Small Business Accounting 101 for Entrepreneurs | Millennial Entrepreneur Magazine

Small Business Accounting 101 for Entrepreneurs

Small Business Accounting 101

Why should you care about small business accounting?

For all the reasons that someone gets into business, accounting is never on that list. It is boring, it is complicated, and there is always something more important to do. I happen to be one of those gluttons for punishment that actually enjoys accounting, but I certainly understand how you feel.

Proper small business accounting converts your transactional data into something meaningful.

What that meaningful something is, is up to you. Do you need to know it for basic compliance reasons? Yes – tax filings, regulatory requirements, or providing data to a stakeholder are all important. But the real value comes from converting your financial data into information that you can actually help you to plan for business growth or evaluate historical activity within your business.

The Power of Effective Accounting for Small Businesses

Well-executed accounting helps you to understand your business in a more analytical way. In a sense, it’s how you convert your gut feeling into something quantifiable

Below, I break the small business accounting basics into 4 simple steps, including:

  • Segregate
  • Automate
  • Categorize
  • Review

Small Business Accounting 101

It takes passion and determination to start a business – let’s make sure we keep your business (and financial) goals on track with effective small business accounting strategies. This post is meant to be a guide path to get you started, no matter where you are in the process.

Segregate Accounting Transactions

1. Segregate

First, it is important to Segregate your business from you personal finances. Though there are many reasons for this, we are only going to focus on the accounting reasons in this post.

The easiest way to segregate business from personal is with a separate bank account. If you want to go all in – incorporate, then file with the IRS for an EIN (Employer Identification Number). Take that EIN and incorporation paperwork to a bank of your choice and open a business checking account.

How you incorporate, and with what entity, depends on your unique situation and business goals.

With your separate bank account, you will now need to deposit money, and start running all business transactions through that account.

2. Automate

Can you run your whole business accounting through a small paper ledger you carry with you?

Yes, but why?

One of the keys to effective small business marketing is being able to Automate your accounting process.

Depending on your business, we recommend either Quickbooks or Freshbooks – automated programs for small businesses. Freshbooks is geared toward freelancers, but Quickbooks can support your needs as well.

The reason this software is a powerful automation tool, is that it connects to your bank, and pulls in transactions in near real-time. This means that instead of manually logging each transaction, your software will log the date, time, vendor, and amount of each transaction.

Now instead of having to chase receipts, you have a list waiting for you. This saves you time, and reduces the risk of manual entry errors.

Categorize Accounting

3. Categorize

With your transaction list in front of you, it is time to Categorize your transactions.

In categorizing your small business transactions, it is best to think simple.

Think, What does this transaction represent to your business?

  • If it was marketing expense, then categorize it as “Marketing”.
  • If it was a service you purchased to provide services for a client, then it may be “Cost of Sales”.
  • If it was for materials for a product you are building and selling, it could be “Cost of Goods Sold”.
  • If it was a meal with a potential client, this could be “Meals and Entertainment”.

Categorizing your transactions will help you stay organized, and further help you budget for future expenses. Over time, you will come to see how much money you spend in each category, and can adjust accordingly. You may find that you are appropriating too much money to “Meals and Entertainment” when you could be investing more in “Marketing”, for example.

Pro Tip: You can teach Quickbooks how you want regular transactions to be classified, and it will start to do that step for you.

4. Review

Once all your transactions are categorized and organized, it is time to review your accounting on a regular basis. You can check out your reports, and see how much money you are making or losing. Start identifying areas where you could spend less, or service lines you need to put more work into.

This is the step where you start to convert the day-to-day sales and purchase activity into real valuable information for your business.

And, if you are doing this, when tax time comes, your tax preparer will thank you. Now, instead of a box of receipts and an apology, you can send them the info they need and get back to focusing on your business.

Pro Tip: Do this regularly, every week, two weeks, or monthly depending on the volume of transactions. Mark some time on your calendar. You will thank yourself knowing you didn’t wait until the end of the year to get it all done. 

Review Accounts

Wrapping Up: Small Business Accounting 101 in Review

If you follow those 4 simple steps: Segregate, Automate, Categorize, and Review – you will have won the majority of your accounting battles.

If you are in need of additional help, we recommend that you consult with a certified accountant. For example, one area you will need to get right is how to incorporate, what to incorporate as, and which entity type to be taxed as. This question is massively important, particularly with the new tax reform.

If it is all done right, the benefits you gain will pay for themselves. You have already done most of the work by getting your small business off the ground – now it’s time to get organized and serious about creating a small business accounting strategy that works!

Small Business Accounting 101 for Entrepreneurs

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