The Importance of Accounting in Your Small Business

You found your passion, and now you want to turn that passion into a successful business. Congrats! You are living the American Dream. So where do you start? Having a good understanding of accounting and how it can benefit or sustain your small business is crucial to being financially stable and profitable. This article will give you general knowledge of accounting to utilize in your business and where to get started.

The Importance of Accounting

Accounting in your small business is essential. Simply put, accounting is a way to keep track of a business’ credits/debits, payroll, and to keep your annual tax documents organized. When starting your business, you will want to review and chose a financial process that works best for you and your company. If you are self employed with no employees, you may be able to keep track of your finances easier than if you have multiple employees working for you. In any situation, you may wish to use a bookkeeping software for simple record keeping, or hire a bookkeeper and/or accountant for more complex situations. By consulting a local accountant, you can feel confident that your business will have a strong financial foundation to build on.

Setting a Good Foundation

When creating your business, starting off on the right foot means the difference between financial stability and financial struggle. Here are a few ways to set a good foundation financially for your small business:

• Open a Business Checking Account: In order to keep your individual and business finances separate, it is important to open a business checking account. 
  • Before opening a business checking account, shop around at different banks to see who offers the most benefits. Some banks limit the number of monthly transactions you can process before fees are assessed and some institutions have higher account or balance requirements than others.
  • Having a separate business account will allow you to better track incoming and outgoing transactions, write checks, or add additional signers such as account treasurers to the account without mixing your personal finances. 

• Determine Your Bookkeeping and Expense Reporting Process: The process of bookkeeping and expense reporting is crucial. This will allow you to better track where your money comes from, where it goes, how much wiggle room you have for additional supplies and payroll processing. 
  • Expense tracking will allow you to keep records of your business expenses  which can be used as deductions on your annual taxes. Example of  business expenses that can be deducted include:
    1. Office supplies, software, or hardware materials to perform the job.
    2. Mileage or gasoline receipts if your car is used for business.
    3. Business meeting receipts.
  • Bookkeeping allows you to record, plan, and review everything related to your business. You can review reports on your financial status and view statistics, and commonalities. These reports show trends within your business which will allow you to plan ahead and make purchase/expense decisions wisely.

• Meet With a Local Accountant: When starting a business, setting up a meeting with a local accountant or bookkeeping company can give you better knowledge and guidance of the structure of your business. 
  • If you plan on working as an individual freelancer, an accountant can better guide you on what to expect. Freelancers can often file taxes as an individual rather than filing both personal and business taxes. However, freelance workers or contractors do not have taxes withheld from their pay earnings. Contract workers are also not considered W2 workers but rather 1099. This will impact how your annual taxes are filed. An accountant can prepare you on what to expect and can give you guidance on how much money you may need to pay or set aside in preparation for taxes.
  • If you are a business owner with multiple employees, accountants can also guide you on the structure of your company and how to file taxes. 
    • When initially meeting with an accountant regarding your small business, come prepared with any questions you may have. Some common questions to ask are: What are the tax laws that affect me and my company? 
      1. What qualifying business expenses can I deduct on my taxes?
      2. What tax forms do I need for my business? My employees?
      3. How can I grow my business financially?
      4. What are the tax laws that affect me and my company? 

Accounting Solutions for Your Small Business

After meeting with an accountant, you can better make a decision of how you wish to manage your business’ finances. The most common options include:

1. Hiring a CPA or accountant
2. Hiring a bookkeeper 
3. Using a bookkeeping/expense reporting software 

Whichever method you chose to implement, it is important to know you can and should adapt with your business’ needs. For example, if you start a small business with no employees, you can probably manage the accounting yourself (if time allows). However, as your business grows, you may get more clients and employees to manage and in turn need the assistance of a professional accountant/bookkeeper. 

In order to have a financially successful business, it is key to know the basics of accounting and the accounting services available to you. In order to make a profit, you need to understand the expenses within your business. Bookkeeping and accounting are the key to reach financial success. Meeting with a local accountant can give you the guidance and basic information needed to make an informed decision and ultimately rake in the money.