1. Tracking Expenses
Many business owners may think that the only solution to a cash flow issue is to bring in more revenue, so that’s the only place they put their attention. They fail to realize that tracking expenses can be a more viable solution in some cases. Carefully tracking expenses means you can see exactly where money is going and how much. This knowledge then shows you where you can cut back to get your cash flow back into positive territory.
2. Managing Inventory
Inventory management is another area that’s often overlooked by business owners. It’s important to know what’s in stock at a given time, what needs to be ordered, and what needs to be sold. Inventory can be the biggest asset you have on the balance sheet, but if you don’t have enough product to fulfill customer demand, it could hurt the business. Inventory management also helps you better manage the supply chain and stay on top of issues that may arise in the process.
3. Keeping up with Receipts
You may think that staying on top of receipts is a thing of the past when bank accounts can be accessed digitally and you can review everything later. However, tracking receipts now helps you keep track of all your income and expenses so you can better manage your cash flow. It also ensures you can track and separate your taxable and nontaxable income and track your expense deductions for your tax return.
Keeping up-to-date, accurate records will get you started with a more successful financial approach. Staying organized, however, won’t solve all of these common challenges. Sometimes you need to work with an expert who can help you make it all make sense.
How to Free Yourself of Small Business Accounting Challenges
Fortunately, there are several things you can do to overcome these challenges and improve your processes. It all starts with prioritizing your accounting and opening up visibility into financial performance. Here are steps to take to free yourself of these problems:
1. Hire a Tax Accountant
One of the best steps you can take is to hire a tax accountant to support your business. They help you track your expenses, manage your inventory, and keep up with your receipts with more efficient processes and best practices. They bring a lot of expertise to the table about tax obligations and tax breaks, and they’ll help you create reports and summaries for better business analysis.
2. Stay on Top of Taxes All Year
Tax preparation isn’t just reserved for April, when it’s time to prepare your tax return. Taxes should be on your mind throughout the year. Staying ahead of taxes helps you reduce your liabilities, optimize your credits and deductions, and lower the amount of tax you owe. Preparing early and staying organized also helps ensure you don’t make any tax mistakes.
3. Plan for Unexpected Expenses
A common mistake business owners make is not planning for unexpected expenses. They may have everything planned out perfectly for the future, but they’re not thinking about what would happen when they’re hit with a major maintenance bill after an emergency or a lawsuit from an employee. Put a plan in place for what you would do if you’re facing a huge unexpected expense, even if it’s just taking out a new line of credit.
4. Prioritize Cash Flow Management
The first step to better cash flow is monitoring it. You’ll never know how you’re doing without detailed, regular reports. You also need to take steps that will optimize your cash flow, like lowering your expenses wherever possible, staying on top of late payments from customers, tightening payment terms, and invoicing clients as soon as services are provided.
5. Understand Payroll Requirements
Small business payroll is pretty complicated for employers. Wages and hours worked play into how much tax is withheld from employees’ paychecks, so detailed, accurate calculations are required. You need a process in place for easily paying employees on time, like a direct deposit system, and collecting the applicable paperwork from employees, including a W-4 and Form I-9.
6. Use Accounting Software
Accounting software helps businesses streamline these tasks with automated transaction tracking, simple report generation, and more efficient tax preparation and compliance. Today’s software tools are based in the cloud, so you can access your financial information from any location or device.
7. Avoid Doing Everything Yourself
One of the most common problems for small business owners is taking on too much work. They spread themselves thin trying to manage every aspect of operations, staffing, marketing, customer service, and financial management. Doing all of the financial work yourself means you don’t have time for other important business concerns, like getting and retaining clients. Avoid this situation by setting up more efficient processes and getting outside help.
One point to remember is that this process never stops. It’s not enough to generate a report or analyze your cash flow once and then think that everything will stay the same moving forward. Accounting is an ongoing concern and needs consistent, long-term attention.
Other Common Accounting Challenges for Business Owners
Now you know three of the biggest accounting challenges and effective ways to deal with them. Let’s finish up by briefly covering some other financial management issues you might face as a small business owner:
- Financial data management: Using an Excel spreadsheet isn’t usually enough to manage all the moving parts of your business’s finances. You need better solutions for data management, like accounting software, an invoicing system, or automation tools.
- Separating personal and business finances: Small business owners may have their operation closely tied to their personal finances. Separating the two is crucial for more accurate reporting and tax preparation.
- Budgeting: You won’t be able to create accurate, realistic budgets without all the analysis and reporting required for a better accounting system.
- Tax return mistakes: A lot goes into a tax return, including business information, year-to-year changes, business structure, income, expenses, and tax breaks. It’s easy to miss an income stream or a tax credit you qualify for without the help of an expert. Mistakes can end up costing your business.
- Lack of accounting knowledge: It’s no surprise that many business owners are not accounting experts. They may not understand tax or payroll laws or the steps they should be taking to stay on top of reporting and analysis requirements.
It’s impossible to completely avoid financial management and accounting challenges, but with the right help, you’ll be on your way to more efficient processes and a growing business. Giving this area the attention it needs is your first step in creating a better future.
Contact Silver Tax Group for Your Accounting Needs
Trying to handle accounting yourself as a small business owner can create unnecessary stress and can even impact your taxes. You have enough to worry about when trying to run the business. Financial processes and tasks need to be handled with care so that no requirements are missed, business performance is accurately reflected, and everything is tracked consistently.
The team at Silver Tax Group is ready to help you with all of your financial needs and tax questions. We provide consulting, audit defense, tax debt resolution, and emergency tax services so you’re never left facing a problem or concern on your own.
You can reach out to Silver Tax Group to speak to a tax expert about small business accounting.
