Establishing good accounting practices is one of the biggest struggles facing small businesses. Entrepreneurs wear many hats and often run a lean business, which can make it difficult to get a good handle on small business accounting. Thankfully, modern software and a little know-how can make accounting infinitely easier.
Here’s a brief overview of how to do accounting for small business and a peek at some of the best accounting software for small business owners.
What is Accounting?
Accounting is the practice of measuring, processing and communicating financial data about a business. In simplest terms, accounting helps business owners keep track of cash flows—both inbound and outgoing—as well as the company’s assets and investments. Accounting paints a picture of the business’ financial health and capabilities.
There are two primary modes of accounting: cash vs. accrual. Cash accounting looks at real-time balances; accrual accounting considers transactions made on credit. Say, for example, a client owes you $1,000. Under cash basis accounting, that $1,000 isn’t counted until it’s in your bank account. Accrual basis accounting counts the transaction at the point of origination, even if you haven’t been paid yet. Most businesses use accrual basis accounting.
Understanding small business accounting revolves around getting familiar with three primary financial statements:
- The balance sheet shows the company’s assets and liabilities
- The income statement breaks down revenues vs. expenses
- The cash flow statement examines the company’s liquidity
Using these financial statements and the data contained within them, small business owners can better-understand the company’s financial outlook. This includes planning for the future, optimizing business operations, applying for loans and much, much more.
Key differences between accounting and bookkeeping
Accounting and bookkeeping are often confused. Bookkeeping is the administrative process of actually entering and organizing business transactions. Accounting involves higher-level interpretation of this data to improve decision-making and increase business profitability.
Steps for Setting Up a Small Business Accounting System
While it’s true that accounting is a complex discipline, there’s an abundance of technology out there designed to make it much simpler for small business owners. You’ve likely heard of programs like QuickBooks, FreshBooks, Xero, and Wave. These pieces of accounting software are smart enough to do most of the work for you, while being customizable enough to conform to your business’ financial needs.
Setting up a small business accounting system is simple. Here’s a look at the general process, which can vary slightly depending on the software:
- Assuming you have a business bank account or business credit cards already open, the first step is linking them to your accounting software. If you don’t have a business bank account, get one in as little as three minutes with NorthOne.
- Major accounting platforms like QuickBooks and Wave have integration capabilities that make syncing your financial accounts easy. Simply authenticate the connection and the software will communicate with your accounts to do the rest!
- After syncing your bank and credit accounts, you’ll also want to connect any sales technologies you have. For instance, if you operate an ecommerce site that processes transactions, you’ll want those to feed directly into your accounting program.
After you’ve finished building your accounting tech stack, take some time to explore and configure the platform. There are tons of settings, automations and preferences that will help make accounting effortless and insightful—you just need to take a little time to set them up.
Remember that if you’re not super tech-savvy, there are plenty of CPA services out there dedicated to one-time setup of accounting software for small businesses. A small business accountant will be more than happy to get your accounting software up and running, usually for a very affordable on-time fee.
Frequently Asked Questions
No two small businesses are the same, which means you’re bound to have questions when it comes to establishing your own accounting practices. Thankfully, good accounting and bookkeeping fundamentals are the same across every business. It won’t take you long to get the hang of them, and to adapt your practices around your business.
Have questions in the mean time? We’ve got answers to some of the most common ones:
Can I do My Own Small Business Accounting?
Absolutely! Many startups hire a small business accountant because they assume it’ll be too difficult to do on their own. With a little time and energy upfront, you can largely automate much of your accounting thanks to modern software and integrations.
How Much Should I Pay an Accountant for my Small Business?
If you are going to outsource to a small business accountant, do your research and ask about their fee structure. You might end up paying an hourly rate ($50-$100), a monthly retainer ($400-$1000) or a one-time fee that varies depending on your needs.
How do Small Businesses Maintain Basic Accounting?
Good small business accounting comes down to routine upkeep. That means reconciling accounts at regular intervals, running and reviewing financial reports often, and ensuring integrations and synergies stay functional and consistent.
Correct Accounting is Critical for Small Business Success
Small business accounting isn’t as difficult as you might think. In fact, thanks to accounting software for small businesses and ease of integration with other digital resources, your books will largely keep themselves! Instead of worrying about everyday bookkeeping, you’ll be free to look at the bigger picture: the financial health of your small business and the opportunities for growth in front of you.