As a small business owner, you wear many hats, including an accountant. While it might be tempting to focus more on your product, marketing, and customer service, you shouldn’t let accounting duties or systems take a back burner. You need an accurate record of transactions, revenue, expenses, payroll, and liabilities in order to properly evaluate business performance, set a budget, and do taxes. The New Year is the perfect time to review your systems and, if necessary, revise your approach. Here are four things to consider in 2021:
- Review your basics and ensure they are foolproof – if you aren’t already, you should be keeping separate books for the business. When setting these up, make sure you create a chart of accounts, establish a monthly closing process, and create sound financial reporting practices and procedures.
One of the first things to decide is whether you will use a cash or accrual method of accounting. With a cash method, revenues are recognized when payments come in and expenses when you pay them. The accrual method recognizes revenues when earned and expenses when incurred. The accrual method allows for a more accurate picture of your business’ financial health, and helps to ensure revenue and expenses aren’t over or underreported. A general chart of accounts for a small business using the accrual method might include:
- Petty cash
- Accounts receivable
- Inventory assets
- Prepaid expenses, such as insurance
- Accounts payable
- Payroll liabilities
- Notes payable
- Retained earnings
- Operating revenue
- Operating expenses
- Non-operating expenses
These accounts will help keep your finance and accounting organized, and are used in closing the books and creating financial statements. When you close the books, you’ll want to make sure all financial activity has been accurately accounted for and then produce the monthly financial statements, which should include a balance sheet, income statement, and statement of cash flow.
- Choose the right accounting software – while your grandfather may have kept his small business books in a green-paper ledger, you’ll want to use an accounting software program. QuickBooks, Xero, FreshBooks and Wave are frequently used and highly rated small business accounting systems to consider. Not only will these programs help you generate monthly financial statements, but depending on the program they can also generate invoices, manage payroll, keep track of inventory, compare budget to actual, and do a host of other financial tasks.
- Stay up-do-date – don’t let your accounting duties slide. Keep up with inventory, invoices, sales and receipts, petty cash, purchases, and bank transactions on a daily basis. At least once a month, you’ll need to process payroll, make loan payments, and evaluate whether you will take an owner draw and then pay it. Your accounting software can help you with much of this, but you still need to in some cases enter data and keep up with other manual tasks. You should also review items for accuracy.
- Don’t be afraid to outsource – if your business is growing and you are finding it harder to keep up with the accounting tasks, consider hiring a bookkeeper. If your business hasn’t grown large enough to support a full-time or even part-time bookkeeper, you can hire an accounting firm or local bookkeeping service to help.
Rialto Accounting can help you review and set up small business accounting practices. Our experienced accountants can assist you with financial reporting, taxes, payroll and budgeting. When you work with Rialto Accounting, we put your needs first. Contact us today.
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