Business owners, especially for small businesses and startups, must wear many hats, with finance and accounting being the most challenging to perfect. There is always accounting to maintain regardless of your position, regardless of whether you’re involved in a solo endeavor, and it needs to be accurate.

Accounting is the process of tracking, assessing, and documenting the company’s financial health. It includes the business’ cash flow, expenses, and revenue. Proper accounting helps prepare business leaders for the impending tax season and helps them navigate factors that can impact profitability and bring growth opportunities.

The term “accounting” refers to the overall financial management of a business. It is important, however, to distinguish between accounting and bookkeeping in order to accommodate your specific needs and purposes.

Accounting goes beyond bookkeeping since the process involves analyzing, interpreting, and summarizing financial data that’s provided by the bookkeeping system. Accounting provides a more in-depth assessment and helps with strategic decisions and creating budgets based on the data.

The objective of setting up an accounting system is to gain insight into a company’s financial health for improved decision-making.

An Accounting Guide for Business Owners

Aside from a sound plan, business leaders must chart a path to growth and success by assessing, analyzing, and documenting the company finances via an accounting system. Most business owners are not accountants.

This lack of a finance background can make setting up an accounting system overwhelming initially. Consider the following tips when establishing an accounting system for your business.

Consult an Accountant or CPA

The internet is a good resource when you want to learn about accounting for businesses of all sizes. Still, personalized guidance from a certified professional is ideal. This can be a CPA, accountant, or even a bookkeeper.

• CPA – Certified Public Accountant: Accountants who have passed the Uniform Certified Public Accountant Exam holds accountants to a more precise standard.
• Accountant: Maintains and organizes financial records while providing deeper insight into the company’s financial status.
• Bookkeeper: Maintains and organizes financial records.

If you require assistance from one of these professionals, they will likely require a retainer and will charge by the hour for monthly services.

Business Bank Account

The moment you launch your company; the business’s finances should be kept separate from personal finances. A business bank account can be set up to handle company transactions, and a savings account will cover unexpected circumstances. Separating finances is vital in order to track the business’s financial progress.

This is difficult if the company’s accounts are mixed in with personal cash and credit. Further, it acts as a legal protection if the business is involved in a lawsuit; personal assets won’t be used as collateral.

Cash vs Accrual

Business leaders must settle on one of two accounting methods before their tax returns can be filed, either on a cash or accrual basis.

Because of the impact this decision can have on your business, it’s highly recommended to speak with a certified professional when considering the accounting method to best serve your needs.

Cash-Basis

• Offers a more accurate look at the company’s cash flow
• Simple and straightforward accounting
• Less accurate portrayal of the business’s financial health

When setting up cash-basis accounting, financial transactions are recorded when cash moves accounts.

Accrual-Basis

• Less accurate portrayal of the company’s overall cash flow but more accurate with current cash flow
• Requires accurate cash flow statements more often
• Offers a better depiction of assets and liabilities
• Accurate view of long-term finances
• Less accurate for overall financial health
• Simple and straightforward accounting

Transactions will be recorded as they occur when setting up accrual-basis accounting instead of when money moves accounts.

Many accounting software programs use the accrual method by default, but it’s important to speak with a certified professional, such as those with Profitwise Accountants, and do due diligence in research to determine which method is most suitable for your needs.

Accounting Software

Most modern businesses incorporate accounting software for keeping track of income and expenses. Spreadsheets or paper ledger methods require much more manual effort and increase the risk for mistakes.

Software on the market today is cost-efficient, user-friendly and offers features to streamline accounting processes. The primary options are cloud-based software-as-a-service (SaaS) programs and desktop-based programs.

Ideally, the software you select will grow with your company and offer high-quality customer support to satisfy questions and concerns.

COA – Chart of Accounts

Business finances can be better organized by categorizing transactions on a COA—chart of accounts. At the top should be income and expenses, which can be broken down into revenue, assets, liabilities, equity, and expenses. These can be further broken down into subdivisions to better track finances.

For example, an expenses account can be broken down into multiple categories such as office supplies, marketing, staff wages, software subscriptions, and payroll taxes.

If a tax professional assists with your accounting, they will want to see categorized transactions, making it wise to develop a habit of organizing finances from the start.

Final Thought

Accounting is a critical business task that all leaders must contend with regardless of the industry, sales method, or business model. Setting up an accounting system adequately following the development of a business plan can save company owners’ frustrations and hassles as they work toward growth and success.

Once the foundation of the business’s account system is set up, the company finances will need to be monitored to ensure each transaction is properly categorized and recorded. Setting time aside each month to review and reconcile the finances and ensure everything is accurate is vital.

You don’t have to handle accounting tasks on your own; however, if you have a restricted budget disallowing hiring an in-house accountant, it is possible to outsource or consult with a financial advisor.

These details must be worked out before launching a new business. It’s ideal to have your financial needs addressed as you enter into a new venture.