Own A Business? Here’s Everything You Need To Know About Managing Your Finances
From the experts in business accounting and bookkeeping
Outsourcing your Accounting and Bookkeeping to Professionals
Most business owners started their companies because they were experts in providing a good or a service—not at balancing a book. Nevertheless, good bookkeeping is necessary to manage any company’s financial health, guiding decisions for growth initiatives and ultimately ensuring your business is in good standing with its tax obligations throughout the year. However, it can also be tedious, complicated, and time-consuming — especially for those who own smaller businesses or sole proprietorships. Additionally, the IRS can be unforgiving when it comes to mistakes — for instance, filing your payroll taxes just one day past the deadline incurs a 2% penalty. To make matters worse, these penalties can add up to a hefty 15% of the initial amount owed.
There is good news, however; outsourcing accounting and bookkeeping to an outside firm is a simple and rewarding process that allows business owners to spend less time worrying over books and more time, well, running their businesses. Every day, more and more businesses make the switch to outsourced bookkeeping and accounting with FinancePal.
We at IRS.com are proud to recommend FinancePal as the leading accounting and bookkeeping firm to help your business prosper for years to come.
Accounting and Bookkeeping for Startups
So, you’ve turned your great idea into a lucrative business opportunity, started making sales, and are now thinking about processes that can help take your business to the next level. As a startup owner, your focus is likely set on acquiring customers and generating revenue. While those aspects are key to your business’ success, so are your finances.
Accounting is an essential part of any business, but especially during the startup phase. Once you’ve lifted your idea off the ground, established the structure of your business, and figured out your basic logistics, you need to start thinking about accounting. Since money will ultimately drive the success of your startup, financial management will play a significant role in the viability of your company.
While in the early stages, it may seem that your income and expenses are not complex enough to merit formal management, doing so from the get-go will significantly benefit your business in the long run. Setting up accounting during this phase can optimize your financial organization, increase your operational efficiency, and give you a better picture of your present and future financial health. More importantly, having proper, GAAP-compliant accounting from the very start will make your business much more attractive to investors.
Small Business Cash Flow Basics
Maintaining a positive cash flow is critical to your company’s long term success — as much as securing investors, accurately forecasting and setting benchmarks, and being able to sustain growth. However, many small business owners cite cash flow management as one of their biggest challenges. This is due to a variety of factors, ranging from not being familiar with accounting and bookkeeping to simply not having the time to dedicate to the task.
Experiencing cash flow problems at any point in your business’s operation may be more detrimental to its overall financial health than consistently seeing losses month after month. In fact, according to a study by U.S. Bank, 82% of small businesses to fail because of poor cash flow management.
So what factors affect your business’s cash flow? There are many, but several of the most important include:
- Inventory – While inventory is necessary for product-centric businesses, it can become an issue if you have invested in too much inventory that is not selling quickly enough.
- Sales – Sales are an important factor in growing your business but when it comes to cash flow, it’s not a direct indicator of your success. Additionally, sales are easily affected by the economy which can make them unreliable, presenting a risk to businesses with high expenses.
- Accounts Receivable – This is the incoming cash you have from purchases. If you have too many open invoices, meaning you’re waiting for money to hit your account, it could lead to trouble.
- Accounts Payable – This is the outgoing cash your business is responsible for. Accounts payable can include labor costs, loans, and other operational expenses.
A lot of small businesses run into cash flow issues when these factors stack up because they are trying to grow too quickly. Without proper financial planning, these aspects of your business can get out of hand. The easiest way to mitigate cash flow problems before they happen is to have professional accountants and bookkeepers on your payroll.
The Balance Sheet and the Income Statement
When running a business, there are five types of financial statements that are part and parcel to the smooth operation of a company. These are: (1) the balance sheet; (2) the income statement; (3) the cash flow statement; (4) the statement of change in equity; and (5) the statement of financial position. Of these five financial statements, the balance sheet, the income statement, and the cash flow statement are considered the “Big Three” — the three main financial statements that the owner of any business, regardless of size, should be very familiar with. And when looking at the big three, the importance of a healthy balance sheet and profit and loss income statement cannot be understated.
It is important to note all of the key differences between the income and balance statements so that a company can know what to look for in each.
The first and foremost key difference between the two documents is the indication of performance. The balance sheet doesn’t indicate performance — it merely portrays how a company is utilizing its resources. The income statement can give a much clearer picture of how a business has performed over a period of time.
The second key difference between the balance sheet and the income statement is timing. The balance sheet is more of a snapshot; it shows what a company owns and owes at a specific moment in time. Meanwhile, the income statement shows total revenues and expenses over a specific period of time.
The third key difference is what each document reports. The balance sheet reports assets, liabilities, and equity. The income statement reports cashflow information such as revenue and expenses.
The fourth key difference between the balance sheet and the income statement is how each document is used by businesses. Companies use the balance sheet to determine if the company has enough assets to meet financial obligations. Banks use the balance sheet to keep track of how the company uses its resources. Meanwhile, the income statement is mainly used to evaluate performance and to shed light on which, if any, financial issues need correcting.
The fifth key difference between the two documents is how they affect creditworthiness. Lenders use the balance sheet to judge resource utilization in order to help them determine if they should extend any more credit. Income statements, on the other hand, are used by lenders to decide on whether or not the business is making enough money to pay its liabilities.
Any business owner needs to be cognizant of the differences between the income statement and the balance sheet to better synthesize the vital insights they provide. But even though these two documents provide different sets of information, it is plain to see why both statements play an important role to banks and investors because they provide a solid indication of the current and future financial health of a company.
The key to a healthier financial future for your business.
Connect with professional accountants and bookkeepers today to help inform the direction of your business.
7 eCommerce Accounting Tips and Procedures You Need to Know
In 2019, eCommerce accounted for $3.5 trillion in retail sales worldwide. Translation: There’s a lot of money to be made through online sales.
Are you planning to open a business that relies extensively—if not exclusively—on eCommerce? Then you must brush up on the basics of eCommerce accounting. Here are 7 tips and procedures you need to know:
- Choose the right business entity. When you open a new business, you’ll have to elect a business entity. There are several different types of business entities you can choose from, but most small businesses elect to be either a sole proprietorship or a limited liability company (LLC). Some companies may choose to be an S Corp. This affects how you are taxed.
- Choose your accounting method. You need to choose the accounting method that your company is going to use. There are two kinds of accounting methods: cash accounting and accrual accounting. Cash accounting means that you only record transactions the moment that money enters or leaves your business. Accrual accounting means that you record transactions as soon as they occur. Most small businesses choose to use cash accounting because it gives you a better idea of how much money your company has at any given time.
- Cut Costs. Bookkeeping is more of a day-to-day process, but the goal of accounting is to make your business more profitable in the long-term. One of the best ways to boost your company’s profitability is to cut costs. To inform cost-cutting, you must utilize your financial statements, especially the income statement. Your income statement will list the majority of your company’s expenses, including the cost of goods sold and operating expenses. Pore over these documents and find where there’s the heaviest amount of costs. Think about ways that you can minimize these costs. Can you get by with one fewer employee? Can you buy cheaper goods to sell? Can you rent a less expensive office space? You might not be able to dramatically cut your costs, but if you trim a little fat where you can, it’ll add up over time.
- Boost your profitability. Here’s the question that all business owners and accountants lose sleep over: how can I boost the profitability of my business? There’s no universal answer, unfortunately, but your financial statements might be able to provide some clues. Are there any products that are selling extremely well? Maybe you can sell more products of that type. Is there a correlation between increased spending on marketing, and higher sales in a certain category? Perhaps you can continue running that marketing campaign or targeting that specific audience. Use your balance sheets to find where sales are coming in, and, if possible, how and why they’re coming in. That may give you some ideas on how you can boost your company’s profits.
- Conduct seasonal budgeting. Small businesses are more susceptible to slow periods, regardless of whether they’re brick-and-mortar or eCommerce-based. For example, you might be very profitable during the summer, but struggle to make ends meet during the winter (this is also called the “feast-and-famine” cycle). You can overcome the slow periods by budgeting throughout the year. Use your financial statements to determine how much money you need to stash away in a business savings account to pay your rent and wages during the slow season. Then put a little money away throughout the year to prepare yourself. You should also keep track of how your inventory changes throughout the year; do you sell less of a certain product during March? Only stock a limited amount of that product so you don’t waste money buying anything that’s not going to sell right away. Do you sell more of a certain product in April? Then be sure to stock plenty of it that month so you’ll have lots of products available to sell. Tracking your inventory highs-and-lows is both a cost-cutting measure and a profit-boosting tactic.
- Maximize your tax savings. This is both a bookkeeping responsibility and an accounting responsibility. At the end of the year, you can save money on taxes by claiming tax-deductible expenses that your business made. Some of these expenses include:
- Office rent
- Equipment and supply costs
- Utility costs
- Accounting services
The more money that you save on taxes, the more money you’ll have to put into your business savings, to reinvest in your business, or to pocket.
- Know the Use Tax. Here’s one accounting challenge that’s a unique burden to eCommerce companies: use tax. Since eCommerce has become such a large part of the economy, interstate trading laws have evolved. In 2020, if you sell a certain amount of products to another state or if you make enough revenue selling to buyers in another state, you’re technically considered a legally-operating business entity in that state, and you’ll be required to pay that state’s sales tax on the transaction. This is technically a bookkeeping concern, but it’s also an accounting concern, for two reasons:
- You may need to account for interstate sales tax when you’re deciding on pricing for your products
- If you don’t stay on top of paying interstate sales tax, you could get in legal trouble with that state’s tax authority
Good accounting is how you’ll gauge the health of your business and grow your profits. Bad accounting could lead to the failure of your company, or worse: trouble with the IRS. It is always important to rely on professional, dedicated accountants to guide your eCommerce business to success.
Cash vs. Accrual Basis Accounting for Small Businesses.
As a small business owner, one of the many important financial decisions you’ll make is whether to use cash or accrual basis accounting. For many business owners, this can be a roadblock when getting started; whether you’re unaware of the difference between these two accounting methods even or simply need more background on how they work, we have you covered.
Put simply, the difference between accrual vs. cash basis accounting comes down to the timing — specifically, when transactions are recorded. In accrual basis accounting, transactions are recorded as soon as an exchange is initiated. However, in cash basis accounting, transactions aren’t recorded until the money is sent or received.
While making accounting decisions with little to no financial experience might seem overwhelming, we’ve created this guide on cash vs. accrual accounting for small business owners to help simplify the choice.