As an entrepreneur, It is crucial to learn how to manage finances and for your small business. With the right accounting foundations and expense tracking, you can gain control of your finances, maximize tax deductions, and set your business up for long-term success.
From core accounting and bookkeeping concepts to leveraging technology to simplify recording and categorizing business expenditures, this guide will walk you through the basics. Follow these tips to run a financially organized business prepared for tax time and potential IRS audits.
Too Long; Didn’t Read
- It is crucial for all business owners to have a basic understanding of basic accounting concepts like cash vs. accrual and double-entry bookkeeping.
- Open dedicated business bank and credit card accounts.
- Consider using accounting software to automate and categorize transactions.
- Keep meticulous records for taxes and audits.
Accounting Basics for Non-Accountants
Accounting is the language of business, yet it is something that many people struggle to understand. Knowing cash-basis and accrual-basis accounting is crucial for tracking your company’s finances properly. Here are what these two principles mean in layman’s terms:
Cash-basis accounting: Income and expenses are recorded when money actually exchanges hands.
Accrual-basis accounting: Income and expenses are logged when billed/invoiced, not necessarily when paid.
Since cash-basis is the simpler of the two options, most small businesses use it. While accrual accounting gives a more accurate picture, this method requires more detailed record keeping.
Another accounting concept to note is double-entry bookkeeping. This is when you record every transaction across two accounts. For example, if you spend $1,000 on office supplies, you spent $1,000, but you have an increase in office supplies worth $1,000.
Watch this 11-minute video to learn about double-entry bookkeeping in-depth.
Setting Up Your Books
To establish strong financial tracking, start by opening a business bank account and obtaining a credit card solely for company use. Log all income into your business account and make expenses only using the company card. This separates business and personal finances. Do not brush this off thinking that business bank accounts are only for large corporations. Even if you are the only person at your company, this is an important step.
It is also crucial to have an efficient invoicing process to record sales and accounts receivable. For tracking expenses, develop an organized record keeping system. File paper receipts or forward digital copies to a central accounting system. Date and label transactions to match them to bank/credit card statements.
Websites and Apps for Managing Small Business Finances
There are tons of accounting softwares and apps to help small business owners navigate their expenses. Accounting software like Xero helps automate transaction logging and key expense procedures like:
- Generating expense reports
- Matching receipts to credit card/bank imports
- Categorizing expenditures with custom tags like supplies, mileage, equipment, etc.
- Creating budgets and monitoring your actual spending
- Generating financial statements like profit and loss reports
Other helpful expense management tools include:
- Receipt scanning apps to digitize paper receipts using OCR
- Mileage tracking apps that log trips for car expense deductions
Leverage solutions that integrate with your accounting system for easy data import and categorized expenses.
If you’re interested in seeing how an accounting software could help you, Xero offers a 30-day free trial.
Organizing Expenses and Records
Logical organization is critical for easy reporting. Within your accounting software, create custom categories and use them consistently. Some examples of these custom tags could include:
Cost of Goods Sold – Expenses tied directly to producing your products/services
Operating Expenses – Fixed overhead costs like rent, utilities, etc.
Sales and Marketing – Advertising, trade shows, brand assets
General and Administrative – Office supplies, software, insurance
Payroll Expenses – Employee salaries and benefits
Interest Expenses – Credit account and loan interest costs
Maintain meticulous physical or digital records of all receipts, invoices, contracts, and other documentation. You need supporting evidence of expenses if audited by the IRS.
Tax Time and Audits: What Records to Keep
The IRS requires all businesses to keep reliable expense records. For small businesses, it’s recommended to keep records for at least 3 years after filing your tax return. Examples of documentation you should save include:
- Invoices from vendors and suppliers
- Receipts for every business purchase and expense
- Mileage logs
- Credit card and bank statements
- Payroll records and tax documents
- Purchasing contracts
Thorough expense tracking and organized records will demonstrate legitimacy if faced with an IRS audit.
Succeeding as a Small Business Owner
Mastering your company’s financials may seem daunting, but doing so is crucial for success.
With smart financial management and diligent expense tracking, you can position your small business for financial success.
The time you invest in setting up proper accounting practices and record keeping will pay dividends in the long run through improved decision making, operational efficiency, and tax and regulatory compliance. Don’t let the numbers intimidate you – with the right foundations, tools, and organizational system in place, you can take control of your finances and set your business up for sustainable prosperity in 2024 and beyond!
Looking for Financial Guidance for Your Business?
If you still have questions on best practices for your business, we’re here to help provide clarity and guide you to financial literacy.
Contact us so we can discuss your specific situation, clear up any confusion, and ensure you have the information needed to feel confident making financial decisions for your business.
