What is Business Accounting for Small Businesses - Managing Finances

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Learn business accounting and different business accounting software. Enroll in business accounting classes to learn more about this sect of accounting.

[Featured Image]:  An accountant, discussing with his co-worker going over the financial books of their small business.

Business accounting is integral to the operation of small and medium-sized businesses. This type of accounting manages a company’s daily financial activity while setting long-term financial goals. From forecasting to invoicing, business accounting works with bigger decision-making and granular level of operations through financial tracking, analysis, recordkeeping, budgeting, and more. 

To better manage finances, business owners can use business accounting principles to keep track of inventory, profit and loss, and cash flow, so they catch problems early and maintain profitability or improve when needed. Some business owners manage their own finances, hire a bookkeeper, outsource accounting duties, or use a mix of these options. In this article, learn more about business accounting, how to manage business accounting, and whether you need an accountant. 

What do we mean by business accounting?

Business accounting refers to bookkeeping and managerial accounting done by accounting professionals, typically for smaller businesses rather than large corporations. Small businesses may conduct their business accounting in-house or with an accounting firm, depending on the size and needs of the company. A company can track, organize, and analyze finances through business accounting to make financial decisions easier. The core of business accounting is management, so most of the core elements involve steps to monitor things like cash flow, expenses, and inventory. 

Financial advisors can use the financial data gathered by business accounting to help small business owners make important financial decisions about the future and day-to-day operations. 

Business accounting vs. accounting

Business accounting differs from other types of accounting in a few ways. One significant way this type of accounting differs from other accounting methods, like financial accounting, is that there are no compliance regulations. Business accounting also does not focus on long-term financial decisions but on internal tasks within the company. 

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Steps to managing your business accounting

Small businesses must adhere to effective and accurate business accounting practices. Some common steps to manage your business’ accounting include a few processes involving a company’s overall record-keeping methods, taxes, forecasting, budgeting, and more. 

1. Record your transactions.

Government regulations and requirements govern how a company must record transactions. Some requirements include supporting documentation such as receipts, invoices, or other proof of purchase. The IRS recommends that you organize supporting documents by year and type of transaction. A good record-keeping system for business transactions should include items such as: 

  • Check disbursement journal 

  • Business checkbook 

  • Employee compensation records 

  • Summary of cash receipts (daily and monthly) 

  • Depreciation worksheet 

It’s essential to have a methodology for recording business transactions that works well for the company’s needs and structure. Expense tracking software is an efficient, paperless method to ensure the accuracy of transaction recording. Popular software options include QuickBooks Accounting, Expensify, and Certify. If you use an electronic tracking system, it must be accessible or able to be shared with the IRS electronically. 

2. Document your receipts and invoices.

Proper documentation of financial transactions like purchases is important for preparing financial statements like balance sheets, preparing tax returns, and monitoring a company's financial health. When documenting receipts and invoices, have an organization system that tracks taxable and non-taxable transactions, the source of the purchase, and whether you can take that purchase as a company deduction. In many cases, if you’re already using expense tracking software, you can also document receipts and invoices within the same platform for easier accessibility and organization. 

3. Manage cash flow.

Cash flow refers to the total amount of cash that comes in (revenue) and out (expenses) of a company. The company can use this financial data for budgeting, forecasting, and making financial decisions. You'll record cash flow using a cash flow statement. Cash flow statements include internal and external cash inflows and outflows over a certain period, which may include investments, financing, and operational costs. 

Maintaining a positive cash flow and having a system to manage it is vital. This means a company should organize and track when and where cash goes at all times. A company can get into negative cash flow by carrying too much debt or having too much income in overdue accounts receivables. Some systems to manage cash flow include: 

  • Have a strategic plan for paying all bills. Stagger bill payments and have a system or methodology behind when and how you pay certain bills. 

  • Put systems in place to encourage customers to pay on time. Make overdue AR a priority. 

  • Allow electronic payment systems. Online payment is more convenient and faster in many cases. 

  • Structure payroll in billing cycles that flow well with the company's income stream. This means timing the frequency and amount of payouts in congruence with other business expenses and payouts. 

4. Oversee payroll.

Payroll means all payouts to a business's employees, including benefits, salaries, taxes, garnishments, and other deductions. Companies will use payroll processing software to streamline the process or outsource the task entirely. In many small businesses, a payroll manager is in charge of oversight of the payroll. Some tasks involved in payroll management are ensuring compliance with state and federal regulations, preparing financial reports for audits, and having accurate and timely payout of payroll salary and benefits. 

5. Make projections.

Financial projections should closely align with a company's goals and objectives. Small businesses should position themselves in a way that helps them achieve long-term financial goals. To do this, companies make projections or hypothetical scenarios that may involve predicting future financing needs, allocating funds and organizing spending around cash flow, or creating budgets. Small businesses make projections to prepare for the future, and business accounting provides companies with the financial insight and records to make strategic and smart projections and budgets. 

6. Understand tax.

The taxes a company pays is dependent on the type of business. The IRS outlines these different business taxes as income, excise, employment, and self-employment taxes. All businesses pay income tax unless the company is considered a partnership. Small businesses would not have to pay self-employment tax since it’s an organization with employees, but the company will have to pay employment taxes.

All employees must fill out an I-9 and W-4 form upon employment for tax purposes. These documents provide accurate wage reporting, along with Social Security and Medicare benefits. Excise taxes are specific to certain industries and uses outlined by the IRS. Check with state tax laws as well. 

7. Manage profits and losses.

Managing profit and loss in business accounting involves calculating revenue and finding ways to cut costs. Profits are earnings or cash in, and loss refers to anything the company has to pay for or money out—record profits and losses on a profit-and-loss statement or income statement. 

Many small businesses use software like QuickBooks to log and track income and expenses. The purpose of managing revenue, costs, and expenses are so that it’s easy to see how much the business earns and how to adjust if needed. For example, if losses outweigh revenue, a company may look at the cost of goods or pricing on the products or services offered to see about cutting costs or raising prices. Some businesses keep profit-and-loss statements monthly, quarterly, or yearly. 

8. Review inventory.

Companies hold a certain amount of inventory, or finished products/goods, that have not yet been sold. Inventory is considered an asset to a company. It’s important that a company does not hold too much or too little of an unsold product or service. To ensure that doesn’t happen, a component of business accounting is managing and reviewing inventory. 

Many small businesses use a cloud-based inventory management system that provides real-time data when needed. Beyond the tools a company may use, it’s also critical to have a consistent system to track all inventory. Common methods include batch tracking, demand forecasting, and bulk shipments.

9. Submit tax returns and financial reports.

A company must make federal tax deposits before submitting a tax return to the IRS. An accountant can do this via electronic funds transfer (EFT) or outsource the task. 

The tax forms filed by a small business depend on the type of business and whether it's a partnership, a partner in a partnership, a sole proprietorship, an S Corp shareholder, a C corporation, or an S corporation. Financial reports are required if the company files business deductions or depreciation. 

Do I need an accountant?

Small businesses may benefit from an accountant as the company grows and the need for more financial tracking, recording, forecasting, and budgeting accrues. Bookkeeping involves the day-to-day administrative tasks of recording sales and financial transactions. Bookkeeping aims to collect and track financial data involving the company's daily operations. It does not include any kind of analysis, budgeting, or forecasting compared to accounting. 

Accountants are certified to file taxes, while bookkeepers are not. Taxes and government compliance to certain rules and regulations may be best managed by a certified accountant professional (CPA). CPA certification is important when hiring an accountant who offers business accounting services. 

Some companies may use an accountant or the services of an accounting firm only to do taxes. Others only analyze data gathered during bookkeeping a few times a year to assist in financial budgeting and projections. It’s not a requirement to have an accountant on staff, but it’s a requirement to properly file taxes per the IRS and state tax laws. 

Accounting software 

Accounting software can help a business manage finances more efficiently, prepare for tax filing, and provide a clearer sense of the company’s financial health and needs. 

You can choose from many accounting software systems with varying features and prices. The type of business or industry and its number of employees are two major factors to consider when choosing the best accounting software system for the needs of a small business. This list includes some of the top accounting software systems for 2022: 

  • QuickBooks Online: This accounting tool is popular for most small business owners and freelancers. A few features include invoicing, payment tracking, payroll, receipt capture, report generation, project management tools, and assistance in finding tax deductions. The features will vary by the plan you choose to use. 

  • FreshBooks: FreshBooks is known for its mobile app and online-friendly system that allows a company to link online payments to the app, which can be fully customizable and customer-centric. Other features include time tracking, project management tools, report generation, payment tracking, and the ability to turn an estimate into an invoice. 

  • Xero: With three plans to choose from, this cloud-based accounting software offers small and medium-sized companies features that include expense manager tools, bank connection, and online payment options. Xero also allows companies to track projects, manage payroll, and track inventory. 

  • Zoho Books: Zoho Books has a free version and three other paid ones. This software platform can help you file and prepare your taxes as a small business and calculate how much you may owe. As with other similar systems, Zoho Books can help companies track spending, manage inventory, pay employees, accept online payments, organize receipts and other supporting documents, and track projects. 

  • Wave: Designed for smaller businesses, Wave can generate invoices, track payments automatically, run payroll, as well as calculate payroll tax (depending on your state). This software system does not offer as many features as similar accounting software, but you can use Wave’s accounting services for free. Wave has an "a la carte" set up where you can choose what features you need and some of these features or services are free, and others are not. Payroll, for example, requires a monthly fee. 

Get started

Get your small business on track and move forward toward the goals and financial objectives you have for your company with business accounting principles. Once you understand some of the steps to take for effective, accurate business accounting, take the initiative and learn key skills in business accounting. 

One way to learn business accounting skills is through online business accounting classes. Create a Financial Statement in Microsoft Excel, offered on Coursera, is an excellent course for beginners who want to learn more about financial statements vital to a small business, like profit-and-loss statements and balance sheets. This course teaches the core basics of business accounting. 

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Create a Financial Statement using Microsoft Excel

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