Every small business must maintain accurate records of its income, expenses, receipts, invoices, and bank statements. Maintaining accurate records enables you to monitor the financial performance of your company, spot trends, and come to wise judgments. Here is an overview of basic accounting principles.
Assets: Your company’s possessions that have value are referred to as assets. Your bank account balance, the amount of money you have in accounts receivable (what your clients owe you), your merchandise, computers, and furnishings are all examples of assets.
Liabilities: Anything owed by your business is a liability. Accounts payable balance (what you owe vendors) and any loans or notes the company owes are examples of liabilities.
Keep a watch on your highest cost expenses. The biggest expense for the majority of small firms is labor, and inventory is frequently another. Many small firms hire contractors who charge by the hour to complete work on their behalf in order to lower labor costs. This may be less expensive because the contractors do not need to work 40 hours per week to finish your project and they are not entitled to benefits.
Leaders can better budget and discover strategies to manage costs by using time-tracking software to determine how much particular jobs are costing the company.
Transportation. Keep track of the dates, locations, and reasons you drove any vehicle for business activity, as well as any rental or fuel receipts (HMRC permits certain mileage allowance relief). Other forms of transportation, including bus, train, and taxi fares, are also eligible for reimbursement.
Rent, utilities, phone and supplies. Rent, bills, and other office expenses may qualify as business expenses for tax purposes. If you work from home, the firm might be held responsible for a portion of your rent and utility costs.
No matter how little the purchase, keep all of your receipts, and make sure they are legible. Debit and credit card receipts are among the receipts you must maintain.
Key Financial Statements
Financial reports can be used to assess corporate performance. These three important financial statements are created by tracking expenses and income.
- Income statements aid in calculating a company’s profit or loss.
- A balance sheet provides a picture of a company’s financial situation at a specific time by listing its assets, liabilities, and shareholders’ equity.
The cash flow statement displays the amount of cash on hand as well as the amount of money that has flowed into and out of the business during a specific time period.
But when paired with the balance sheet, the cash flow statement can demonstrate if a business has enough cash on hand to cover its immediate obligations. Banks and investors demand all three declarations in order to obtain financing or investment.
An accountant creates the cash statement, income statement, and balance sheet using the corrected trial balance. These display the company’s cash flow, results, and financial situation.
Maintain the books in order. Owners and staff can’t get a good view of the business’s financial situation without keeping the accounts up to date. One technique to make sure the books are constantly up to date is to automate the receipt and invoice capture process.
Connecting bank accounts with your accounting software is a further crucial step. Businesses can download and manually input credit card and bank statements, but some accounting systems provide a plug-in that can automatically extract data from your bank account and get daily bank transactions and statement files.
Regular bank account reconciliation guarantees that your financial records and bank statements are in agreement. It makes sure that all transactions are accurately documented and aids in finding any discrepancies.
If bookkeeping is not your strongest skill, think about hiring an accountant or bookkeeping service. Alternatively, have someone internally store all receipts and invoices for commercial activities and outsource it to someone who can finish your records once a month.
Check your inventory levels. If not handled effectively, inventory can be a significant source of cash leakage. Put a structure in place to guarantee that you are not holding onto extra goods, which wastes money, and that each penny is utilized effectively.
Income tax preparation
It is simpler and more time efficient to handle your accounts with accounting software. It enables you to automate processes like billing and bookkeeping and provide current financial information about your company.
Consult a tax preparation specialist for advice. It’s hardly surprising that around two thirds of small businesses employ an outside tax expert or accountant to handle their taxes since one in three claim to spend more than 40 hours year on federal taxes. For a sole owner, there are even more advantages because you can deduct the expense of employing a tax professional to prepare your company’s tax return.
When it comes time to file your business taxes with the IRS, accountants and tax preparers most frequently ask for a profit and loss (P&L) statement. However, if you apply for funding, you can also be required to share it with lenders. Your P&L statement, which lists your sales, costs, cost of goods sold, gross margin, profit, and other important metrics over a given time period (such as monthly, quarterly, or yearly), provides an overview of your company’s profitability.