9 tips for successful small business accounting

Key takeaways:

• Create a dedicated business bank account to simplify your small business accounting
• Recording transactions accurately can help you get as many tax deductions as possible and limit your risk of underpaying taxes
• Review financial statements regularly to inform your business decisions

Small business accounting may not be the most thrilling part of running your company, but it’s one of the most important. Knowing how to manage your finances can keep your business afloat, your taxes accurate, and your profitability high for years to come. Understanding the basics can set you up for a more successful future. Take these nine steps to get your small business on the right path.

1. Set up your accounts

The first step to making your small business accounting tasks easier is separating your personal and business transactions. Create a dedicated business bank account to ensure your records don’t get muddled—and pay attention to fees, minimum balance requirements, and other terms.

This step is legally required for most business structures, including LLCs and corporations. Even if you’re not obligated to have a separate bank account, as is the case with sole proprietorships, it’s still a good idea. Business bank accounts not only make recording transactions easier, but they also help you protect your personal assets and avoid costly slip-ups in your tax returns.

2. Record every transaction

Bookkeeping is a key aspect of small business accounting as it provides an accurate record of your financial transactions. To be a great bookkeeper, you need to track both your expenses and your income every week—don’t wait for the receipts to pile up before you get started.

Tracking your expenses not only gives you a clear picture of your cash flow, but it can also help you maximize your deductions when tax time rolls around. Categorize each expense based on deductible categories, so you can save yourself some time during the filing process. When you track your income closely, it helps you pay exactly what you owe and avoid expensive penalties from the IRS for underpayments.

Always maintain your receipts and other financial records for at least three years in case of an IRS audit. Small business accounting software often allows you to store these records digitally so you don’t need to keep a drawer full of papers or a box full of messy receipts.

3. Reconcile your bank statements

While the main function of bookkeeping is recording transactions, it also involves reconciling bank statements, which means double-checking your financial records match up.

Each month when you receive an account statement from the bank, compare transactions from the bank to those in your books. If you find any discrepancies, look into them. In most cases, it’s nothing to get concerned about. For example, a client may have sent a payment, but it hasn’t cleared your bank yet. When reviewing your statement, adjust your books accordingly so all transactions are recorded under the right month.

Adding this step to your small business accounting process will help you quickly catch legitimate bank errors or fraud, while keeping your records well-organized.

4. Stay on top of your accounts payable

Your accounts payable describes the money you owe to suppliers and creditors. This amount is listed as a liability on your balance sheet—a financial document that breaks down your assets versus liabilities—since you usually receive the item before paying an invoice.

As a small business owner, it’s your responsibility to know your liabilities and when they’re due. Set up reminders for yourself to make on-time payments.

5. Budget for other expenses

Beyond your accounts payable, your business will likely have day-to-day expenses. These expenses may include credit card processing fees, inventory restock costs, rent, utilities, payroll, and more. To ensure you never overdraw your bank account, create and follow a budget that accounts for these expected costs, with room for unexpected ones should they occur.

6. Follow up on unpaid invoices

Simply invoicing your clients isn’t always enough. Sometimes they need a nudge to make a payment. Track your accounts receivable—the money owed to you—so you always know who you need to follow up with at the end of the month.

It’s also important to track how long each invoice has been left unpaid. Many businesses will give clients between 90–180 days to pay, sending a reminder every 30 days. Some businesses will charge a late fee for every 30 days that pass with the invoice unpaid. If a bill is left unpaid for more than 180 days, you can hire a debt collection agency to collect the payment for you. These agencies usually take 25%–50% of the total, but they can take all the action necessary to get the debtor to pay, whether that’s proving their ability to pay, reporting to credit agencies, or taking them to court.

Keeping up with—and taking action on—unpaid invoices is essential for growing a small business, as clients can easily take advantage of any accounting negligence.

7. Review your financial statements

Your financial reports can tell you a lot about your company’s growth trajectory—or if your company is struggling to keep up with expenses. If you aren’t already manually creating these reports yourself (or with the help of an accountant), the simplest way to access financial reports is by using accounting software that can automate them, like QuickBooks or Xero.

Every week, take a look at your cash flow statement which shows exactly how much money is coming in and out of your business. Positive cash flow is crucial, as this tells you if you have immediate access to funds (and how much). Over 80% of small businesses fail because of poor cash flow management. As such, a weekly review of your financials should be a permanent part of your small business accounting system.

Each month, review these statements to better understand your business:

• Profit and loss statement: Also known as an income statement, this document shows your expenses and revenue. Compare this to your budget to see if you’ve gone off track.
• Balance sheet: Review this document to see if your accounts receivable are exceeding your accounts payable. If not, you’ll know some adjustments need to be made.

Each quarter, it’s a good idea to make projections about what your future financial statements will look like. Accounting professionals can help you calculate the most accurate projections to give you a clear picture of where your company is headed and what actions you need to take. If you want to DIY your financial projections, make sure you do thorough calculations and market research.

8. Understand your tax obligations

Every small business owner has different tax obligations, and much of this has to do with your legal structure. Some businesses, like C corporations, are taxable entities. Your business must pay taxes on its total income, and you must pay your own income taxes on what you’re paid from that revenue. 

Other businesses—including LLCs, partnerships, S corporations, and sole proprietorships—benefit from something called “pass-through taxation,” which means your business income is passed through to you and filed on your personal tax return.

Calculate how much you can expect to owe ahead of time so you can bookmark that amount in your savings. In addition, set deadline reminders so you know when you need to pay. Most self-employed individuals owe quarterly estimated taxes, and the IRS can penalize you if you wait until April 15 each year to pay—even if you’re a new business owner.

Beyond your federal taxes, you should be aware of any state and sales tax obligations. If you have employees, you also need to consider payroll taxes. Your payroll tax payment schedule may be monthly or semi-weekly.

9. Simplify by outsourcing

Small business accounting can be a lot of work. As your weekly transactions increase or your accounting needs become more complex, it can be hard to get enough time to focus on important business growth strategies.

Most small business owners use accounting software like QuickBooks, Xero, or FreshBooks to automate or streamline some of the processes described above. Many also outsource to a bookkeeping service provider to free themselves of the time-consuming tasks like recording transactions, maintaining records, and reconciling bank statements.

Hiring a certified public accountant (CPA) can also help significantly. For around $100–$200 per month for most small business accounting services, CPAs can fulfill your needs with accuracy and speed while also helping your business with financial planning.

Master your small business accounting

You may not have started your business to crunch numbers, but that doesn’t mean you can go without small business accounting. Every successful business owner needs to be aware of their financial information so they can make strategic decisions. Whether you outsource to an accounting firm or take care of the accounting yourself, don’t ignore what the numbers tell you.

If you’re looking to boost your company’s income after reviewing your financial statements, learn how to price a product to inspire more sales.