Customers are happy, employees are happy, and you’re racking up new orders. Life seems good in the business world, but there’s just one problem — nobody is consistently monitoring the cash flow.
It’s easy to overlook things, such as unpaid debts, lender financial statement requirements and accounting implications, especially when sales are high. Unfortunately, failing to track incoming and outgoing expenses can cause some major problems for your business. In this guide, we’ll explain why and share some helpful suggestions for how you can implement effective accounting practices at your company.
Why Is Accounting So Important for New Businesses?
Simply put, most businesses have to spend money to make money. If you spend more than you make, you’ve got a problem. However, it may take months — or even years — to notice issues if you aren’t tracking expenses correctly. This can result in lost profits or unpaid debts for your company, but it can also land you in legal trouble.
Businesses must report all of their annual income to the IRS. If you don’t track every source of revenue or monitor the amount you spend on health insurance and other company benefits, the IRS won’t be impressed. You may get audited, fined or even threatened with legal action. If you continue slacking on accounting practices, your business may even get shut down.
Fortunately, there are steps you can take to prevent this outcome. Establishing an accounting routine gets overwhelming for many new business owners, so we’ve compiled a list of the best accounting practices to help you get started.
Every business has different financial needs and expectations. However, there are several accounting practices that can benefit nearly any company. From budgeting to hiring help when needed, here are seven things you should consider implementing.
1. Create a Budget
You can’t avoid overspending if you don’t establish a budget for your company. In order to create a budget, there are few things you should do:
- Identify all of your income sources
- Calculate fixed and variable expenses
- Plan for one-time or rare expenditures, such as renovating your office
- Provide some cushion for unplanned costs, such as a broken water heater or equipment repair
After you’ve completed these steps, determine whether you need a monthly, quarterly or annual budget. Some businesses have all three because it helps them stay on track throughout the year and identify any budget-draining expenses.
2. Separate Business and Personal Expenses
It’s convenient to merge business and personal expenses, especially if you’re running a small business with limited staff. However, you must keep business and personal finances separate, even if you can save money by using personal accounts for business expenses.
Let’s say, for example, that you have the lowest APR credit card available for an individual account holder. It may be tempting to use this card for company expenses rather than trying to get the best small business credit card for your company. Unfortunately, it makes it difficult to track your business expenses accurately and may create problems if you get audited. Also, some lenders and credit card companies specifically state that you must use traditional credit cards for personal expenses, not company costs.
Make things easy on yourself and use separate accounts for all business and personal transactions, especially if you run your company from home. Here are some accounts you should keep separate whenever possible:
- Credit cards
- Bank accounts
- Equipment financing
- Working capital funds
Even if you keep funds separate, the occasional mistake may still happen. If you accidentally buy something for your business with a personal card, don’t panic. Track the expense in a business log immediately and save the receipt or invoice.
3. Track Every Expense
Whether you treat your morning crew to donuts every Friday or spend $10,000 on new computers once a year, whoever handles accounting for your business should know exactly where every cent goes. Your team must record all company expenses, big or small, even if they aren’t directly related to inventory or equipment.
For example, let’s say you buy dinner for your team on the last day of each month if they agree to stay late and help with month-end tasks. There are 30 employees, and you spend approximately $500 for their food. If you fail to track this expense, your statements may be $6,000 short at the end of the year. You may also overspend on training material or supplies because your accounting team doesn’t realize your company spends $500 on meals each month.
Make sure you hold on to receipts and invoices and clearly label any expenses. Don’t assume that you’ll remember what a receipt means a few months later if it’s not labeled correctly.
4. Know the Basics
You don’t need to be an expert on the importance of financial statements to lenders or whether you can lower your APR on a credit card just yet. Start with accounting basics, such as monitoring assets and regular expenses.
Here are some financial terms and practices every accounting team should understand and implement:
- Balance sheets: These detailed documents show exactly how much capital your business has, plus any assets or liabilities associated with your company
- Cash flow statements: This shows incoming and outgoing money movement for your company’s operating costs, financial investments and other business activities
- Cash basis accounting: Great for beginners, this accounting method tracks income when it’s received and records expenses when they’re paid
- Accrual method accounting: Revenue is tracked when it’s earned rather than received, and expenses are recorded when invoices are received rather than paid
- Accounts payable: Money your company owes its creditors
- Accounts receivable:Money that debtors owe your company
- Profit and loss income statements:Provides details of revenue and expenses from a specific time frame, such as one month or one year
Once your accounting team knows the basics, it’s okay to focus your attention on other financial practices. For example, you may want to learn more about how to get a low credit card APR, commercial investment property loans or startup business equipment financing.
Lendzi can help answer questions you have about these financing options and other business investments. Get started with Lendzi now.
5. Choose the Right Accounting Software
Accounting can be tedious and time-consuming, and there is plenty of room for errors if you don’t have strong math skills. That’s why many businesses rely on accounting software instead of calculating expenses by hand. Accounting software lets you automate data calculations and track expenses digitally. This helps prevent mistakes, and it also helps reduce the amount of paper documents your company needs.
There are numerous options for accounting software, and QuickBooks is the go-to choice for many companies. QuickBooks has a user-friendly layout, and it’s great for small businesses and solopreneurs. However, it’s pricier than other options, such as Xero, Zoho Books, and FreshBooks. You may want to test drive free accounting software, such as Wave, before investing in another program.
When you select accounting software for your company, make sure it has all the features you need. Xero and Zoho Books work well for inventory management, while FreshBooks works well for team projects. Consider QuickBooks if you need a program you can learn quickly and that works well on various devices.
6. Prepare for Audits
The IRS can audit your company at any time, but you should also perform internal audits to make sure things are running smoothly. An internal audit performed by a neutral third party can help expose flaws in your accounting system before issues become worse. You may notice mislabeled or miscalculated expenses, forgotten revenue or funds that are unaccounted for.
Here are some things you should keep on hand for a potential audit:
- Receipts for all purchases made using cash, credit, debit, business lines of credit or any other payment method
- All bank statements for checking accounts, savings accounts and other financial accounts
- Invoices or sales slips
- Canceled checks
- Checkbooks, ledgers or journals with your company’s financial info
- Equipment records, such as records for company cars and cell phones
- Appointment logs
Experts disagree on exactly how long you should keep these documents, though many believe you need them for at least three years. Keeping records from the last five to seven years is ideal, though you may want to save them for up to 10 years so you have peace of mind.
7. Expand Your Team
There’s no room for guesswork when it comes to accounting. If you’re struggling to monitor your company’s cash flow, consider hiring a bookkeeper or requesting help from an independent contractor who specializes in accounting. Look for someone with verified experience, such as an educational or professional background in finance, and make sure you hire a candidate you trust. After all, they’ll have access to your company’s confidential data.
Consider having your accountant sign a non-disclosure agreement (NDA) promising not to share information about your company with others. This may protect your company’s data from winding up in the wrong hands. You should also make sure your accountant has access to a secure platform during the workday so you can minimize digital threats from hackers and other online troublemakers.
Find Financial Services for Your Business at Lendzi
After you determine how much money your company has and where it’s going, it’s time to explore beneficial financial services. Lendzi is here to help you or your accounting team every step of the way, whether you need information about small business loans, merchant cash advances or invoice factoring. Contact us today so we can help you develop a solid financial plan for your business, whether you’re a female entrepreneur who works from home or a business owner with stores across the nation. We have solutions for every business, big or small, and look forward to connecting with you soon.