Unless you’re like me (a former CPA and a numbers nerd), I’m guessing the thought of numbers in your business makes you want to scream. Sound about right? I get it. Even business accounting basics can seem stressful and overwhelming. I’m here to tell you that there are so many things you can do to lessen that accounting load. In doing so, you can finally get a handle on your small business’ finances.

Why does this matter?

Before I dive into my 10 tips for stress-free business accounting, though, it’s important to understand why accounting matters at all (and no, the answer is not just at tax time!). While it is important to have your business accounting in order for those pesky taxes, there are other important reasons why this is an area of your business you should NOT neglect.

First, knowing your numbers allows you to make smart, strategic business decisions. How can you know if the next move is the right one if you don’t know where you’re currently at? Second, your business’ financial position is one of the best measures of its health and success. So if you’re ignoring those numbers, you may not have the most accurate view of how well it’s going. Lastly, there may come a time that you’d want to sell your business or take on investors. When that happens, you’re going to want to have those accounting ducks in a row, trust me.

Changing the Mindset

So how can you approach accounting without letting it overwhelm you? Think about it this way – numbers are the one thing in life where you will always get the same answer. One plus one will always equal two. When does that ever happen in business? Never! So embrace the consistency and reliability that are numbers, and recognize the importance of understanding your business’ accounting.

Accounting Methods, Oh My!

Oh and one more thing before we get to the tips. In case you don’t know, there are (usually) two types of accounting methods – cash and accrual. Cash is where income is recorded as the payment is received, and expenses are recorded when you actually pay them (not when you are invoiced for them). This is the simplest method and the one that many small business owners use. The upside is you don’t pay tax on income until it’s received; the downside is, you may not get the best picture of the overall financial health of your business. You may owe a lot of money that isn’t recorded on your books yet.

On the flip side, the accrual method is where income is recorded when earned (even if it’s not paid) and expenses are booked when incurred (again, even if you haven’t paid them). This gives you a much more realistic picture of how your business is doing financially. But, it’s more complicated to implement. Also, it doesn’t give you a clear picture of how much cash you actually have in the bank. So which to choose? That’s a decision for you and your accountant. But know that if you are a products-based business, depending on your revenues and a few other things, you might be required by the IRS to use the accrual method. Alternatively, a lot of inventory-based businesses use the hybrid method – accrual for inventory and cash for everything else.

And now that I’ve bored you with Accounting 101, let’s dive into those tips!

Tip #1: Understand what you are and what you want to be.

Before you can make sure you are doing the right things in your business accounting, you need to understand exactly what those things are that you’re supposed to be doing. This often depends on what you are (your legal structure), what your activity is (services? products?) and where you’re going (are you in the growth phase?). First, know your legal structure. Sole proprietor, LLC, S-Corp, C-Corp – each has different treatments for accounting, taxes, paying yourself, payroll, etc. Not sure? If you didn’t do ANYTHING to set up a legal structure for your business you are, by default, a sole proprietor (if there is only one founder/partner).

There are also different tax treatments and requirements depending on what you sell. It depends on whether that be services, products, digital products, etc. Having a good vision for what you are offering (both now and in the future) will ensure you are prepared and understand the accounting and tax consequences of each revenue stream.

Lastly, if you expect to hit certain revenue thresholds in an inventory-based business, or you know you are going to bring on investors, or you want to take on a line of credit, you may want to make some strategic decisions with respect to how you set up and manage your books. Your best bet is to talk to an accountant about anything you are planning in the future. In doing so, they can help get you set in the best way possible now.

Tip #2: Keep EVERYTHING separate.

Repeat after me – DO NOT RUN YOUR BUSINESS OUT OF YOUR PERSONAL CHECKING ACCOUNT. OK? There is a big mistake that a lot of new business owners make. And that is, not getting a separate bank account for their businesses. This is so important for several reasons. One, it’s easier to track everything. And second, to ensure your business accounting would stand up to scrutiny under an audit or legal matter.

It’s still possible to find free or very inexpensive small business checking accounts. You can check local credit unions or smaller banks. This is a key step to ensure you’re handling everything on the up-and-up. Also, don’t pay for anything personal with company funds. Just don’t.

What about a credit card? I always recommend getting a credit card in the business’ name, even if you don’t plan on using it. This is important because at the beginning, your business doesn’t have any credit, so starting to build it up early will set you up better in the long run. Most small business owners will have to co-sign for their business’ credit cards in the beginning. It’s worth it to start building that credit.

So what if you use your personal credit card to pay for something for the business? That’s okay. Just make sure you reimburse yourself from the business’ account. Also, properly record the transaction in your accounting records. And if you start loaning or otherwise contributing money to your business, talk to your accountant about the best way to handle it.

Tip #3: Show me the money!

Otherwise known as, have a really good process for tracking and collecting payments. This starts with having a solid contract that clearly states invoice and payment dates, late fees and any other relevant payment terms. Note that what you can charge for late fees are often regulated by your state and/or federal government. Having these terms laid out ahead of time will minimize the issues down the road if you’re trying to collect what you’re owed.

If your local, state or federal government charges additional taxes (such as sales tax) on your products or services, make sure your contract spells these out so it’s clear who is responsible for paying them. If you’re a product-based business and therefore don’t have a formal contract with your customer, this will usually be included in your website disclaimers such as your Terms of Use.

Lastly, have a good system to track your payment info (such as HoneyBook, FreshBooks or QuickBooks). This is important to ensure you get paid. It also helps if you get audited because it created a paper trail both of the payment terms and the funds actually received.

Tip #4: Manage your cash.

In small businesses, cash is king, so have a really good system for staying on top of it. Expenses such as taxes can be overwhelming if you don’t plan for them. So, I like to recommend that you save 30-40% of every payment you receive for taxes (based on your actual rate), 20% for overhead and other expenses (again, depends on your situation) and then the remaining 50% can either be reinvested back into the business or kept as profit. Obviously these amounts will differ depending on your business. Figure out the allocation that makes sense for you and implement it no matter what.

 

Tip #5: Build your all-star team.

The best business advice I’ve received is to invest in good help, and nowhere else is this true more than in your business’ accounting. The first investment you should make is in your bookkeeping system. The system should be simple enough that you will use it but also have the features your business needs (such as payroll perhaps). There are a lot of great systems out there – Wave, FreshBooks, Bench, QuickBooks – and which one you choose will depend on your particular business. Whatever you do, please don’t use Excel. While I’m normally Excel-obsessed, there is too much room for user error and manipulation when it comes to my oh-so-favorite spreadsheet.

The second investment I would recommend is a bookkeeper. While this is by no means a requirement, it’s a nice thing to have if you can afford it. A bookkeeper will make sure that you stay on track and everything is recorded properly. This will make tax time a breeze but will also help you stay on top of your business’ financial position by knowing that your books are reliable and up-to-date. If you go this route, make sure you find someone who understands your business – if you’re an e-commerce shop, don’t choose a bookkeeper who usually handles law firms. It has to be the right fit.

The last investment I would make is on a really good Certified Public Accountant (CPA). A good CPA is not just there for you at tax time – they will stay up on current trends and recent law changes to ensure that your business is always compliant and taking advantage of every possible legal strategic option. Much like with the bookkeeper, they NEED to understand your business. Don’t choose that family friend just because they’ll give you a good price on filing your annual taxes. You need your CPA to be an advisor who gets what you’re doing and will use their expertise to save your business time and money.

Tip #6: Keep a paper trail.

You’ll be so thankful if you have kept a defensible paper trail in the event you are audited or sued. The more you can show that you are on top of things and have the documents to back up your claims, the less pain, hassle and money these unfortunate circumstances will cost you.

The first step is to keep your receipts. I generally like to keep a receipt for everything, but there are different rules about what you have to keep receipts for so if you don’t want to have a receipt for everything, talk to your accountant about the must-haves. Me? I think it’s easier to just get in the habit of saving a receipt for everything and not risking that I’ve inadvertently not saved a receipt for something I really need it for.

You have a few options with receipts. You can keep them in a shoebox (bad), scan them in manually (better but time-consuming) or use an app or other tool to save them into your accounting software (the winner!). I personally use Hubdoc for One For Women and the Wave App for my consulting work, but there are plenty of options out there.

The more you automate, systematize and keep electronically, the better your paper trail will be. And your paper trail, if done right, is often what will save you.

Tip #7: Understand the difference between an employee and an independent contractor.

In all my years of tax, this is still the one that gets people. Because the costs associated with having an employee (taxes and other fees) are higher, many small business owners rush to call their workers independent contractors to ease the financial burden. Unfortunately, if you try to call a fish a dog, the IRS will call you out on it. Luckily, they have put out some guidance on how to know the difference between the two. Click here to download my 20-point Checklist on how to figure out if your worker is really an employee. Now unfortunately the text isn’t black or white. Ultimately, it’s based on the facts and circumstances of your particular situation. The more you can do (and document) to show the analysis you completed, the better off you will be if questioned.

Tip #8: Get to know your numbers.

Every month I have an appointment on my calendar for one hour, to meet with myself. It’s my monthly financial check-in and it’s during that meeting that I review three important reports from each of my businesses – the balance sheet, the income statement (also known as the profit/loss statement) and my cash flow report. As I said at the beginning, knowing your numbers is crucial to understand where your business stands. It’s vital in making good, strategic decisions, so checking in on those numbers on a regular basis is the best way to stay on top of things. If you’re new to your business and/or to reviewing the numbers, I would do this check-in weekly or bi-weekly until you get more familiar.

So what do I look for during this review? When it comes to my balance sheet (what assets, liabilities and profits I have), I look at how liquid I am. Liquid, meaning, how much cash do I have on hand. I’ll also look at whether or not a lot of clients haven’t paid me yet. Also, if I have too much or too little inventory on hand. If I’m carrying a lot of debt, that’s something I’ll look into as well.

On my income statement, I want to understand my gross profit margin and my net profit margin. My gross is simply what I took in for my products minus the cost of those products. My net factors in other overhead costs, such as paying myself and buying office supplies. I’ll also do a period-over-period review, comparing this month with last month and with the same month last year. Lastly, I’ll look at how closely I am to reaching my annual goals.

As you do this more and more, you’ll get comfortable with your numbers. You’ll start to understand what to look for. The most important thing is to just start. You can’t be a good business owner if you don’t open the hood and get a look every once in a while. 

Tip #9: Be 100% compliant from the beginning.

If you remember nothing else, remember this. Even if you don’t have the money to pay your taxes, FILE ON TIME. With most taxing authorities, there are two types of fines/penalties – one for filing late and one for paying late. So if you can’t make that big end-of-year tax payment, at least get that return in to save yourself some dough on the late filing penalties. Then, work with the IRS or your accountant to figure out a plan to pay the bill.

And whatever you do, please don’t think that just because you’re young/new/don’t have an MBA that the IRS will let you off the hook for your early tax and accounting mistakes. There’s a chance they won’t – so get your ducks in a row from the beginning.

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