A Beginner’s Guide To Small Business Accounting

You’re a doer. The type of person who dreams, then goes out and makes those dreams a reality. That’s how you started your small business and made that business grow. But when you live by Marcus Lemonis’ “Know your numbers” philosophy, you can make your business grow even stronger. Let’s say you bottle lemonade and had your best year on record. That’s awesome. It looks like you have enough money to hire another person, like you’d always wanted. But are you sure you can afford it? Maybe you look at your books and realize that you still owe a supplier $40,000. Now you can weigh that in before you hire another person and find yourself in a cash crunch. That’s the power of “knowing your numbers.”

You definitely want to open a dedicated bank account for your small business. The key word here is “dedicated.” This is all about isolating your business transactions. From there, just make sure you use your personal account strictly for personal matters, and your business account strictly for business. That might sound obvious at first. But a lot of people might think, “Wait a sec… I’m the only owner and I funded this business myself. This is technically all of my money anyway. What does it matter if I blur the line?” That’s a pretty common thought process, especially in the early days. But you really need a dedicated bank account for your business. That’s the only way you can rely on the accuracy of your small business accounting. And just to be perfectly clear, you definitely want accounting you can rely on. Let’s take a look at five reasons why reliable small business accounting is so important.

A great bookkeeping system helps you plan your financial future in a ton of ways, but in this case, it could’ve helped them manage cash flow and spot trouble before it even cropped up.

It Allows for the Accuracy of Your Reporting

• Whether you’re doing your taxes, communicating with your partners, or navigating an audit, you need to make sure you’re passing along reliable information. If you don’t, you take on an unnecessary risk. What if you owe your partner money? How about a government entity? What if you underpay? That could result in penalties or even legal action. It’d probably never come to that, but you definitely want to give yourself that extra piece of mind. Small business accounting helps you file the right forms and pay the right government entities their share.

It Protects You Legally

• If someone takes legal action against your company, you want to make sure they’re just going after your company and not your personal assets. A separate bank account and airtight bookkeeping helps your lawyers protect you in court. If you’re going to explain to a court that you and your company are truly two separate entities, you need to have the paperwork to back that up.

The way you get your small business accounting in order is by recording every single business transaction. You do that in something called your “Chart of Accounts.” That might sound like a technical term, but this is really just a ledger where you record all of your financial moves. You’ll typically have categories like assets, liabilities, equity, revenue, and expenses. Then you break each of those out into sub-categories that help you draw actionable insights. Let’s take a look at a few of those sub-categories, because once you see a few examples, you’ll realize that it’s all really intuitive and easy to digest.

• Assets might be broken out into cash, accounts receivable, and inventory.

• Liabilities will probably have line items for your company credit card balance and accounts payable.

• Equity will have all the money that each owner contributed along the way.

It all gets really specific. There’s a sub-category for every nook and cranny of your business. Do you have too much money tied up in inventory? Do your sales justify that much inventory? In those moments when you don’t have all the answers, a chart of accounts helps you find them.

You might hear people use the terms “bookkeeping” and “accounting” interchangeably. But there’s a small difference worth mentioning. Bookkeeping is the actual process of recording transactions in the chart of accounts you just read about above. Accounting then takes an extra step, using that information to generate reports and financial statements. In other words, bookkeeping gives you all of the source material you use to do your accounting. So, they’re attached at the hip. You need one to do the other. They’re part of the same process of tracking everything, and of course, knowing your numbers.

Some people do this themselves by hand or through spreadsheets, which might seem like the cheapest option at first glance. But think about the time value of money. Get a sense for your own hourly rate, then ask yourself if your time is more valuable spent elsewhere, like closing deals. This thought exercise leads some people to delegate their bookkeeping to a professional who can do this cheaper, faster, and better. For some, this means hiring a freelancer. Others hire a full-time employee. But handing this over to a specialist might help you get your books right the first time, and liberate you to play to your strengths. If you do hand this over to someone else, you’ll want to put a few checks and balances into place. Your accountant can give you a list of safeguarding procedures to implement such as having an approval process for all outgoing funds, checks and credit card payments.

As you’re trying to decide who’s keeping your books and doing your accounting, you should know that it’s a nuanced field. Whoever does it, or advises you, will definitely need the proper training. To give you some idea, below are a few of the many factors you’ll need to keep in mind along the way.

The accrual method accounts for all of that context. You might be legally required to use one or the other depending on where you’re based, so make sure you look into that.

• This is a very custom decision you’ll have to make based on the consistency of your workload. But when you’re running that math, you also want to factor in the tax implications. Whether your team is full-time or freelance, each path triggers state, federal, and local taxes. Some are paid by you. Others are paid by the freelancer. Some are paid quarterly. Others are annual. But all of them have their own paperwork and filings — the specifics of which will flow from where you and your contractors are doing business. So, make sure you see the complete picture when you’re making the “full-time vs freelance” decision. A payroll company and accountant can help you break it all down.

Some states charge tax according to where the goods originate. Others states charge tax based on where those goods end up. If you do a lot of interstate commerce, you’ll want to meet with an accountant on the front end to ensure a smooth launch. It’s definitely not complicated once someone shows you how to do it. But that clarity usually begins with a custom professional review. Once you get huge, you’ll be glad you took the time to get this right.

Is it because your business model slowly changed and now you no longer have a margin? Or is it because your business model is great, but you had a one-time cost you’ll never have to worry about again? This sort of review is huge for seeing the big picture, especially when you’re sniffing out trends year-to-year. But as useful as this is for your internal purposes, it’s also important for your external reporting. You probably owe a few different government entities taxes on a quarterly basis. The amount you owe is based on your income statement. So, in order to settle up with the government, you’ll need an accurate, up-to-date income statement.

You’ve just taken in a lot of information, but this is a great opportunity for something Marcus really loves: process. Take it one step at a time, and remember, this only seems like a lot because it’s new. After you make it through a year of small business accounting, it’ll all start to feel like a breeze. Here’s how to get started:

1. Planning Meeting – Meet with a professional accountant and gain an understanding of all the forms you need to file, which entities you’re filing with, and when those forms are due.

2. Bookkeeping – After you get a handle on the above, you’ll have a sense for whether you can handle bookkeeping yourself or you need to loop in a professional. But this step is where you actually assign your bookkeeping responsibilities to a designated person, and figure out whether they’ll be using Quickbooks, or another system you prefer.

As always, keep a meticulous record of every form and every payment you make along the way.

A rock-solid accounting approach isn’t just good for your business. It could also keep you out of serious trouble. Bookkeeping is at the center of a lot of fraud cases. The CEO of Tyco, Dennis Kozlowski, didn’t do a great job separating his personal finances from those of his company. He spent company money on $6,000 shower curtains, a $30 million home, and a $2 million birthday party for his wife. He basically disguised personal expenses as business expenses, which is known as “misappropriating company funds.” Time Magazine reported that this landed Kozlowski in prison for 25 years, so make sure your company’s books are always squeaky clean.

Do you remember your first day of high school? Or your first day in the real world? Or your first day running a business? It all seemed like a lot, but once you got the hang of it, everything was a piece of cake. That’s a great way to think of small business accounting. It’s not hard. It’s just new. So, embrace the challenge, because it’s like Marcus always says, “You don’t get anything. You have to earn it.”

This article is informational only and subject to errors or omissions. As with any legal or regulatory advice, please consult your legal counsel or tax advisor to make sure you are in compliance with all and any federal, state, city or county rules and regulations. More