With these 14 essential accounting tips for small business owners, you'll learn how to start keeping accurate and reliable records. This is crucial to any successful operation, helping you manage your finances effectively, make smarter decisions, and stay compliant with legal and tax requirements.
What is accounting and why is it important?
Accounting is recording and analysing your financial transactions, which is important because it helps you make informed decisions, manage your financial risk and stay compliant. If you're looking for investment, to borrow money or to sell your business, you'll need this information too – it gives a reliable snapshot of your company's financial performance and health. Here are 14 tips to help you manage your finances effectively:
1. Separate business and personal expenses
Separating business and personal expenses is important, even if you're a sole trader or just starting. It ensures you keep tidy and accurate records, making it easier at tax time. When you can see which transactions are deductible business expenses, you also protect your profit margins.
2. Open a small business bank account
Opening a small business bank account should be one of the first things you do when you start your business. A business bank account helps you separate business and personal finances while giving you easier access to financing options like cash flow finance, equity finance and other kinds of business finance. A separate account also makes you look more professional, helping to build trust with customers and suppliers.
3. Choose an accounting method
Choose an accounting method that best suits your business goals, size and complexity. There are two main accounting methods:
Cash accounting records transactions when cash goes in or out
Accrual accounting records transactions as they happen
Accrual accounting gives you a more accurate picture of your business finances but is more complex to manage. Cash accounting is more straightforward but may give misleading impressions of your business finances. For example, say your sales decline one month, but clients pay invoices from previous months – this can make it appear like your business is on track, even if it's not.
4. Record all transactions
Record all transactions in your business to track your income and expenses so you get a clear picture of your business finances, make smarter decisions, set goals, spot and correct errors early, and simplify tax returns. While you can record transactions on paper, the ATO recommends that businesses do it electronically, using small business accounting software.
5. Keep detailed and up-to-date records
Keeping detailed and up-to-date financial records is the law in Australia. It also means you can always access reliable information when making business decisions, applying for funding, loans or investments, finding cost-cutting strategies or making growth plans.
6. Seek professional tax preparation guidance
Seek professional tax preparation guidance for your small business – it can save you time, keep you compliant with tax laws and regulations and ensure your books are accurate. Accountants can also help you interpret your financial information when making business decisions.
7. Manage cash flow
Managing cash flow well means you'll always have the money you need to keep your business running, take opportunities when they come up and avoid expensive debt. To manage your cash flow, you need to track the money in your accounts, what you'll need to pay soon and what you expect from customers, so you can spot and resolve potential cash flow problems early.
8. Automate invoicing
Automated invoicing minimises errors while all but eliminating the time-consuming task of sending and following up invoices. It lets you set up invoices for recurring payments, keep track of which invoices are overdue, and get real-time insight into your cash flow. It's the best first step towards improving accounts receivable.
9. Use financial statements to assess business performance
Using financial statements to assess business performance can give you a snapshot of how you're doing. Each statement gives you different information.
An income statement shows your profitability by comparing your business turnover to your expenses.
With a balance sheet, you'll understand your fixed assets, equity, debts or other liabilities.
A cash flow statement shows what you've got coming in and any accrued expenses.
Regularly analysing your financial statements will help you see potential issues early. For example, if you see your expenses going up but not your revenue, you can cut costs, increase sales, or price your product or service more effectively.
10. Review and analyse inventory status
Reviewing and analysing inventory status is essential for optimising cash flow, inventory days and carrying costs while improving customer experience. When reviewing, look for instances of under or overstocking and inventory that might become obsolete or unsellable. Analysing what stock is and isn't selling can also help you with demand management, so you always have the right products in stock to improve profits.
11. Keep an eye on expenses, especially high-cost expenses
Keeping an eye on expenses, especially high-cost ones, is critical to your long-term business success. Cutting unnecessary expenses may enable you to free up working capital to make investments or respond to changes in the market. Review where your money is going regularly – you may find you could be spending it more effectively elsewhere. For example, if one of your highest costs is staffing, you could reduce spend with technology that automates repetitive tasks.
12. Plan for taxes
Plan for taxes by making sure your books are tidy and accurate and being aware of what tax you're likely to owe so you'll have cash on hand to pay it. Working with an experienced tax adviser can optimise your tax planning to minimise what you owe while still meeting your obligations.
13. Review month-end balance sheets vs prior period
Compare your month-end balance sheets to a prior period, most commonly the previous quarter or year. This helps you spot changes, trends or errors, and make informed decisions about your business.
14. Review your systems and processes regularly
Review your systems and processes regularly to uncover errors and inefficiencies. Even if you have a well-honed system, reviews keep you abreast of changing customer preferences, technology, markets and the trajectory of your business.
Small business accounting FAQs
What are the accounting methods for a small business?
The two main accounting methods for small businesses are cash accounting and accrual accounting. Cash accounting records transactions when you pay or receive cash. Because it's straightforward, it suits small businesses. Accrual accounting records transactions when they happen, not when cash comes in or goes out.
For example, say a client signs off a new project in January and pays in May. Cash accounting will record the revenue as being earned in May, while accrual will record it for January. In this way, accrual accounting gives you more accurate insight into how your business is performing but is more complex, making it generally suitable for larger businesses.
What is the best way for a small business to maintain a balance sheet?
The best way for a small business to maintain a balance sheet is with consistency – check records are accurate, regularly reconcile accounts, and accurately categorise transactions.
In what order do you prepare financial statements?
There's an order to preparing financial statements to make sure they're accurate and complete:
A statement of financial performance
A statement of profit and loss
A statement of cash flow
A statement of movements in equity
Consolidated financial statements
A statement of accounting policies
Notes to the financial statements
Directors' declaration that the statements are compliant and correct
Directors' report, including the auditor's independence declaration
The auditor's report
Most businesses will need a qualified accountant to help prepare these statements.
Accurate accounting – the foundation for business success
Small business accounting offers more than just tax compliance – it measures your business performance, helping you run more efficiently and plan for future success.
Whether your business has just launched or is well established, following accounting best practices is critical. MYOB Business can make this easier by removing manual work, improving accuracy, and making reporting as simple as clicking a button. Get started today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.