Top 15 Small Business and Startup Accounting Tips

By Scott Beaver
Oracle Netsuite | Originally published November 17, 2020

Proper management of a business’s finances, and having someone dedicated to that process, is a crucial component of success for small businesses and startups alike.

According to the Bureau of Labor Statistics, 20% of businesses don’t make it past year one, and only 30% of small businesses will remain in business 10 years after their launch. Adherence to accounting best practices and hiring or outsourcing a person dedicated to this function, can help prevent the cash flow issues that are to blame for many business failures. Further, these best practices can also point the way to insights that can lead to small business growth.

Top 15 Small Business and Startup Accounting Tips

Every small business needs to follow basic accounting processes to ensure strong financial management practices. These include:

1. Separate business and personal expenses. One of the first steps a small business should take is opening a business bank account, which it can do after obtaining its Employer Identification Number, or EIN (sole proprietors can use social security numbers). Business bank accounts offer several advantages over personal ones, including:

• Making it easier to track and substantiate business expenses to take advantage of tax deductions.
• Offering personal liability protection by keeping business funds separate from personal funds.
• Providing the option of a line of credit that the company can use to cover cash gaps.

Businesses should open a checking account, savings account, credit card account and merchant services account, which allows the company to accept credit and debit card transactions from customers.

2. Get bookkeeping software (and a bookkeeper). Bookkeeping is the organized process of tracking all income and expenses. It’s a critical component of financial management that ensures business owners have the information they need to make sound business decisions. For many small business owners, accounting is not among their skill set. Hiring a person dedicated to the task or, for smaller businesses, outsourcing the function is often a wise investment.

Accounting software automates bookkeeping processes that are time-consuming and error-prone if completed manually, and makes it easier to find all of that information to complete financial statements. Small businesses are finding a lot of success with cloud-based accounting software, in particular, with more than half of U.S. respondents surveyed by Robert Half reporting their companies use either some or only cloud-based solutions for accounting and finance. Although most businesses start with basic accounting software, as they grow and become more complex, they may need to invest in an enterprise resource planning (ERP) system. Once a company has an ERP system, it can add modules for other business functions, with everything tied to a single database.

3. Develop a budget. One of the first steps in creating a business plan is coming up with revenue projections and a list of anticipated expenditures, and then comparing that budget to actual expenses and revenue. A study by The Federal Reserve Banks of Chicago and San Francisco reported that more than 60% of businesses with excellent financial health always built a budget and, subsequently started a separate bank account for payroll. Less than 5% of businesses with poor financial health engaged in these two financial planning and management practices.

4. Keep accurate business records. Recordkeeping is one of the most important responsibilities for a small business owner. Accounting software can automate much of the recordkeeping process and digitally store financial records. That makes it easy to document the amount, time, place and business purpose of a transaction when you claim expenses as tax deductions. IRS requirements mandate keeping the records, in general, for at least three years—accountants recommend keeping them for seven years. Records a business needs to maintain are listed in detail in IRS Publication 583. But a few worth calling out for small businesses and startups include:

A. Gross receipts are the income you receive from your business, and records include: Cash register tapes, deposit information (cash and credit sales), receipt books, invoices and Forms 1099-MISC.
B. Expenses are the costs you incur to operate your business, and records include: canceled checks or other documents reflecting proof of payment/electronic funds transferred, cash register tape receipts, account statements, credit card receipts and statements and invoices.

Receipt scanners make it simple to digitize receipts and invoices for easy tracking by automatically mapping the contents to defined fields in the accounting software. Accounting software may either offer its own mobile app or support a third-party app that enables an employee or business owner to scan receipts with their smartphone camera. These apps use optical character recognition (OCR) technology to translate text into machine-readable code.

C. Fixed assets need to be recorded to compute the annual depreciation and their gain or loss when you sell them. Asset documents include purchase and sales invoices; real estate closing statements; canceled checks or other documents that identify payee, amount and proof of payment/electronic funds transferred; credit card receipts and statements and invoices. Costs related to the purchase of limited life intangible assets are amortized. Other asset categories, such as current or indefinite-life intangible, are neither depreciated nor amortized.

5. Choose an accounting method. Every small business and startup must pick a set of rules for determining when to report income and expenses. This provides a consistent accounting method for tax purposes. In general, under changes put in place by the Tax Cuts and Jobs Act, small businesses with $25 million or less in annual gross receipts for the three prior tax years can choose between accrual accounting and cash basis accounting. However, because Generally Accepted Accounting Principles (GAAP) require accrual accounting, many companies prefer this method.

Cash basis accounting can be more straightforward and easier to manage for small businesses because revenue is recorded when payment is received. Similarly, expenses are deducted when the money actually comes out of the company’s account. Accrual accounting records the sales when a product ships or a service is delivered. In a retail setting, a sale is recognized at the time of purchase, and in other industries revenue may not be recorded for several weeks or even months after the sale. It requires double-entry bookkeeping. Since accrual accounting takes a long-term view of the business, it generally provides a better picture of a company’s financial health.

6. Keep the books up to date. Without keeping the books current, owners and employees don’t have a clear picture of the company’s financial state. Automating receipt and invoice capture is one way to ensure the books are always up to date. Another important step is to link bank accounts with your accounting software. Businesses can download credit card and bank statements and manually import them as CSV (Excel), but some accounting systems offer a plug-in that will pull information from your bank account and automatically retrieve daily bank transactions and statement files. The business can define the matching rules in their system to reconcile the statements, which makes the reconciliation process much easier. Some accounting software offers a direct integration to banks, so the business owner can manage and complete all banking tasks in the accounting system without also logging into their bank account portal…

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To read the entire article by Scott Beaver at Oracle Netsuite, visit: Top 15 Small Business and Startup Accounting Tips