But at the same time, there is an incredible level of variance between industries and business types. There are many different ways to account for different expenses and income. This guide will demonstrate the importance of accounting for a small business.
Get it right, and you won’t have to worry about business inefficiencies or unwelcome fines from the authorities.
An Introduction to Small Business Accounting
Small businesses do not need an in-house accountant. Given that most of the essential details can now be completed with high-caliber payroll software, this is not a requirement. Small businesses only need to use an accountant on an as-needed basis. For really small businesses, you don’t even have to do this.
Small businesses, however, often rely on thin profit margins. As such, it is important to file everything on time and to make sure that everything is accurately recorded. It is the indirect cost of poor accountancy that can kill a small business. If you get hit with a court case for liability but cannot find the record, it will result in no small amount of stress
Not to mention the time you will save as opposed to manually filling in the information and sending it off yourself. Small business owners should look towards software and understand the following (non-exhaustive) list of terms:
What Is the Real Purpose of Accounting?
There are many reasons to take accounting seriously. Accounting is itself an indirect cost. You need it to run your business, but it has no impact on what you are providing (unless you are an accountant!).
But you need to do it right anyway. The following are just some of the reasons why accounting is necessary. Note that accounting and payroll are linked, and often come together in software packages. This means you hit two birds with one stone, so the employee hours are recorded, calculated, added to forms, and sent to the relevant authorities by the deadlines.
Compliance With IRS Deadlines
If you miss a deadline, you will get a fine. And there are many of these deadlines. Not only do you have to pay tax records on time, but you have more information to submit relating to employee information and other records. The accounting will save the relevant documentation for you. You can even get an accountancy software provider to automatically file the taxes for you. If you have ever tried to manually file taxes before, then you can see why this is a truly wonderful innovation for modern business owners.
Business Performance Analysis
Wouldn’t it be easy to have an online platform that showed you exactly where all of your money was going? How much you were spending on each department, employee, contractor, project, etc? Well, this is exactly what a good accounting system can do for you. This is slightly more relevant to large corporations as compared to smaller businesses, but only just. You can track where you are spending too much capital and see operational inefficiencies with smart accounting.
Budgeting and Performance
Linked to the above point, accounting is excellent for basic budgeting. How much capital do you have, can you afford to hire new staff, what are your debt obligations, etc. It is not fun when you misallocate resources and do now have enough capital to survive long term. Most US business owners barely have enough capital at hand to survive the month. Review your accounts to ensure that you have a backlog of capital and optimize it where you can.
Decision Making
You cannot run a business without making good decisions. And you cannot make good decisions if you do not know everything about your organization in-depth, right down to the last expense. Many businesses go under due to poor management of resources. They thought they were in a better position than they were, and they ended up blindsided. Review your accounts to understand where you should take your business in the future. And always have capital reserves at hand, just in case.
Liquidity
If you do not know where the money is going, then you are unlikely to have a lot of it. Like all resources, money has to be managed. And you need to make sure that you have an adequate amount at hand. You can never really know when a disaster is going to strike. Which is an apt sentence, given we are currently going through the COVID pandemic which shut down a lot of businesses.
Loan Acquisition
All banks are going to want to review your accounts. The last 3 years are the most relevant to them, but they will want to see as much as possible to make the correct decisions. Take your cue from this. The banks want to look over your finances in detail – surely you should want to look at your business documents in far greater depth to spot trends?
Online loan providers will also want to see business documents. Many will require you to hook up an accounting system for easy transfer of accounting records. Some online providers only require this before you can take out a loan. This is how relevant accounting software is.
Business Sale and/or Audits
If you are getting an audit, then it is best to have all of your records in order. You do not have to have done anything actively criminal, simply by failing to keep adequate records you are violating the law. In the context of a business sale, you will also need to have a good accounting system in place for easy retrieval. Potential business owners will want to see all of your accounts before they even consider making a purchase. Different documents for the sale of the business and audit qualification will be relevant, depending on your industry, state, and size of business.
How to Stay on Top of Small Business Accounting
In the past, the only way to stay on top of accounting was through a dedicated accountant. It was tough work, not to mention expensive! Thankfully, we are now in the digital age where you can avail of these benefits at a low cost. The most direct way to stay on top of small business accounting is with high-quality accounting software providers. We have made a detailed list of the advantages and disadvantages of each. In shorter formats, the 3 top providers we tested are:
The level of functionality offered with each platform differs depending on what kind of package you subscribe to. Ideally, look for an accounting solution that also offers payroll. Some will even offer Human Resource management on top, which can be ideal for larger businesses. The most important item to look for is automatic tax filing and the ability to issue the relevant forms to contractors and employees. Most small business owners will only need basic accounting functionality unless they are specialized.
Features of a High-Quality Accounting Software Provider
Accounting software can do a lot to enhance a business. Below is a list of some of the items that an accounting software package can provide:
On top of this, the typical accounting functions will be provided by all platforms. This includes double-entry accounting, balance sheet, profit, and loss, etc. Other providers may cater to specific industries. Some businesses might have a real need for inventory management functionality and job costing, or other benefits.
There are many, many, many other features we could enumerate upon. These include Envelopes, Receipts, Reminders, Credit Notes, Pack Slips, Estimating, Quoting, RMA Support, Customer Credit Management, Versioning And Approvals, Variance Reporting, Flexible Accounting Periods, Lifo, Fifo, Average Cost Option, Multi-Currency Support, and more.
At Finimpact, we love all things related to accounting! But we have given you the most relevant ones above. The bottom line is that a good accounting and payroll system can do much to improve your business. It should also serve to help you to understand the business in-depth.
The Consequences of a Poor Accounting System
As can be seen from the list above, the benefits of a high-quality accounting system are vast. And we haven’t even scratched the surface. On the other hand, a poor accounting system is next to useless. You need accounting software to complete the tasks pertinent to your business model. Records need to be kept, forms need to be filed, and you need the ability to crunch numbers and see the correct, real-time information.
The worst-case scenario is when an accounting provider updates their software and leaves you in the dark due to a lack of backward compatibility. It can be a literal nightmare when you have customers to invoice and suppliers to pay. Reconciling bank accounts and records en masse with a new provider is a massive pain.
And there are direct financial costs. If you fail to submit a form on time, you will get a fine. If you fail to keep proper records, you could get a fine or lose a court case due to it. In a more general sense, you will suffer from a lack of time and efficiency due to a poor interface. You will not be able to view all of the details of your company from a financial perspective. Ultimately, your business will suffer, as there will be a mismatch between your suppliers and vendors. A smooth system of financial transfer is needed.
The Bottom Line
Accounting is not an area that you can skimp out on. Free trials are available, and the basic packages typically only cost about $10 a month for those that have less than 10 employees. You can scale as you see fit, once satisfied with the design and functionality.
There can be something of a learning curve despite the intuitive nature of such platforms. But all in all, accounting has been made easy for small business owners. It can serve to enhance your business and your business knowledge if you take the time to get familiar with it.
There is no excuse for maintaining sloppy records or trying to save $5 a month on such a vital business component. Let automation resolve the accountancy and payroll side of your business while you focus on profit generation.