Take control of your business finances and avoid problems with these 10 accounting tips for small business owners.
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Your small online gourmet coffee business is taking off and you've managed to double your coffee club subscription sales over the past year. You're excited about the success, but you've fallen behind on the administrative side.
Your desk is full of invoices and receipts, and you haven't looked at your company's accounts or bank statements for three months. It's time to take accounting and financial management seriously. Here are some tips to help you do just that.
INDEX
What is accounting?
10 accounting tips for small businesses
Frequently Asked Questions About Accounting Tips
What is accounting?
Accounting is the process of gathering and presenting financial data canadian email addresses about a business. It is used to analyze the financial health of a company, track its various operations, and make decisions about whether to expand, hire, reinvest profits, take out loans, or seek investors.
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Financial management provides much of the material used in accounting and involves collecting invoices, receipts, payrolls, and tax payments and recording the financial data on those documents. Accurate and up-to-date financial management increases a small business's chances of success.
10 accounting tips for small businesses
Separate personal and business expenses
Use financial management software
Make a budget
Keep detailed records
Understand the laws relating to VAT
Manage cash flow
Stay organized, clean up your accounts
Choose an accounting method
Automate billing
Plan your taxes ahead of time and meet deadlines
1. Separate personal and business expenses
Open a business bank account to avoid the confusion that comes from mixing personal funds with business transactions. This will make it easier for you to collect and verify business expenses for tax deductions.
Although it is not always mandatory to have a business account, many experts recommend using a business account for better business management.
Avoid using your personal credit card for business expenses and opt for a business credit card. It can also help cover temporary cash gaps that don't affect your personal finances.
2. Use financial management software
Properly recording income and expenses is essential to good accounting. Financial management and accounting software can automate many time-consuming activities that have to be done manually, such as sending invoices to clients, classifying expenses, and paying employees. Accounting software can also help reduce errors.
3. Make a budget
Small business owners should have a budget that projects revenue and expenses and review it periodically to compare it to actual results. Budgeting helps small businesses analyze their operations to improve cost efficiency, as well as identify potential opportunities for expansion.
According to several U.S. government studies, creating a budget is important and companies that do so tend to have better financial results. Those without a budget may not realize a problem until they are in the midst of a cash crunch.
4. Keep detailed records
Detailed records increase a small business's chances of success. Records are also critical during tax season, when a business must document any deductible expenses.
Tax Agency rules require companies to keep records for at least six years; accountants recommend ten.
As a first step, a small business can use different folders for paper receipts based on the type of expense, vendor or supplier. Some business software services allow users to electronically scan receipts with mobile devices and then sort and categorize them in the financial management system.
5. Understand the laws regarding VAT
Business owners should be aware of VAT laws in the countries where they operate or sell. In Spain, VAT is applied in the Peninsula and the Balearic Islands, so the Canary Islands, Ceuta and Melilla are exempt.
Businesses in Spain must collect VAT, although if you sell to other countries in the European Union or around the world, VAT will have to be added by the entity that buys from your business.
Small business owners, especially e-commerce businesses that operate in different countries, may want to consult with an accountant or manager about how to comply with applicable VAT laws in different cases.
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6. Manage cash flow
A business's cash flow indicates its liquidity, or how much money there is to pay expenses immediately. Many small businesses fail because they don't generate enough cash flow.
A small business can create a cash flow statement so it can measure when money is coming in versus going out. Some ways to improve cash flow include:
Synchronization. Shorten payment terms for customers (e.g. from 60 days to 30) and extend payment terms for suppliers (e.g. from 30 days to 60).
Margin of error. Incorporates a margin of error into cash flow projections.
Emergency fund: Set aside a cash reserve for times when cash flow fluctuates.
Line of credit. Get a business line of credit or credit card to use if you need it.