Running your own business can be a very exciting affair. Setting up your systems and processes, acquiring clients, delivering terrific work – it can feel exhilarating going through all this, and creating work that is fulfilling and meaningful to you. The thought of being your own boss and not being tied down by a job has great appeal, and that is possibly why millions of people across the globe currently run their own businesses.
Managing your own company is very different from being an employee. The roles and responsibilities of an employee tend to be limited to a specific department. But the duties of a business owner are not limited to a single department – they are bound to have a finger in every pie. This is particularly true when a single individual is running the company.
One of the more technically complex departments happens to be finance and accounts. If you are trained and have experience in it, it might feel a bit easier to navigate. But the vast majority might not have much expertise in this department, and handling it could feel intimidating for that segment of entrepreneurs.
Those of you who find yourselves in this category, you could check out 6 business accounting tips that have been compiled below to enable you to manage your numbers better:
1. Track All Business Expenses
Continually being aware and keeping a record of all your business expenses can feel overwhelming, but keeping track of expense receipts isn’t as complicated as it appears to be. To have a robust business accounting system in place, you need to employ methods that are effective at tracking expenses. This will give you an accurate report of the growth of your business and help you build your financial statements. Over a longer duration, it will also help validate what you report on your tax return.
In the United States, the Internal Revenue Service doesn’t ask you to save receipts for expenses under $75. Nonetheless, it’s essential to remain consistent about recording all your business expense receipts. Sticking to a straightforward routine can help you stay consistent and simplify the process of keeping track. The more natural the process, the more likely you are to continue doing it. Saving all of one’s paper receipts could feel taxing, and misplacing paper receipts might happen often. But with the advancements in technology, this process has become less complicated. You can now take a picture of your receipts and upload them securely to a cloud accounting platform. It’s not a demanding procedure and you are likely to keep up with it.
If you have an expenditure that overlaps between your personal life and business, you should make sure to show the mixed use. For example, if you use the same phone for conducting your business and for handling your personal affairs, then you could allocate a rough percentage of the total phone bill to each of these.
You should be a little warier about the following types of receipts:
a)- Home Office Receipts: Running your business from home will help you keep your operating costs low and help you with your taxes too. You need to calculate and be aware of the things you use at home for business purposes. It could be electricity charges or home printer expenses. This should then be added to the home-related expenses section.
b)- Vehicle Usage: If you’re using the same car for work and your personal affairs, then it would help to track how much you’re traveling for each of these purposes and make deductions accordingly.
c)- Entertainment: When having business meetings outside, like in restaurants or cafes, make it a point to document the expenses well. You could write at the back of the receipt about the purpose of the meeting and who was with you at the time.
d)- Business Travel: The IRS doubles down on people who show personal expenses as business activities. Retaining travel receipts safely helps to support your claim of traveling to conduct business affairs.
e)- Gift Receipts: When it comes to gifts, it’s important to observe whether the gift giver indulges in the gift along with the receiver. For example, if you gave your client tickets to a movie and they go for it without you, then it is a gift receipt. But if you went along with them for the movie, then the expense would come under entertainment and not be counted as a gift. Make sure to categorize and keep track of the details of these expenses.
It’s best to keep your business and personal expenses separate; this helps to ensure that the bank statements and accounting are in sync and matching up. Checking the accounts routinely helps to make sure there no gaps keep popping up.
2. Payment Method
Just like you have to keep your personal and business expenses separate, you must never mix up your personal and business bank accounts. This should be kept in mind even if you are running a freelance business or are operating as an independent contractor.
A simple way to handle discrepancies is to reconcile the business bank account at the end of each business day, rather than doing it once every few weeks. It could take an extra 5-10 minutes, but it’s more convenient than going through the records weeks later and being confused about why things are not matching up. The longer you wait to reconcile your bank account, the more likely it is that you will face errors and find it difficult to correct them.
Similarly, you’ll need a payment system set up for accepting funds from sales. If you have sales across the world, then a third-party payment app like PayPal could be of help. These apps generally have a fee attached to each transaction. You could also use a merchant account for receiving payments. A merchant account is an account that lets your company accept credit payments from customers.
3. Using Software
Using software can expedite the process of saving your transactions and free up time for you to focus on other things. There are apps that allow you to photograph the receipt and submit it for processing immediately, on a daily basis. An automated system like this reduces the percentage of errors that are prone to happen if the procedure is done manually. You also don’t require space to save paper receipts and bills, so that’s one less hassle for you. Software like this also makes it easier for the accountant to go through the records and have a clear idea of what’s going on with the numbers.
QuickBooks is a commonly used accounting software used by businesses. It provides accounting applications for accepting business payments and managing bills and payrolls. Another popular software is Wave, and it is fast growing as an alternative to QuickBooks and other previously used accounting software.
When using this third-party accounting software, remember to ensure the safety and security of your data. Keep a check on whether the data you send to your accounting software is protected with 256-bit SSL encryption.
Bookkeeping is different from accounting because it involves recording transactions, segregating them, and reconciling bank statements on a daily basis. When an individual is running the whole business, it is only natural for them to try and handle all the tasks themselves. But hiring a bookkeeper can help ensure that you aren’t messing up your records and filling them with errors. If someone with experience is handling your books, you will feel assured and there will also be fewer errors.
If you aren’t sure about employing a full-time bookkeeper or if you can’t afford to employ one, you could try hiring someone as a freelancer or part-time worker. This way you would be saving on costs while having someone knowledgeable handle that department.
American and Canadian businesses will have to decide what method of accounting they’ll be employing – the cash or accrual method.
a)- Cash Method: The expenses and revenue are recognized and recorded when they are received or paid.
b)- Accrual Method: The expenses and revenue are recognized and recorded when the transaction happens, irrespective of the cash being received or not. In this method, you have to track the payables and receivables.
American businesses must use the accrual method if their revenue is above $5 million. If it’s under that, then they can use the cash method. As for Canadians, they are supposed to use the accrual method. They can, however, use the cash method through the year and make adjusting entries at the end of the year for due payables and receivables.
5. Tax Obligations
Your taxes will vary depending on the legal structure of your business. Consulting a tax professional or an attorney when establishing your business can help with its longevity and save you money on taxes. You can claim business income on your personal tax return if you have established a partnership, sole proprietorship, or an LLC. Corporations, however, are taxed independently from their owners.
Handling taxes can be a complex and tricky affair. You could check out a few tips here to better navigate the tax season.
6. Re-Examine Processes
When you first start your business, you may need to use an Excel sheet to keep a record of your accounts. But as your business grows, you must re-evaluate your existing methods and switch to more efficient ways of conducting the same tasks. If bookkeeping and accounting are taking too much of your time, then you know that you need a better system in place to save you that precious time. You could either update to a more advanced software or hire a bookkeeper or accountant to begin managing that department. It would be added expenditure, but it would give you the time to focus on the most essential aspect of growing your business. The right bookkeeping solution will help you invest more time in parts of the business that you enjoy.
Running a business is no easy task, especially when you are the only one managing everything. Business accounting is an integral part of running a business. Taking the right steps to conduct it well can make the whole process feel effortless and it can give you the clarity you need to enhance your business. Use the tips given above to make accounting less daunting to handle!