As an entrepreneur, you can set your business up for financial success by mastering the basics of small business accounting. Proper accounting can help you understand the financial health of your company, plan for future growth and ease the burden of tax season.
The year 2022 is fast approaching and as such, all the updates that you need as we move into the new year have been provided in this article to help you stay updated.
Benefits of Accounting for Entrepreneurs
Taking appropriate accounting measures as they relate to your business will aid in your financial success. You will be able to make better and more informed decisions regarding your business’s current status, as well as setting future goals to strive for.
There are a lot of benefits for an entrepreneur to adopt an accounting technique that suits their financial needs and business model.
Successful Financial Budgeting
With the help of accounting, entrepreneurs will be able to develop and maintain comprehensive budgets for the business. Once there is a better understanding of the relationship between business income and expenses, business owners develop an enhanced awareness and intuition that will better equip them to plan for future expenses.
Once an entrepreneur implements a successful accounting system that can be easily maintained, business revenues can be forecasted. Meaning, business owners will be able to see the bigger picture depicting whether or not the company is effectively generating revenue from all the expenses.
A better understanding of this allows you to re-evaluate marketing strategies and general management of resources meant to produce income.
Better Prepared for Tax Season
When it comes to tax season, the more prepared you are, the better. Filing income taxes can be a huge source of headache to business owners, however, proper accounting measures taken in the beginning can reduce a lot of stress and anxiety associated with that task.
Effective bookkeeping strategies will ensure that all your business-related documents (earnings and expenses) are recorded and organized.
Monitor Your Business’s Progress
You can become more resourceful and proficient in monitoring the progress of your business when you apply and maintain a successful accounting method. The business’s assets and liabilities will become clearer, as well as the trends they follow as your company evolves over time.
Gaining a more comprehensive outlook of your highest revenue-earning services will allow you to modify your company’s business model to advance your profit-earning potential.
The Basics of Accounting for Entrepreneurs
When you first launch your business as an entrepreneur, it is crucial to your success that you implement an effective method in regard to accounting. No, you do not need to have a degree in accounting (not saying it wouldn’t be helpful) or be an expert in all things finance, all it takes is being mindful and utilizing your resources efficiently to provide you with an overall sense of direction for your business.
Register Your Business
As an entrepreneur, your #1 priority is to register your business. The registration guidelines and requirements will vary between industries and geographical locations. In order for you to better comprehend your finances, it is necessary that you have a business license registered under the specific type of business model related to your own.
There are three types of models you can register your business as, and they are as follows: Sole Proprietorship, Limited Liability Company, a Partnership, or a Corporation.
It is highly recommended that you diligently research each before registering as there are similarities, but also major differences that could cause issues for you in the long run.
1. Sole Proprietorship
First, what is a Sole Proprietorship? This business model is set for an unincorporated company with a single owner.
A Sole Proprietorship means you and your business are linked as one, so when it comes time to file your business taxes, they can be claimed as part of your tax return for personal income. That said, if there are any business debts that accrue, you are personally liable.
Sole Proprietorships are highly endorsed for entrepreneurs being that the process of registration is fairly simple and affordable.
2. Limited Liability Company
Next, a Limited Liability Company – also referred to as an LLC.
This business model incorporates characteristics from both a sole proprietorship and a corporation. This means that you are granted a little more leniency when filing taxes and claiming as personal income tax versus filling the business separately.
An LLC also offers some protection in regard to being personally liable for company debts.
In a Partnership business model, you equally share company ownership with a business partner. It is required that partners of the company provide some type of asset to the business. Assets can range anywhere from knowledge/skills, financial support, or property.
In order for this type of business model to be successful, a clear, structured, formal agreement needs to be set in place that outlines all of the roles and expectations for both parties involved.
Corporations are without a doubt the most multifaceted and intricate business model. Rightfully so, they are expensive and require an extensive amount of time to set up.
Corporations are permitted to work as a single entity, which means they are legally allowed to file as a single taxpayer. With that, the benefit of starting a corporation is that the tax rates are lower, with more extensive legal protection.
Open A Separate Bank Account For Your Business
It is critical that entrepreneurs separate their personal finances from their business. If these are not kept separate, tracking your business expenses can easily be lost, which complicates the accounting system you are maintaining as a whole.
By opening a bank account strictly for your business, you will save yourself a lot of stress and headache overall.
There are different methods that entrepreneurs can utilize to organize and track their business-related expenses. It’s important to remain consistent with your process, particularly when tax season rolls around.
Two of the basic accounting methods are cash-basis and accrual-basis.
1. Cash Basis
The more direct approach is cash-basis when comparing the two. This type of accounting implicates a system of instant record-keeping pertaining to business revenue and expenses – meaning you are being mindful of all your income and expense transactions the moment they occur.
This tactic is comparatively simple and the more common accounting method amongst entrepreneurs.
2. Accrual Basis
Second is accrual-basis, which records your confirmed revenue and expenses once incurred compared to the actual physical exchange practiced in cash-basis accounting.
This type of accounting more thorough reflects the business’s overall financial status of revenue versus expenses.
Track Your Expenses
All business expenses needed to be tracked in an organized manner for tax season. Once you develop a system for filing your receipts and business-related paperwork, you will be able to provide a detailed account/report of the inner workings associated with your business to assure each tax season goes smoothly.
The type of filing system you adopt should be easily maintained and consistent. Paperworks that requires tracking are:
- bank statements
- credit card statements
- receipts for business meals
- automotive expenses (parking, repairs, maintenance, fuel)
- business bills (utilities, technology-related expenses)
- your business’s financial statements, and
- all tax-related documents
Filing taxes can be an intimidating task for some entrepreneurs. How you registered your business is important to understand because each business model requires different tax obligations.
An entrepreneur should have all the required documents prepared to submit for self-employment tax, employment tax, income tax, and sales tax – all of which are business tax obligations required when filing for taxes.
In order to gain a better picture of how your business is performing financially, a fundamental component that entrepreneurs need to maintain is accurate financial reports.
These reports help when making informed decisions regarding your business in the present, and in the future, to aid in the success of the business and provide a detailed analysis of how you can prioritize efficiently.
There are three major financial statements that all business owners should familiarize themselves with:
- First is the income statement, which shows business revenue and expenses, indicating profit and loss.
- Second, a balance sheet accounts for assets, liabilities, and equity of the business.
- Last, the cash flow financial statement. This report summarizes all cash debits and credits within the business.
For the majority of entrepreneurs, their ambitious calling can be somewhat stunted when it comes to accounting. If you want your business to progress, it can prove quite advantageous to you as an entrepreneur to seek an opportunity in learning how to manage your company’s expenses and income.
Entrepreneurs have a profound sense of awareness for the business world.
The idea for including accounting in their repertoire of business skills is to advance their understanding of business administration. Accounting is multifaceted and requires attention to detail, organization, and management.
As an entrepreneur, if you understand the importance of accounting in your business, you will find yourself more equipped with the tools and resources to better understand the necessity of successfully managing a budget, record-keeping, and expense-tracking – all of which are connected in maximizing your business’s potential.
Entrepreneurs require proficiency with business accounting on both a large- and small-scale practice as it relates to the functionality of their business ventures. Understanding how accounting is connected to all functions in a business is knowing how quickly circumstances can change and requires appropriate awareness to adjust when needed.
Accounting principles as an entrepreneur will set you apart from the majority because it expands your knowledge and capabilities as a business owner and enhances professional growth.