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The Easiest (and Most Important) Accounting Tips For Small Business Owners

by
Lee Reams II
on
8/7/2017
The Easiest (and Most Important) Accounting Tips For Small Business Owners

According to the Bureau of Labor Statistics, about 50 percent of all small businesses will fail within the first four years. Because there is no “one-size-fits-all" approach to running a business, it should come as no surprise that there is no one blanket reason for business closures, either. A recent Capital One study revealed that 76 percent of small business owners reported facing significant marketing challenges, for example. They knew they had the right product for the right market, but they were either unable to or unsure of how to best communicate that information. 

Other common reasons for small business failure include a general failure to clearly define and understand a market, its customers and their buying habits, along with a general inability to price products and services correctly. Inadequate cash reserves, a failure to adequately anticipate cash flow — the list goes on and on. 

Though these reasons are all unique and represent their own specific challenges, the running theme throughout all of them can be summed up in two simple, yet important, words: business finances. 

Diving deeper, it's easy to see how a business's control over its finances (or lack thereof) impacts all of these risk factors for small businesses. Failure to clearly define and understand a market will lead to spending money inefficiently, which itself is a major contributor to inadequate cash reserves in the long-term. Not taking the steps today to correctly anticipate your cash flow means that you'll often be forced to pass by opportunity when it arises, stifling your business and hurting your ability to grow in the long-term.

The good news is that the reverse effect is also true. Getting a handle on your small business accounting practices today gives you a stable foundation to build from, allowing you to address the challenges of tomorrow and beyond.

The State of Small Business Accounting

Once you acknowledge just how important small business accounting really is, it's important to dive deeper into the subject and examine the various components that make up this much larger concept. According to one study conducted by QuickBooks, these are the most significant accounting challenges that small businesses face on a regular basis:

  • Accounts receivables and collections. 
  • Cash flow. 
  • Managing paperwork. 
  • Closing the books properly and on time each month. 
  • Managing payroll.

As you can see, small business accounting is a lot more detailed than just "money in vs. money out." There are a lot of moving parts at play and decisions you make in one area affect the other. Failing to properly manage your payroll means that you'll have a hard time closing your books each month, which ultimately affects cash flow, collections and more.

Despite all this, small businesses in particular are actually less likely to work with a financial professional than their larger counterparts. According to QuickBooks, only about 25 percent of businesses with 11 to 25 employees have someone with the sole job of overseeing finances, while 46 percent of companies with 26 to 50 employees can say the same. At the same time, only 40 percent of those who responded to a survey said that they were "extremely" or "very knowledgeable" when it came to their business finances.

The 60 percent that aren't "extremely" or "very knowledgeable" are likely a large part of the reason why of the 1.09 million penalties assessed by the IRS in 2015, an incredible 47 percent of them were for delinquent payments.

We asked a number of financial professionals about important but easy accounting tips that small business owners can implement today to help guarantee success moving forward. Their answers vary, but every expert had actionable information that business owners everywhere can start using today.

Don't Forget Those Deductions

Ray Fatland of Lodestar Tax and Accounting said that in his opinion, one of the easiest accounting tips for a small business to implement involves making sure that they're always taking the ever-important mileage deduction on their taxes. In order to take this deduction at all, he said, ”owners are required to keep a current log of the travel. Many owners find it too burdensome and fail to keep a good record if they even keep a record at all. Some think they can recreate a log after the fact." This often leads to people overlooking the deduction entirely, leaving a great deal of money on the table.

However, keeping track of the mileage deduction is a lot easier than one might think. Fatland said, "I recommend using an app like MileIQ for their smart phone. It runs in the background keeping track of all their travel. All owners have to do is classify each travel and print their reports. It is so simple, takes no time at all, and can save them some money."

Katherine Bennett, CPA, agreed with this, stating, "Track your mileage!"

Terrence O'Neill of Terry O'Neill EA LLC took things one step further and extended advice towards all deductions across the board. He said, “Most single member small businesses just starting out seem to lack a fundamental understanding of what constitutes a deductible expense. I encourage studying a 1040 Schedule C and referring to it frequently while applying the new found knowledge to their unique business and transferring that to consistent record keeping.”

It's All about Keeping Proper Records

Many of the experts agree that keeping appropriate and quality records for business finances isn't just important — it's also a lot easier than most people think it is. All you have to do is come up with a system that works for you and stick with it throughout the year. Everything else falls into place on its own.

Nicole Davis of Butler-Davis Tax & Accounting LLC said, "Business owners should utilize some sort of filing or folder system to keep track of receipts and bills. Stop using the shoebox method. This is important in the case of an audit because the documentation will be easy to find. Business owners should scan receipts into a PDF document or JPEG file and save them in a category folder. For instance, business meals can be saved in a folder called 'Meals and Entertainment' under a folder for the year 2017."

Gerri Lazarre of TriMergeTax agreed, saying that owners should "start by purchasing an accounting and bookkeeping ledger booklet from your local office supply store. Use it to begin tracking customer sales, payments from customers, vendor bills and expenses, payments to suppliers and for equipment, payroll expenses, loans from others and other monies you've contributed or loaned to start your business."

Both experts agree that the most important thing is to develop a routine system of tracking — something you can develop into a daily and weekly habit. This will help you get a better idea of where your business finances actually are, which gives you the most actionable, accurate information to work from when it comes to making decisions in the future.

A Holistic Approach to Accounting

John Ellis of the John Ellis Company said that one of the most common mistakes he sees in terms of small business accounting involves people who rely only on looking at bank statements. This may seem comprehensive at first glance, but it really doesn't give you a solid idea of what is really going on under the hood of your business because activity isn't organized by category. Because of this, you're missing a lot of significant planning opportunities.

Based on this, his easy and important piece of advice is to actively use online banking: "If you are a small startup look at using online banking and use the coding of transactions feature," he said. "Many banks have a feature where you can code transactions for each payee. This might take the time to initiate but once it is set up the bank will automatically sort your transactions by category providing you use only your debit card or online payments."

Linda Feliciano of Asher Business Group took things a step further, recommending that people use smartphone apps to keep track of expenses in real-time instead of trying to collate everything after the fact. "The easiest accounting tip a small business owner can implement in my opinion would be to download an application onto their phone that allows them to keep track of their business expenses on the fly," she said.

She went on to say, "Technology today allows us to use Google's Play store or Apple's App store to download FREE applications that will enable you to take pictures of receipts before you accidentally lose them, track business miles with a simple swipe on your phone and even scan and upload important documents while away from the office."

Carey Gay of Treasure Tax LLC said that keeping track of records doesn't even have to be this intensive if you don't want it to be, so long as you're making an effort to do so in the first place. "Take a picture of all receipts and record a business purpose for them," said Carey. "While it's hard for business owners to remember initially, getting them into the practice of doing this is the best thing that they can do for their business to ensure their bookkeeper can determine what the expense was for and how to categorize it in their books.

In the End

Business finances are important to your daily operations, but not necessarily in the way you might think. Yes, a small business is supposed to turn a profit — but true financial success is about a lot more than that.

Brian Dela Cruz, Take Flight Business Solutions LLC suggests "doing a periodic sanity check on your financial information."

How are you going to reach your customers?

What are you going to do in the off-season if your products or services are seasonal?

How loyal are your potential customers?

Do they keep coming back for more or are they one-and-done buyers?

Do you have enough cash on hand to carry you through the next six months?

What does long-term success actually look like?

The answers to all of these questions and more invariably lead back to your business finances. But the good news is that for as stressful and overwhelming as they may seem, success in terms of your finances is rarely the result of any one major move and more of a series of smaller, meaningful ones. One quick adjustment here and there, including making sure you're taking the right deductions and keeping better track of your business expenses, make a world of difference moving forward.

And as always, entrepreneurs should never be afraid of calling in a helping hand when the need arises. Yes, you got where you are today by sheer force of will. You had an undying drive to do it all and it has carried you far. However, this cannot extend to something as important as your business finances forever. What is more important — the pride that comes with knowing that you decided to handle your books by yourself, or keeping your business open beyond that magical four-year point?

When you put it that way, the choice between those two options isn't really a choice at all. Joshua Standley, EA, ABA, of DKK Accounting LLC perhaps said it best: “The easiest accounting tip I have for a small business is talking to an accountant right away. It's always cheaper to hire an accountant before a mess is made than to hire one after things get out of control. Save yourself some money and leave it to a professional — you have enough to worry about."

Lee Reams II, writes for TaxBuzz, a tax news and advice website. Reach him at [email protected] or on LinkedIn.

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Lee Reams II

Lee Reams II

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I am a tax and business news junkie who has spent the last 20 years developing and executing "best in class" word-of-mouth marketing campaigns for tax and accounting professionals. With TaxBuzz and CountingWorks we have taken that same commitment to quality content directly to the consumer. Keeping you up-to-date with the latest tax law changes, business growth tips and planning strategies to help you reach your best financial outcome.

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