Small business owners wear many hats. From marketing to managing, they have to be intimately involved in every aspect of their business if they want to succeed.
Yet, many small business owners are not fully equipped to handle managing their finances and accounting. Money is key to a small business’ success, and every owner should know financial management basics.
Completing these three steps will allow you to make more informed business decisions, keep your bookkeeping on track, and facilitate growth:
1. Determine the best accounting method
The U.S. Small Business Administration (SBA) outlines two core accounting methods for small businesses:
- Cash basis: A business records a transaction once a payment has been received or made. This method is more straightforward and better for cash flow management, but it provides less long-term clarity for business planning and forecasting.
- Accrual basis: Records transactions as soon as they happen. This method provides real-time updates of your company’s finances because it simultaneously records expenses and revenue tied to a sale, but it’s more complex to manage.
The SBA claims that cash accounting is more common, but recent data shows the accrual basis method being far more popular.
Businesses that are larger and more complex should consider the accrual method because it facilitates better long-term decision making. Businesses with simpler operations, on the other hand, may benefit from a cash-based accounting approach.
2. Keep separate accounts for everything
Some small business owners sometimes have a difficult time delineating between personal and business finances.
No matter how much of your blood, sweat and tears you have sunk into your business, the line between your business and personal bank accounts should never be blurred.
According to PNC Bank, setting clear boundaries between business and personal finances allows more control and less complication in the balance between personal and business finances.
This delineation is particularly pronounced in 3 main areas:
Keeping your personal and business finances separate will make it easier to maintain proper records for tax filing, track your cash flow accurately, and forecast your long-term financial performance for a lender or investor.
Despite the benefits of keeping separate accounts, Clutch’s survey indicates that nearly 30% of small businesses don’t have separate personal and business bank accounts.
Additionally, your business should maintain a separate credit card account. While it is tempting to put business purchases toward your personal credit card to earn cashback rewards or frequent flier miles, establishing and managing business credit can provide crucial benefits, such as:
- Securing better financing terms
- Negotiating supply agreements
- Protecting against business identity theft
3. Research Accounting Pros to Keep Your Books Balanced
Your finances become more complex as your business grows. As this occurs, you may need to consider outside assistance.
Small business owners should review available expert resources when they need them. There are a few options available, depending upon your needs and financial situation:
- Certified public accountant (CPA): CPAs offer tailored accounting services for your small business needs and serve as advisors to determine the best financial practices for your business. Review accounting firms that specialize in small businesses to find the best fit for your company.
- Bookkeeper: An in-house bookkeeper provides basic day-to-day accounting functions, but likely does not possess the formal accounting experience of a CPA.
- Advanced software or online service: If bringing an employee or contractor onboard isn’t an option, there are advanced software options online.
Outsourced accounting firms may be able to provide a CPA, bookkeeper or other talent only when needed, rather than hiring in-house.
Remember, asking for outside help isn’t a sign of weakness, particularly when it comes to financial matters that may not be your strong suit.
Invest Time and Resources Into Your Small Business Accounting to Facilitate Growth
Small business owners should consider their accounting strategy when planning for the long-term.
As their business grows, accounting becomes more complex and important. Your small business needs to review core accounting methods and resources to determine how to best facilitate and organize growth.