Accounting for Small Businesses: What You Need to Know

Running a small business can be a big job, but your accounting doesn’t have to be a hassle.

Here’s an itemized overview to get you started.

You’ll want to know how much income your business is generating so you can track your profits and manage your money effectively.

You’ll also want to track income to report your earnings correctly for taxes and avoid penalties. Keeping detailed records will help in claiming your deductions and credits — we all want to reduce our tax liability!

What about measuring the financial performance of your business? Income tracking provides clarity about which of your products or services are most profitable, and also reveals trends in earnings over time. You’ll need this information later for planning and making adjustments to improve your profitability.

Income tracking can also help you manage your cash flow. It ensures that there’s enough cash on hand for business expenses, debts, and personal purchases. The goal is to maintain the availability of liquid assets and ensure the stability of your business.

What if you’re trying to attract investors or get a business loan? When you track your income through detailed and accurate records, your business is more attractive to potential investors and lenders. These records are crucial in showing your ability to generate revenue and manage your finances.

While there are many effective methods for tracking income in a small business, there are two you should be most aware of:

Tracking income by product or service helps you identify the most profitable aspects of the business and focus on expanding them.

For example, you may be a building contractor who also offers landscaping and interior design services. Find out which service is more profitable and put more effort into expanding that area.

Some ways to do this:

Use software like Quicken to generate reports on income by product/service category.

Create spreadsheets with columns for product/service, revenue, and profit margin. Then assign each product/service a unique code for easy tracking.

Tracking income by customer or job provides a view into your most valuable client relationships or your most profitable kinds of jobs.

Going back to our earlier example, if you were a building contractor, you could find out which customers or jobs generate the most income and understand where to target your efforts.

Use software like Quicken to categorize your income by customer or job.

Use spreadsheets with columns for customers, product/service, revenue, and profit. Then assign each customer a unique code for easy tracking.

It’s important for business owners to track expenses for several reasons. First, it makes financial management and planning easier. It shows where money is being spent, allowing for better budgeting and cost control.

Second, it aids you in tax compliance. Detailed receipts are necessary for claiming deductions and credits when filing taxes, minimizing tax liability.

Third is fraud detection. If you regularly review your expenses, it’s easier to spot signs of fraudulent activity, like duplicate or fake expenses from an unauthorized party.

The fourth and most important benefit of tracking expenses: it helps you save on costs, explore new growth opportunities, and earmark money for future opportunities because you’re armed with information about your business spending.

If you don’t know what’s coming into your business, planning for the future becomes a tough job.

Open a dedicated business bank account and credit card to separate business and personal finances.

Make digital copies of receipts to eliminate paper clutter. Regularly review expenses and put them into categories to get a better view of your outflows.

Use Quicken to automate expense tracking and categorization.

Integrate Quicken into your business bank accounts to automatically import transactions.

By consistently categorizing your expenses, you can gain valuable insights into your company’s spending and profitability. It also makes it much easier to generate the financial statements you’ll need to do your taxes.

Operating expenses — The costs created by a business in its day-to-day operations, like rent, insurance, and funds allocated for research and development.

Cost of goods sold (COGS) — The costs associated with manufacturing the goods sold by your business, like the cost of materials and labor directly related to the production process.

Marketing and advertising expenses — Ad costs, sponsorships, and anything else you do to help market your business.

Payroll expenses — Costs related to employees or contractors. Many small businesses use a payroll service due to the complexity of payroll taxes.

When you’re consistent about tracking profitability, you can understand your business better and make better decisions. It’s really that simple.

Is your new line of book-themed candles profitable? Great! Make more. Are your porch swings too labor-intensive to be worth it? Try simplifying the design.

Tracking and understanding profitability helps you make these kinds of decisions and more.

Gross profit is the revenue you have left after paying for the cost of the services or products you sell.

Net profit, by contrast, is what’s left after paying all your expenses and taxes.

Both are important for understanding your business’s profitability and helping you make informed decisions.

Cash flow management is just what it sounds like — paying attention to cash payments as they flow in and out of your accounts.

Many small businesses feel the limitations of cash flow. Maybe they need to buy supplies for a job long before they’ll get paid for that job. Or maybe they need to wait on a customer’s 60-day payment cycle before they can pay their own bills.

Looking ahead at your upcoming cash flows helps you plan ahead so these kinds of situations don’t take you by surprise.

Forecasting cash flow can also help you plan the best way to expand your business, knowing how much cash you’ll have available and when.

Here are 10 simple strategies for improving cash flow in your business:

Offer discounts for early invoice payment or impose late fees for overdue invoices. This encourages customers to pay you sooner.

Make it easy for customers to pay by accepting credit cards, ACH, and online payments.

Provide discounts for customers who prepay for products or services.

Create subscription or membership programs where customers pay upfront.

Offer special promotions or limited-time offers to encourage prepayment.

Avoid tying up too much cash in inventory that sells slowly.

Sell off discontinued or excess inventory at a discount.

Ask for extended payment terms from suppliers.

Review your expenses and cut any costs that aren’t necessary.

Implement cost-saving measures like energy-efficient upgrades to your properties.

Let’s keep it simple — there are three main statements your business needs, and the first two are required for taxes. They are:

An income statement focuses on the revenue, expenses, gains, and losses of your business during a particular time period, such as a day, week, month, quarter, or year.

A balance sheet shows you what your company is worth based on the value of your company’s assets and debts at a given moment in time.

A cash flow statement shows you how cash has been flowing into and out of your business.

Most small businesses use accounting software to generate all 3 of these financial statements automatically.

Tax planning can help lower your taxes while making sure you’re still complying with local and federal tax laws. A tax professional can help you find those savings.

Be proactive and tackle tax planning throughout the year instead of waiting until the end and scrambling around like a chicken in a barnyard. (Been there, done that. Trust me, it’s not great.)

Besides, most of your tax savings will come from things you have to do all year long, like tackling your expenses and saving receipts.

As your small business grows, hiring an accountant or bookkeeper becomes more important to make sure you’re keeping good financial records, complying with tax regulations, and making informed decisions.

Look for a professional who understands your business, and communicate with them regularly about your goals and concerns.

Working closely with someone you trust can help you focus on the things that make your business profitable — and maybe even fun.

You made it!

Accounting work can feel like a hassle, but it doesn’t have to consume you as a business owner.

Automate those boring accounting tasks with a faster, easier way to manage your finances.