Owning a small business has its rewards but the details can become time-consuming and cumbersome. Understanding all of the rules of financial reporting is a daunting task that can be costly if mistakes are made. However, the good news is that using best practices to record your financial accounting can help you grow and improve your business. Keeping accurate and organized reports will help your tax prep for the end of the year. While it can be overwhelming, there are tried and true ways to navigate the financial reporting ins and outs that will streamline your tax return come January.
One of the first decisions you will need to make is what type of business accounting method you will use. There are two different ways to report:
- Cash Basis - This is just simply recording income when it is received and expenses when they are paid.
- Accrual - This method is used to record revenue when it is earned and expenses when they are incurred. The business may not have actually paid the bill or received the income but the recording is done. Entering income and expenses allows the two categories to be matched thus providing a better overall picture of how much profit is being made on a particular job. Accrual accounting is more complicated and is often used as a business grows larger.
Income and Expenses
Keeping track of income and expenses is imperative from the beginning and onwards. Allowing these items to become unorganized will result in more work later. In addition, every business should have separate accounts for personal and business items. The IRS is very specific about this separation.
Automating payments, invoicing and income streams make business accounting easier. Opting for automation can help you avoid missed payments and lagging accounts receivable. It is important to pay your bills on time, especially taxes. If you put these on an automated pay system, you will never have late payments. Late fees can add up and impact your profit margin.
Accounts Receivable Policies
Adopt strict accounts receivable policies and stick to them. Realize that while it may be tempting to be weak in this area, it will directly affect your bottom line. There are some ways to assist with keeping this under control such as requiring partial payment upfront, collect as soon as the job is done, and some companies even offer a discounted rate if payment is made quickly. Check your records daily for late pays and follow up immediately.
Everything in your business should be planned. This means having a business plan and keeping a budget that you follow as much as possible. There will be surprises but if you are ready, they won't be disastrous.
Familiarize yourself with all of the financial reports and use them as tools to monitor how your business is doing.
Hire a Professional
Many small businesses opt to tax prep themselves. While this may be less expensive in the short term, it can be costly later on. At the very least, you should consult with a professional bookkeeper and small business tax preparer on a regular basis. Accounting is a complicated process and requires training and experience. Tax preparation can be cumbersome when learning what items you need to document and what items can be used as future deductions. Chandler & Knowles CPA is a full-service nationwide accounting firm and we can guide you in your financial reporting best practices. Call us today to make an appointment: (817) 406-3917.