As a small business owner, you may often find yourself juggling between a lot of important tasks, including accounting. Understandably, the number game is pretty tricky and probably the last thing that you want to worry about. However, keeping an up to date record of accounting is inevitable for a business to prosper and succeed.
Small business accounting is all about managing cash flow efficiently where it particularly narrows down to:
- Keeping record of financial transactions
- Generating comprehensive financial reports
- Filing of tax return
If your business accounting is out of order, so will be the rest of the operations. Hence, to prevent this from happening, here is how you can manage the task to help your small business dodge financial crisis:
Keep a Separate Bank Account
Whether a business is big or small, you should definitely consider getting a dedicated account for it. This will help in separating your personal finances from the business cash flow and keeping the account streamlined. Furthermore, a separate account will also ensure efficient organizing of revenue generated while clearing out the payables.
Generally, it is preferable to create a savings account to manage business accounting smoothly. Besides, by keeping business accounts separate from personal income, the business owner can protect their personal assets from unfortunate cases of lawsuits, bankruptcy or audits.
Track Record of Cash Flows
In order to build a solid foundation of small business, accurate and effective cash flow tracking is essential. This crucial step basically allows the business owner to monitor the business growth, cut down on unnecessary expenses, prepare for tax returns, and overview financial statements.
To efficiently track record of business cash flows, only direct income and expenses such as purchase orders, invoices, business documents, cancelled cheques etc.
ought to be systematically managed.
Choose a Suitable Bookkeeping Method
Before establishing a specific system of bookkeeping, it is vital to select a particular accounting method for your business. The two significant methods of bookkeeping are accrual basis of accounting and cash.
The accrual method of business accounting is supported by double entry, which means that every transaction will be recorded as two entries. Furthermore, all expenses and income will be noted as incurred, regardless of cash exchange. On the contrary, in cash basis bookkeeping, entries will only be recorded when cash is received or paid.
Create Journal Entries
Whenever a business transaction is made, it becomes compulsory to record it in the books as journal entries. Moreover, all transactions pertaining to the business will be recorded in the general journal via a double entry bookkeeping technique. This means that each journal entry will be entered in two accounts that will be affected at the same time. However, one side of the account will be credited while the other will be debited.
While creating journal entries, make sure to include the following columns:
- Number of reference
- Journal entry date
- Description of journal entry
Record Financial Statement
Once you figure out a bookkeeping method and generate journal entries, it is time to see the bigger picture in terms of a financial statement. This is one of the most important documents featuring a detailed description of cash flows, retained earnings, balance sheet and income statement.
Determine Obligations Related to Tax Payment
In case your business model thrives on importing goods from other countries, know that you will be liable to pay to duties and taxes. Thus, it is necessary to investigate all the associated taxes and rules regarding imported goods before finalizing your business model.
Select Payment Method
The two main methods of payment while running a small business are either offline or online. Offline payments refers to payment through cash or cheque. Whereas online payments are done via credit cards, online bank transfer, payment gateway service, E-Wallets etc. Whatever the method, the amount needs to be mentioned in the journal.
Improve Business Credit
Small ventures can reap benefits by building business credit since this allows them to gain multiple funding opportunities whenever required.
For building business credit, you can do the following:
- Maintain & establish good terms with vendors
- Get yourself a business credit card
- Maintain a satisfactory personal credit score to gain business credit.
Reconcile and Close
The last step of the accounting cycle obviously involves reconcile and closing entries at the end of every month. If managing accounting on your own seems impossible, and hiring an expert to do it isn’t affordable right now, opt for an efficient bookkeeping software. Fortunately, there are multiple software available in the market that can help in making the entire accounting process much easier.
Nevertheless, efficient account keeping can enable a small business to adapt necessary changes in managing operations. Once you have settled down your account keeping, step back and divert your focus back to where it should be: streamlining the overall business system and creating brilliant strategies for growth.