9 Accounting Basics Every Small Business Owner Should Know

Lauren WardUpdated April 21, 2023

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Running a business of any size requires at least a basic understanding of small business accounting. Accounting not only keeps you on top of your financial statements and taxes but also helps you figure out your true profits. Armed with this knowledge, you can make informed decisions about financing.

What Is Small Business Accounting?

Small business accounting is the process of tracking and analyzing your company’s financial information. The goals good accounting can help you achieve include evaluating the health of your business, staying on top of necessary administrative tasks, and making it easier to file taxes.Before diving into the basic steps of accounting, it’s a good idea to familiarize yourself with a few key terms.

Liabilities: A business liability is any type of financial responsibility, such as a small business loan, taxes, or even a legal liability. It represents a quantifiable level of risk for the business on the balance sheet.
- Accounts payable: Liabilities aren’t just long-term. Don’t forget this category, which is the money your company owes to other vendors, creditors, or service providers. Accounts payable should be listed on your balance sheet.
Assets: Any goods or property that add value to the business. Assets can be tangible (like inventory or offices) or intangible (such as patents, trademarks, or even brand recognition). They’re itemized on the balance sheet.
- Accounts receivable: Like liabilities, assets aren’t all long-term. You also need to consider the money owed to your business by others. This category is also an asset on your balance sheet since the client or customer is under legal obligation to pay you.

Recommended: 6 Tips for Managing Small Business Finances

9 Steps for Small Business Accounting Success

Basic accounting for small businesses involves a variety of tasks. Some should be kept up with on a consistent basis, while others you might need to do only once every quarter or every year.Here are the most important steps to take, along with how often each one should be performed.

1. Keep Up with Basic Bookkeeping Functions. How often? Daily or weekly

It’s important to track your accounts for your small business on a regular basis. That means developing several good habits.

Check your cash balances every day. This lets you know how much is coming in and going out. That way, you’ll stay on top of managing your daily cash and avoid overdrawing any accounts.
Record your transactions, including income and expenses. You can use either a spreadsheet or accounting software.
Keep and file copies of your receipts and invoices. This makes it much easier to organize paperwork for your tax records when it comes time to file. And if you’re ever audited, you’ll have an organized system with all of those documents at hand.

All of these tasks should be performed daily or weekly, because If you put them off longer than that, you’re more liable to make mistakes or miss something, which can ultimately hurt your bottom line.

2. Process Payroll. How often? Weekly

If you’ve got a small business with employees, you need to stay on top of payroll. It’s important to meet your payroll schedule deadlines, which are typically bi-weekly. Consider setting up direct deposit if it makes sense with the size of your business. You can also outsource the process to a part-time or contracted payroll manager. In addition to making sure your employees are paid, payroll for small businesses involves meeting tax requirements for federal, state, and local jurisdictions.

3. Send Invoices. How often? Weekly or monthly

Sending out invoices is one of the most important parts of your business because it’s how you actually get paid! This business accounting task could be done weekly or monthly, depending on what makes sense for your business model. Put a due date on each invoice, then track unpaid invoices according to the deadlines. Create a system to follow up with overdue payments so you don’t develop cash flow issues. Using invoice tracking software, for instance, allows you to add automatic reminders. Taking some of the manual work off your hands also allows you to focus on other areas of your business. It helps you avoid losing track of invoices that still owe payments, too.

4. Track Upcoming Bills. How often? Monthly

Just as you keep track of your personal bills each month, you should do the same with your small business bills. You can create a calendar and enter info for all of your vendors and service providers (like utilities) that need to be paid each month. Mark how much is due and when (estimate, if you need to), then track when you’ve actually made the payment. In some cases, a vendor may offer a discount if you pay your invoice early. If you have any relationships that offer this perk, make note of that as well. Once you see the full picture on your calendar, you can then try prioritizing your bills to get the discount. Just make sure you don’t fall behind on other bills in the process, since that can result in late fees, damaged relationships, and even a drop in your credit score if you’re late on a loan or credit card payment.

5. Manage Your Cash Flow. How often? Monthly

A solid invoicing system also helps with successfully managing your business cash flow. It tracks your accounts payable and accounts receivable, as well as inventory. For a less complex small business, you can look at unpaid expenses versus total sales each month to determine your cash flow. If you owe more than you’ve brought in for the month, you’re experiencing a cash flow crunch. You might want to address it by raising your prices, for instance. If your total sales amount is more than your expenses, you’re experiencing a surplus.

6. Make Sales and Income Tax Payments. How often? Varies by location — at least quarterly

Not only are you responsible for payroll tax, you also need to pay sales and income taxes as part of your small business accounting routine. Get to know your state’s specific requirements for each type of tax. Sales tax is required in 45 states, and your local county or city may also collect this type of tax from small businesses. You may qualify for an exemption, depending on your type of business. If not, check each locale’s payment schedule and note it on your calendar.Apply the same process to income tax. Both state and federal governments collect income tax, with estimated payments due each quarter. Check with an accountant or tax advisor if you’re unsure of how to estimate your income taxes.

7. Review and Compare Financials. How often? Monthly or quarterly

You can analyze your financials in several ways to gauge the health of your small business. For example, you might look at your profit-and-loss statement and income statement to get an idea of how well the business is performing. There are also several accounting financial ratios worth reviewing regularly. Here are three that may be particularly helpful.

Gross margin profit ratio lets you see how much profit your business is making after expenses are paid.
Debt-to-equity ratio can help you assess whether or not your company is overleveraged (has too much debt compared to equity).
Cost of capital evaluates how much your company must pay for funds. It’s a useful metric for you since it helps you see if your financial decisions are paying off in terms of profit margins. And it’s also something that investors may look at.

Tracking these numbers regularly also reveals long-term trends. Compare current financials to those from the previous month, quarter, or year to identify factors that are either hurting or helping your business.

8. Prepare Annual Taxes. How often? Yearly

Accounting for small business includes annual responsibilities as well. But even if these only occur once a year, they’re still extremely important. The first is to file your taxes and pay any additional taxes owed beyond the quarterly estimated taxes you already paid. All of the record-keeping you’ve done throughout the year makes this much easier. You’ll have all of your invoicing and expense receipts in one place so you can easily report your income and deductible expenses. Be sure to file on time to avoid penalties and interest.

9. Create Annual Financial Reports. How often? Yearly

A final component of your accounting plan is to pull together financial reports each year. This usually includes a balance sheet, income statement, and cash flow statement. These can help you pull together your taxes and also give you an educational overview of how well your business performed over the year. Just as you pull these details each quarter, your annual report helps you figure out how much growth (if any) you’ve experienced and what opportunities may be worth pursuing in the future. Recommended: 5 Common New Small Business Mistakes & How to Avoid Them

Some Small Business Accounting Solutions

Staying on top of your accounts is a sound business practice, but that doesn’t mean you can’t get some help. Here are some possible aids to consider.

Accounting software

Basic accounting software will help you do things like track expenses and send out invoices, but you may also be able to use it to generate various reports. For example, your accounting software may be able to produce a cash flow statement so you can see where money is coming in and where it’s going out. There are numerous free bookkeeping and accounting programs. If you’re willing to pay for your software, you may be able to get more bells and whistles along with the basics.

Accounting services

While you may not be able to afford a full-time accountant on staff, hiring accounting services may be worthwhile for your small business, particularly if you’re too busy or feel uncomfortable delving into the numbers yourself. Accounting services typically handle payroll concerns, but you may also be able to pay them to do other tasks, like preparing financial statements, too.

Part-time accountant

Not only can accountants perform accounting tasks, they may be able to spot patterns and suggest strategic solutions to problems like cash-flow difficulties. Recommended: What Are the 5 Stages of Business Growth?

The Takeaway

Understanding basic accounting for small business automatically sets you up for a better chance of success. If you’re just starting out, you may be able to manage all of these tasks on your own, especially with the online accounting software available today. As your business becomes more complex, however, it may be time to start outsourcing tasks that are either out of your comfort zone or take up too much time.

3 Small Business Loan Tips

Online lenders generally offer fast application reviews and quick access to cash. Conveniently, you can find recommended small business loans by using Lantern by SoFi.
If you need to borrow money to cover seasonal cash flow fluctuations, a business line of credit, rather than a term loan, provides the flexibility you likely need.
SBA loans are guaranteed by the U.S. Small Business Administration and typically offer favorable terms. They can also have more complicated applications and requirements than non-SBA business loans.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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