How to do Accounting for Small Businesses: Basics and Tips

Introduction

Starting a small business is an exciting adventure to take on.However, most small businesses very often turn their focus to the burden of many day-to-day administrative tasks, one of which is accounting. While the intricacies of accounting might seem cumbersome and challenging, sound accounting practices are important for your business to grow and succeed.

In this blog, we will take that further and delve into the minute details of small business accounting, dispel tricky accounting terms, offer some tips, and outline how the right tools can really simplify the financial processes, especially if you are a small business owner.

What is Small Business Accounting? 

Small business accounting refers to the systematic process of recording, summarizing, and evaluating financial transactions. Unlike firms with dedicated finance departments, small businesses rely on simplified accounting systems tailored to their size and requirements.

Small business accounting is key to accelerating a company’s financial strength. It provides the data and insights required to make informed decisions and plan strategically for long-term success. Implementing robust accounting systems will assist small business owners in managing their money, avoiding risks, and capitalizing on growth and development opportunities.

Why should small businesses start accounting?

Effective small business accounting provides essential insights into the company’s financial health, allowing for more informed decisions and guaranteeing regulatory compliance. Small business accounting involves a variety of activities, including:

• Transaction recording

  Small business owners must keep accurate and timely records of all financial transactions. This includes all sales, purchases, expenses, payments, and receipts details. Maintaining detailed records promotes transparency and accountability in financial transactions.

• Financial reporting

  The preparation of financial reports is one of the most vital functions of small business accounting. Reports like the Balance Sheet, Income Statement, and Cash Flow Statement present a fair view of the financial position, performance, and liquidity of a company. The owners, investors, creditors, and regulators view these statements while evaluating the financial health of the organization and making informed decisions.

• Budgeting and forecasting

  Many small businesses operate on limited resources and require careful financial management.. Budgeting involves setting financial goals and allocating resources to achieve them.. Monitoring expenses is important to maintain financial stability and sustainability. Forecasting enables the anticipation of future financial trends, detection of potential risks, and ways to handle contingencies.

• Tax compliance

  Small business owners must follow the many tax laws and regulations imposed by federal and state governments. This includes filing tax returns, remitting taxes, and meeting reporting requirements. Understanding tax obligations and maximizing allowable deductions are critical for reducing taxes and avoiding penalties.

• Financial analysis

  The analysis of financial data involves examining trends, evaluating performance, and making important decisions taken for sound policy management. This may involve the use of financial ratios, KPIs, and trend analysis in identifying and measuring profitability, liquidity, efficiency, and solvency. Such an analysis will guide business planning, investment, and resource allocation.

How to do Accounting for a Small Business?

Effective small business accounting is based on creating sound accounting procedures that are aligned with your business. It includes keeping detailed records of financial transactions, setting up an organized system of bookkeeping, reconciling accounts regularly to ensure accuracy, and identifying any accounting problems. Most of these processes can be streamlined with accounting software that automates routine tasks and gives a real-time view into your organization’s financial health. Below is an outline of how small firms may start their accounting journeys:

1. Set clear financial goals

   Define your business objectives and financial goals to guide your accounting efforts properly.

2. Pick appropriate accounting methods

   Depending on your business type and operational needs, decide on either cash-basis or accrual accounting methods.

3. Maintain financial records

   Accurately record income, expenses, invoices, receipts, and other financial transactions by using accounting software or manual systems.

4. Reconcile accounts regularly

   Accounts should be reconciled on a regular basis to maintain accuracy and identify inconsistencies in a timely manner.

5. Monitor cash flow

   Track cash inflow and outflow regularly to manage liquidity, estimate financial needs, and take appropriate action to close cash flow gaps.

6. Prepare financial statements

   Prepare balance sheets, income statements, and cash flow statements to evaluate your business’s financial health and performance. 

7. Be compliant with regulations

   Be aware of tax regulations, reporting requirements, and compliance standards relevant to your to avoid penalties and other legal ramifications.

Tips to Set Up Accounting for Small Businesses

Setting up accounting for a small business might seem challenging, but with the right approach, it can be quite an easy and rewarding task. Start by establishing clear accounting policies and procedures; including instructions on monitoring expenses, invoicing, and preparing financial reports. Let’s go through some of these tips in detail below:

1. Define accounting policies

   Establish clear accounting standards and procedures for expense tracking, billing, payroll, and financial reporting to ensure consistency and accuracy.

2. Invest in accounting software

   Automate routine tasks and simplify financial procedures by deploying software that suits your company’s demands, budget, and scalability requirements.

3. Seek professional advice

   Consult with accountants, financial advisors, or business mentors who can discuss best practices, tax strategies, and money management techniques.

4. Invest in employee training

   Ensure employees who handle financial transactions understand fundamental accounting principles, software use, and compliance standards.

5. Conduct regular audits

   Conduct frequent evaluations and audits of your accounting processes, records, and financial statements to identify inefficiencies, errors, and areas for improvement.

6. Implement internal controls

   Implement internal controls such as segregation of duties, approval workflows, and access limitations to help prevent fraud, error, and so on.

Basic Bookkeeping for Small Businesses

Bookkeeping, the systematic process of recording financial transactions, is just one part of small business accounting. Whether you are tracking sales, managing expenditures, or reconciling your bank statement, accurate record-keeping will help you manage cash flow and review your company’s financial health. The fundamental features of proper bookkeeping include a double-entry system, proper classification of transactions, and accurate record-keeping, as detailed below:

1. Record transactions

   All financial transactions, including sales, purchases, expenses, and payments, should be recorded methodically using a double-entry accounting system.

2. Categorize transactions

   To accurately track income and expenditure, classify transactions into relevant accounts (for example, revenue, costs, assets, and liabilities).

3. Maintain ledger accounts

   Set up and maintain ledger accounts for each financial category to track balances, and generate reports.

4. Track bills and payments

   To maintain good and timely financial inflows, ensure prompt billing, track accounts receivable, and follow-up on outstanding payments.

5. Reconcile bank statements

   Regularly check bank statements against the accounting record to detect variances, balances, and errors.

Small Business Financial Documents

Small businesses rely on a number of different financial documents to keep track of performance, assess profitability, and keep up with regulatory requirements. Balance sheets, income statements, and cash flow statements each provide different business insights into the health of your business. Regularly examining and evaluating these documents can assist in identifying patterns, pinpointing areas for improvement, and making sound strategic decisions. Let us further examine these documents:

• Balance sheet

  Summarize your company’s financial condition, to know where the business stands in terms of assets, liabilities, and equity at any specific time.

• Income statement

  Report your company’s sales, expenses, and net income or loss for a specified time period providing insights into profitability for that period.

• Cash flow statement

  Details receipts and disbursements of cash from operating, investing, and financing operations, revealing the liquidity of your company and cash management.

• Budgets and forecasts

  Develop budgets and financial forecasts to aid in resource planning and management, prepare for future financial demands, and monitor progress in achieving the set goals.

Tax and Deductions in Small Business 

Navigating through taxes is a constant challenge for small business owners. Critical aspects of small business accounting include tax obligations, maximizing deductions, and maintaining compliance with tax laws. Proactive tax planning can help reduce your tax burdens and set your business up for financial success. Here are a few tips to help you along the way:

• Understand your tax obligations

  Know the federal, state, and local tax laws governing business activities, including income tax, sales tax, and payroll tax.

• Maximize deductions

  Deductible business expenses can reduce taxable income. Proactive tax plan helps in maximizing deductions and optimizing tax savings.

• Maintain accurate records

  Keep thorough records of your income, expenses, receipts, and deductions to support tax filings, audits, and compliance with tax regulations.

• Pay taxes on time

  File tax forms and pay taxes on time to avoid penalties, interest charges, and legal implications. Use electronic filing and payment alternatives for convenience.

Selecting the Best Accounting Software for Small Businesses

Choosing the best accounting software for your small business is vital to its success and efficiency. However, the number of alternatives available on the market often makes it difficult to identify one that works best for you. Understanding the specific features and functionalities to look for can simplify the process and guide businesses in choosing software that best meets their needs. Here are some factors that small businesses should consider while choosing accounting software:

• User-friendly interface

  Choose accounting software that offers an intuitive and user-friendly interface. Small business owners or the employees might not have extensive accounting knowledge, so ease of access and understanding of the software are important for effective adoption and use. 

• Scalability

  Scalability is an important feature to look for in accounting software. As your business grows, you will need software that can handle increased transaction loads and complexity without requiring a major revamp or migration to a new platform.

• Cloud-based accessibility

  Find an accounting software that is accessible from anywhere with an internet connection. Cloud-based solutions enable small business owners to manage their finances on the go, connect with team members remotely, and access real-time financial data.

• Security features

  Security is the most important factor to consider when selecting accounting software. Your financial data is sensitive and must be protected from unauthorized access and cyber threats. Choose software with robust encryption, multi-factor authentication and regular data backups, that also complies with industry security standards.

• Robust reporting

  Ensure that the accounting software provides robust reporting capabilities. Small business owners need financial reports to make informed decisions, track performance, and monitor cash flow. Find software that lets you generate custom reports, including balance sheets, cash flow statements, profit and loss statements, along with customizable dashboards.

• Integration capabilities

  Opt for accounting software that integrates with other important tools, such as payment processors, CRM systems, inventory management software, and e-commerce platforms. Integration aligns the processes, reduces manual entry of data, and enhances the overall efficiency of financial reporting, allowing business owners to oversee their company’s financial health.

• Affordability

  Consider the cost of the accounting software and how well it fits into your budget. While you want to maintain affordability, prioritize value over price. Consider a full feature set and scalability at a reasonable price, including subscription fees, add-on expenses, and potential savings from enhanced efficiency.

How HighRadius Can Help?

HighRadius’ scalable cloud-based Record to Report (R2R) solution ensures a smooth and efficient implementation experience for our clients with remote deployment, pre-packaged modules and industry-specific best practices, minimizing reliance on internal IT resources. Leveraging the latest technology to enable organizations to fundamentally transform their accounting processes, our comprehensive R2R solutions offer end-to-end capabilities to streamline and automate various accounting processes and workflows. By seamlessly integrating Financial Close Management, Account Reconciliation, and Anomaly Management organizations, can achieve a remarkable 30% reduction in days to close. 

At the core of HighRadius’s R2R solution lies an AI-powered platform catering to diverse accounting roles. An outstanding feature is its ability to automate nearly 50% of manual repetitive tasks, achieved through a No-Code platform, LiveCube. This innovative tool replaces Excel, automating data fetching, modeling, analysis, and journal entry proposals.

Leveraging real-time anomaly management organizations can take a giant leap from reactive to proactive anomaly management by leveraging AI to identify and present anomalies as worklists for a faster closing. With the ability to detect 12 common types of errors and omissions in real- time, organizations can ensure the accuracy and integrity of their financial data.

HighRadius Solution empowers organizations to experience enhanced efficiency by leveraging the best of the latest accounting technology. The R2R solution not only provides organizations with a powerful, AI-driven platform that enhances efficiency and accuracy but also fundamentally changes the way organizations approach and execute their accounting processes.

FAQs

1) What is the best accounting software for small businesses?

While choosing an accounting software, small businesses should choose one that best meets their needs, enhances efficiency and supports their growth objectives. HighRadius’ solution empowers organizations to experience enhanced efficiency by leveraging the best of the latest accounting technology. 

2) What do accountants do for small businesses?

Small-firm accountants play major roles in financial functions, including bookkeeping, tax preparation, payroll, financial analysis, and strategic planning. They enable compliance with tax rules and regulations, increase financial efficiency, and provide insights for corporate growth.

3) How much does an accountant cost for a small business?

For any small business, the cost of hiring an accountant will depend on the location, the experience that comes along with it, and exactly what services you require. Again, the prices that an accountant will charge range from $100 to $300 or even more on an hourly basis. 

4) How to find an accountant for a small business?

Selecting the best accountant for your small business requires thorough research and consideration. Seeking referrals from other business owners, industry associations, or professional networks is always helpful, along with assessing the qualifications and skills of potential candidates.

5) How to open a small business bank account?

Opening a small business bank account is essentially simple and usually involves the following steps: 

1. Bank selection: Compare different bank deals to find one that is best for your business.
2. Gather your necessary documents: Prepare documents to be required to be presented, such as your business formation documents, Employer Identification Number (EIN), and personal identification.
3. Visit the bank: Make an appointment or go by the bank branch to open your account.
4. Fill out the application forms: Fill out the necessary forms provided by the bank, providing correct information about your business.
5. Deposit money: First deposit money to create funds in your account.
6. Review account details: Carefully review the terms and conditions of the account, including fees and features.
7. Activate your account: Once approved, you’ll receive account details and can start using your new small business bank account for financial transactions.