When you start a business, you set some goals. The pursuit and accomplishment of these goals require unchecked dedication and hard work on your part. However, lack of funds often forces business owners to do several roles on your own, which can cause distractions. Small business accounting, for example, is a time consuming and stressful job; doing it yourself means losing focus from the more important objective of sustainable business growth.
Accounting is a crucial part of running a business. Very often, accounting is considered an afterthought by small business owners when, in reality, it must be the foremost concern. Here are some important points about small business accounting that business owners must know:
1. Starting Up: Choose an appropriate accounting system for your business in order to organize and communicate your financial information. You can either opt for an accrual or cash-basis method of accounting.
- Most businesses use accrual-basis accounting since it allows you to report your income and expenses at the time they are earned or incurred. In the cash-basis method of accounting, you record transactions when cash is actually received and expenses are actually paid.
- The cash method is simpler to use as compared to accrual method and can be appropriate for very small businesses. However, for businesses with no inventory or those which deal largely in cash, cash accounting can misrepresent financial results over time.
2. Importance of Financial Records: Most small businesses fail due to inappropriate decisions based on mismanaged or disorganized accounting and finances. So it is very important to keep track of financial records of your business to ensure straightforward management and control of your business. Financial records are critical in order to make decisions pertaining to how much money is owed to your business, how much money you owe, identification of financial problems before they become out of control, how to prepare your tax returns and how to inform bankers and investors about the financial condition of your business
3. Accurate Financial Information for Management: In order to understand the financial health of your business, you need to have accurate financial information. Effective management decisions are critical for the success of your business and must be made by taking into consideration the following:
- How much your accounts receivable are worth
- How old each account is
- How fast your inventory is turning over
- When debts are due
- How much your business owes in taxes and FICA (Social Security taxes)
4. Banking and Tax Requirements: Without well-organized and accurate financial statements, you will not be able to prepare the necessary state and federal tax returns required by the government. Moreover, if the Internal Revenue Service audits your business, you must be able to produce the relevant accounting records and statements to support your tax filings.
5. Why You Can’t Afford to Ignore Accounting: Accounting is a vital aspect of your business and neglecting or putting off financial reconciliations can result in problems for your business, including spending money that you do not have, missing tax payments, losing out on tax refunds, and miscalculating risk in strategic planning. Irrespective of how great your product or service is, the absence of proper accounting can mark the end of your business.