21 Small Business Accounting Tips For Businesses & Startups

Small business owners often face the challenge of managing their finances while trying to grow their business. The benefits of hiring a bookkeeper can help alleviate some of the stress related to small business accounting. In this article, you'll learn how to manage your small business accounting and discover tips for hiring a bookkeeper to help your business thrive. 

Haven offers small business accounting services to help you organize and maintain your finances. 

21 Small Business Accounting Tips For Business Owners & Startups

1. Separate Business and Personal Expenses: Simplify Tax Time and Protect Personal Assets  

Opening a business bank account is one of the first small business accounting tips to implement. Business bank accounts make tracking and substantiating business expenses easier for tax deductions. 

They also protect personal liability by keeping business funds separate from personal funds. Consider opening a:

• Checking
• Savings
• Credit card
• Merchant services account for your business.  

2. Get Bookkeeping Software (and a Bookkeeper): Automate and Outsource for Accuracy  

Bookkeeping is the organized process of tracking all income and expenses. It’s a critical component of financial management that ensures business owners have the information they need to make sound business decisions. For many small business owners, accounting is not among their skill set. Hiring a person dedicated to the task or, for smaller businesses, outsourcing the function is often a wise investment. 

Accounting software automates bookkeeping processes that are time-consuming and error-prone if completed manually, making it easier to find all the information needed to complete financial statements. Small businesses are seeing a lot of success with cloud-based accounting software, in particular.  

3. Develop a Budget: Control Your Cash Flow  

One of the first steps in creating a business plan is developing revenue projections and a list of anticipated expenditures, then comparing that budget to actual expenses and revenue. 

A study by The Federal Reserve Banks of Chicago and San Francisco reported that more than 60% of businesses with excellent financial health always built a budget and started a separate bank account for payroll. Less than 5% of companies with poor financial health engaged in these two financial planning and management practices.  

4. Keep Accurate Business Records: Make Tax Time Less Painful  

Recordkeeping is one of the most critical responsibilities for a small business owner. Accounting software can automate much of the recordkeeping process and digitally store financial records. That makes it easy to document a transaction's amount, time, place, and business purpose when you claim expenses as tax deductions. 

In general, IRS requirements mandate keeping the records for at least three years; accountants recommend keeping them for seven years. Records a business needs to maintain are detailed in IRS Publication 583. But a few worth calling out for small businesses and startups include:  

• Gross receipts: The income you receive from your business. Records include cash register tapes, deposit information, receipt books, invoices, and Forms 1099-MISC.  
• Expenses: The costs you incur to operate your business. Records include canceled checks or other documents reflecting proof of payment, cash register tape receipts, account statements, credit card receipts and statements, and invoices.  
• Fixed assets: Need to be recorded to compute the annual depreciation and their gain or loss when you sell them. Asset documents include purchase and sales invoices, real estate closing statements, canceled checks or other documents that identify payee, amount, and proof of payment, credit card receipts, statements, and invoices.  
  

Receipt scanners make it simple to digitize receipts and invoices for easy tracking by automatically mapping the contents to defined fields in the accounting software. Accounting software may offer its own mobile app or support a third-party app enabling an employee or business owner to scan receipts with their smartphone camera. These apps use optical character recognition (OCR) technology to translate text into machine-readable code.  

5. Choose an Accounting Method: Consistency Is Key  

Every small business and startup must establish rules for determining when to report income and expenses. This provides a consistent accounting method for tax purposes. 

Under changes made by the Tax Cuts and Jobs Act, small businesses with $25 million or less in annual gross receipts for the three prior tax years can choose between accrual and cash-basis accounting. Many companies prefer this method because Generally Accepted Accounting Principles (GAAP) require accrual accounting.   

Cash vs. Accrual Accounting: Choosing the Right Method for Your Business

Cash-basis accounting can be more straightforward for small businesses because revenue is recorded when payment is received, and expenses are deducted when the money leaves the company’s account.

Accrual accounting records the sales when a product ships or a service is delivered. In a retail setting, a sale is recognized at the time of purchase, and in other industries, revenue may not be recorded for several weeks or even months after the sale. It requires double-entry bookkeeping. Since accrual accounting takes a long-term view of the business, it generally provides a better picture of a company’s financial health.  

6. Keep the Books Up to Date: Know Where You Stand  

Without keeping the books current, owners and employees don’t have a clear picture of the company’s financial state. Automating receipt and invoice capture is one way to ensure the books are always up to date. Another critical step is to link bank accounts with your accounting software. Businesses can download credit card and bank statements and manually import them as CSV (Excel). 

Some accounting systems offer a plug-in to pull information from your bank account and automatically retrieve daily bank transactions and statement files. The business can define the matching rules in its system to reconcile the statements, which makes the reconciliation process much easier. Some accounting software offers a direct integration to banks, so the business owner can manage and complete all banking tasks in the accounting system without also logging into their bank account portal.  

7. Optimize AP Terms and Invoicing: Manage Your Cash Flow  

To hold on to cash longer, take advantage of credit terms from key suppliers. Pay bills on a schedule that maximizes your cash flow, and when possible, pay early with vendors that offer a discount for doing so. To ensure steady cash flow, do everything possible to encourage on-time payment from customers. 

That could include offering discounts for early payment, running credit checks on potential customers before doing business with them, and revoking credit terms when necessary. Accounting software that can automate invoicing processes by automatically sending out bills and follow-up reminders could also help prevent outstanding invoices from piling up.  

8. Separate Accounting Functions: Minimize Fraud Risk  

Public companies must follow regulations that require controls to ensure segregation of duties. Small businesses are more likely to have a single person handling many accounting functions, but this creates an environment that introduces accounting fraud risk. 

However, owners can minimize this risk by implementing simple controls. One effective control is to ensure the same person who cuts the checks doesn’t sign the checks and reconcile the bank statements.  

9. Keep an Eye on Certain High-Cost Expenses: Labor and Inventory  

Labor costs are the most significant expense for most small businesses, and inventory is often another. To reduce labor expenses, many small companies outsource work to contractors who bill hourly. This can be cheaper because the contractors may not need 40 hours/week to complete your work and don’t require benefits. 

Time-tracking software can help leaders understand the cost of specific tasks, enabling the business to better budget and find ways to control these expenses. Companies can lower inventory costs by tracking inventory carrying costs, inventory turnover ratio, the amount lost to obsolete inventory, and other key metrics.  

10. Plan for Major Investments: Find the Right Time and Financing  

By tracking expenses and revenue consistently, the business can identify the best time for significant investments and establish the credit it may need to cover the cost. Business credit cards can help an organization establish a credit history so it has a better chance at qualifying for financing (and optimal financing terms), including lines of credit and loans, when it needs more capital. 

Securing these funding sources is essential to a company’s overall financial health. According to the Federal Reserve study, 45% of businesses with excellent financial health received loans or credit cards from a bank, compared to just 3% of companies with poor or below-average financial health. Credit cards offer perks for the business, such as business rewards or travel rewards.  

11. Carefully Monitor Tax Preparation: Stay Ahead of IRS Requirements  

The IRS generally requires that sole proprietors, partners, and S corporation shareholders make estimated tax payments if they expect to owe taxes of $1,000 or more when their return is filed. There are specific employment tax records you must keep (detailed in IRS resources on Recordkeeping for Employers and Employer’s Tax Guide). 

The IRS provides worksheets in Form 1040-ES, Estimated Tax for Individuals, or Form 1120-W, Estimated Tax for Corporations, that help calculate estimated tax. Businesses should also check the IRS tax calendar, which includes due dates and actions for every month. A company can sign up for email reminders or even import reminders into Outlook.  

12. Seek Professional Tax Preparation Guidance: Reduce Your Burden  

The NSBA says that one in three small businesses reports spending more than 40 hours yearly on federal taxes. Unsurprisingly, roughly two-thirds of small businesses pay an external tax professional/accountant to handle their taxes. There are even more benefits here for a sole proprietor, as the cost of hiring someone to prepare your business’s tax return is deductible.  

13. Ensure Inventory Data Is Accurate: Simplify Financial Reporting  

To prepare financial statements, the business needs accurate inventory data. It must calculate the cost of goods sold (COGS) for the income statement and the inventory value on hand for the balance sheet. 

If integrated with the point-of-sale system and accounting software, physical inventory is tracked by manually counting items regularly or pairing counts with an inventory management system that can automatically adjust the numbers as sales happen. Inventory management software makes it much easier to track inventory, and the information will be more accurate.  

14. Use Financial Statements to Evaluate Business Performance: What Are They Telling You?  

Logging expenses and income are the basis for generating these three key financial statements. Income statements help the business determine its profit (or lack thereof), a balance sheet shows assets, liabilities and shareholders’ equities for a snapshot of its financial position at a certain point in time, and the cash flow statement shows whether the company has enough money flowed into and out of a business in a given period and how much cash remains. 

However, when combined with the balance sheet, the cash flow statement can show whether a company has sufficient cash to meet its current obligations. Banks and investors require all three statements to secure financing or funding.  

15. Generate Financial Projections: Prepare for the Future  

Financial projections help businesses estimate future income and expenses to anticipate if they need financing or should make capital expenditures. Financial forecasts help business leaders estimate cash flow and determine when to change pricing or production plans. 

Forecasts provide crucial financial information to external stakeholders when the business seeks a loan or funding, or if the business is the target of an acquisition. A company can also use these forecasts to create pro-forma financial statements: projected income statements, balance sheets and cash flow statements. Projections are based on economic modeling techniques and answer questions that may come from lenders, investors or other business stakeholders. 

At their basic level, they answer a question like: 

• If we lend you this money, what will you do with it, and how will you pay it back?  

16. Set Up Your Chart of Accounts: Start Categorizing Transactions  

To keep your business finances organized, you must categorize each transaction within your chart of accounts (COA). At the highest level, your income and expenses can be divided into assets, liabilities, revenues, expenses, and equity. 

Each of these accounts can be further divided into sub-accounts to help you better track your money. For instance, your expenses account may have multiple sub-accounts like advertising, office supplies, employee wages, payroll taxes, software subscriptions and more. 

Any tax professional who helps your business will want to see your transactions categorized in this way, so it's good to get in the habit of organizing your finances into accounts early on in your business.  

17. Schedule Time Each Week or Month to Review Your Finances and Reconcile Your Accounts (or Hire a Professional to Do It for You)  

Laying the foundation for your business accounting is only half the battle. Once your software and accounts are set up, you'll need to continually monitor your finances and ensure that every transaction has been properly recorded and categorized. Even if you use an automatic transaction import feature, you'll still want to set aside time each month to review and reconcile your business's financial accounts and ensure nothing was omitted or miscategorized. 

Of course, you don't have to handle this task by yourself. Suppose you don't have the budget to hire an in-house accountant or financial manager. In that case, you can outsource your bookkeeping and payroll needs to a specialized firm or consult a financial adviser.  

18. Prioritize Internal Audits: Stay Close to Your Financial Health  

Regular auditing keeps you close to the essential insight into your company's financial health. This empowers you to make the best-informed decisions for your company and helps you anticipate and address potential challenges in your business operations.  

19. Avoid Too Much Debt: Keep Financial Risk Manageable  

Sometimes the wisdom of the ages has the best solutions. The best accounting tip for a company is to avoid too much debt. Sounds simple, but there is precise data that shows 60% of companies over lever and 90% of companies under stress have some component over too much debt.  

20. Maintain Adequate Levels of Working Capital: Manage Market Volatility  

Maintaining adequate levels of working capital is critical, especially with market volatility. Prioritize working closely with key customers to ensure that funds are received promptly, and build strong relationships with your vendors to maximize the benefits of working capital for the company. Better communication across the board leads to success in the long term.  

21. Invest in Your Company: Use Your Finances for Growth  

Invest back into your company. Use your finances for more growth and development to expand operations. Expand by hiring and promoting, building and improving technology anything that can improve and grow your business. Reinvesting in your company is an excellent demonstration of your confidence in its success.

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Why is Accounting Important for Your Small Business?

Knowing your business's financial position is key to growth. With a solid accounting foundation, small business owners can create financial reports to understand the money coming in and flowing out of their organization. The more you track your cash flow, the better you can predict future patterns to help you make smart business decisions. 

Understanding Fixed and Variable Costs 

While small business accounting tips include tracking cash flow, they also involve tracking fixed and variable costs. Fixed costs, such as rent and insurance, are the same each month, while variable costs, such as utilities and raw materials, can fluctuate. 

Cost accounting records fixed and variable costs, analyzes them, and generates helpful reports to help you determine the cost of a project or product production. This allows you to make better financial decisions and create a precise budget to improve your business's net profit margins and maintain economic stability during production. 

Getting a Better Grasp on Your Business's Health 

When you learn to prepare financial statements and read balance sheets, income statements, and cash flow statements, you'll better grasp your business's financial position. Once you understand how your business is performing, you'll be better prepared to make informed decisions to improve your operations. 

Creating Checks and Balances to Avoid Fraud and Theft 

Accurate accounting helps you detect and avoid fraud and theft by customers, employees, and suppliers by creating a system of checks and balances that verifies transactions. It builds accountability by making it easier to trace any transaction. Adequate internal controls are a key element of a successful accounting system. 

Facing Audits With Confidence 

When you understand your business's financials, you'll be better prepared for potential audits. An accountant can help ensure your business complies with all tax obligations and keep you organized with detailed records, so you'll have nothing to worry about if the IRS requests more information. 

Attracting Funding With a Handle on Your Financials 

Bankers are more confident when dealing with business owners who have a handle on their company’s finances and understand the financial implications of their decisions. The overall economic health of your organization can determine future loans, which, in turn, may allow you to purchase new machinery or invest in new technology. 

Running Your Business More Efficiently 

Regularly reviewing your financial statements and establishing a detailed budget will allow you to discover operational inefficiencies. Saving a bit in your business bank account on several expenses can add to significant, long-term results as you improve your organization's overall health and achieve long-term success. 

Haven: Comprehensive Financial Management for Startups

Let your business take flight while Haven manages your financial runway. Built by founders for founders, we handle everything from daily bookkeeping to complex tax filings, R&D credits that put cash back in your pocket, and fractional CFO services. 

Join 400+ startups who've saved millions in tax credits, countless hours of administrative work, and never missed a filing deadline - all while accessing 24/7 Slack support from CPAs who understand the unique challenges of growing businesses. 

Book a call today to learn how our dedicated team can help you focus on building rather than bookkeeping.

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When Do You Need a Professional Accountant for Your Small Business?

When a startup or small business needs a professional accountant, the need varies depending on the industry's stage and financial complexities. Small companies can manage with a bookkeeper to handle daily financial tasks and organize the business. However, as the business grows, an accountant’s expertise will be required to navigate the increasing complexities of financial reporting, tax compliance, and legal obligations. 

When to Transition from a Bookkeeper to an Accountant for Strategic Growth

Certain situations call for an accountant’s involvement regardless of business size. For instance, an accountant should be involved immediately if the IRS audits the business or faces a legal financial compliance issue. An accountant can provide crucial insights when preparing for major business decisions such as securing financing, selling the company, or mergers and acquisitions. 

In summary, while a small business can initially operate with just a bookkeeper, there will come a time when an accountant’s expertise is necessary. Identifying this time and hiring a professional accountant to assist with the transition can save the business from costly mistakes.

Book a Call to Learn More About our Accounting Services (Trusted by 400+ Startups)

Haven is a bookkeeping service that focuses on startups and small businesses. They offer various services to help manage your financials so you can focus on growing your business. Their team includes CPAs who understand the unique challenges of startups. They can help you save money with tax credits and ensure you never miss a filing deadline. 

You can get support from them via Slack 24/7, and they also offer fractional CFO services. 

Join 400+ startups who've saved millions in tax credits, countless hours of administrative work, and never missed a filing deadline. Book a call today to see how Haven can help your business. 

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