Unless you’re an accounting whiz, or one of those odd people who actually find accounting fun, you may be looking for a few ways to make your business accounting responsibilities easier so you can focus on the other aspects of the business. Here are four small business accounting tips to help you on your way to financial success.

Hire a Pro if You Need One

There’s a big difference between not enjoying accounting, and just not being good at it. If the latter is true for you, admit it, and get professional help. No, not that kind of help, although that may come in handy on those particularly hectic days in the life of a small business owner. For now, hire an  accountant. Yes, it will cost you. But just think how much a horrible accounting error might cost you, and your business. If, on the other hand, you’re not too bad with accounting, but the thought of doing your business taxes is enough to send you into nervous fits, consider at least hiring a tax consultant.

Before you trust someone with your books or taxes, though, check in with other business owners for recommendations. Accounting site communities and business networking sites are a great places to find tips for hiring a tax consultant or accountant, and should be your first stop before you start seeking quotes.

Buy Accounting Software

If you decide to do the accounting yourself, you’ll need to get organized. Keeping a bunch of receipts in a shoebox, and writing expenses in a notebook just won’t cut it. If you’re still doing your accounting this way, you may want to reconsider the whole business thing altogether. Using a spreadsheet program to keep track of your business finances is a step above that, but it’s still not your best option. You need to take out the corporate checkbook and buy some accounting software.

Before you make that purchase, do a little research. If you’re a small business with just a few employees, you don’t need something as robust as a business with, say, 100 employees and millions of dollars in revenue. Again, ask around to see what other people are using, and then choose what works for you. Just remember to select something that’s scalable and can grow with you so you can avoid shelling out more money later on for something completely different when you take on more employees and your revenue increases.

Go Paperless

Want to save a bunch of money right now, and increase the probability that your invoices will be paid on time? Go paperless. If you’re still printing and mailing invoices to your clients, take a moment to add up how much you’re spending on paper, envelopes, and postage. And then how much you’re spending to send payment reminders and late notices. And then how many trees have had to die so you could run your business. Going paperless is better for everyone.

This is actually one feature you’ll want to look for when choosing accounting software— invoice printing capability. It doesn’t make sense to have those two things separate. Sending electronic invoices allows for better tracking, and faster response on both parts. And when your client claims his payment is late because he didn’t get the bill, you can have another one to him in seconds rather than days. You may even be able to attach a read receipt to avoid that excuse in the first place.

Keep Impeccable Records

We’ve already discussed the receipts in the shoebox. Even if your recordkeeping isn’t that bad, are you sure it’s good enough? What would happen if you were tagged for an IRS audit right now? Could you survive it? Keeping good records isn’t enough when running a small business. Your records must be impeccable.

Good accounting software will come in handy here, too. Just remember to regularly back up your financial information. Whatever paper records you must maintain (maybe your bank doesn’t offer electronic statements), keep them in order and accessible. You may even want to consider scanning them to keep electronic versions. Be sure to log every expense, and every bit of income. That way, if and when you do end up on the tax man’s radar, the process will be much less painful.

With a little preliminary investigation, careful planning, and attention to detail, small business accounting doesn’t have to be such a chore. By putting a few good ideas in place, you can focus on running your business, and not worry so much about the books.

Anita Campbell is the Founder of the Small Business Trends website and CEO of BizSugar, an online community of small business owners.

The Frugal Small Business Start-up Series has been updated and combined into one PDF. It also includes a detailed start-up checklist at the end. You can download it for FREE!.

Why the Accounting System in Your New Business is Important

You may be familiar with the idea that entrepreneurs and small business owners tend to wear many hats- especially at the beginning when the new business is developing and growing and employees are few if at all. But unless you have some kind of background in business, you may feel a little clueless when it comes to several of those hats.

If accounting and bookkeeping is one of those uncharted areas then you owe to yourself and your future business to learn what you can about the subject (even if you will not directly be charge of recording your business financial transactions). Maintaining an accurate, clear, and legal accounting system will be a fundamental backbone of your business that you will reference in order to make strategic business decisions. Moreover, there are many Federal and State requirements (think sales taxes, payroll and income tax, etc) for how you record the money going in and out of your business. You want your accounting system to make the filling of these government requirements as quick and as easy as possible.

In this post, I will introduce you to the major areas you will need to consider as you set up the accounting system in your new business and then offer several resources and recommendations at the end.

Startup Business Accounting 101: What Questions Do You Need to Answer?

When it comes to setting up the accounting system in your new small business there are basically three questions that you need to answer. Though it may cost you a little money, you should definitely consider seeking the advice of a qualified accountant to help you make these decisions:

1. Which accounting method will you be using?Once you have decided which business structure you will be setting up, you will then need to choose which accounting method to use: either the cash method or the accrual method. In brief, with the cash method, you record income when you actually receive the money (whether by cash, credit card, or check) and your expenses are recorded as you actually pay them. This is the most common accounting method for small businesses that generate less than $5 million in annual sales.

With the accrual accounting method you count income when a sales transaction is made (even if you have not yet received the money for it) and expenses are counted when you actually receive the good or service (even if you don’t pay for it immediately). This method is common for larger businesses or small businesses that rely on customer invoicing.

For more information on cash accounting versus accrual accounting, see the resources below.

2. How will you record transactions?You have several options for recording your business’ financial transactions. The best choice really depends on the nature and scope of your business:

• You could do it the old fashioned way, recording hand-written transactions in a ledger. But this may only be appropriate for very small businesses and may make financial reporting difficult.
• You could set up your own electronic ledger, using an Excel spreadsheet, for example. You could then create your own chart of accounts (a list of all your business accounts, such as income, expense, and asset accounts) and manually plug in numbers into various financial reporting templates, like the ones I have on this site. Again, this may only be appropriate for very small businesses.
• You could use an accounting software package. Many of these programs can automate much of the financial recording and reporting as well as complex areas, such as payroll and accounts receivables/ payables. There are many free and commercial options to choose from; see below for a list.
• You could hire an outside bookkeeper or an accountant to handle all of your financial recording. This may be the most expensive option. But it may be appropriate for those who are either totally adverse to taking on these tasks or who don’t have the time for it.

3. How will you conduct financial reporting and complete your tax forms? Here again, you have several options: do everything yourself manually, do it yourself with the aid of an accounting software package, or hire an outside accountant or bookkeeper. Here are a few points to keep in mind:

• If your income is relatively modest (for tax year 2011, the cut off was $58,000), you may have the option of filing with the IRS’s Free File system which offers free e-filing and tax preparation via commercial software packages. The service is only available via the IRS website. Even if your income exceeds that amount, e-filing is definitely the way to go. You can file yourself via the IRS’s e-filing portal.

• As mentioned above, many accounting software programs can automatically generate various financial reports such as balance sheets, cash flow statements, and income statements. Several commercial accounting suites, such as TurboTax, can also be used to file your business’ taxes electronically online as well as help you maximize your tax deductions.

• If you are considering hiring an accountant or bookkeeper then be sure to read my previous post: Why You Small Business Needs and Accountant and How You Can Save on Accounting Fees

Accounting Resources for Small Businesses

Free online business accounting courses, training, and how-to’s:

• Bean Counting 101
• Accounting Coach
• Simple Studies Online Accounting Lessons
• Financial Management Training Center
• IRS Small Business Tax Center- offers numerous articles and tools designed to help business owners correctly set up their accounting systems and file their taxes. Be sure to also consult IRS Publication 538 Accounting Periods and Methods, and the IRS Small Business Video and Audio Workshops
• Article: 5 Steps to Setting Up Accounting Software
• Several articles on cash accounting versus accrual accounting

Hiring an accountant for your business:

• CPADirectory.com
• AccountantsWorld.com

Best accounting software packages (commercial):

• QuickBooks Pro and QuickBooks Online
• Sage PeachTree
• Freshbooks
• Zoho Invoice

Best accounting software packages (free opensource):

• NolaPro
• GnuCash
• TurboCash
• Express Invoice
• Express Accounts Plus

The Frugal Small Business Start-up Series has been updated and combined into one PDF. It also includes a detailed start-up checklist at the end. You can download it for FREE!

The Small Business Start-up Budget

When it comes to calculating your start-up costs, there are three main goals to keep in mind:

1. You need to figure out the costs associated with getting your business up and runnin

2. It will help you to be aware of any need for additional financing

3. You need to also be in touch with your living expenses and debt obligations while you are going about building your business. Don’t forget about this! It may take a while before your new business will be generating an income, and there is always the possibility that it won’t be successful. These days, especially, you need to have a plan in place to ensure that during the start-up phase you are still eating and paying your bills

Here are two forms for download to give you an idea of what a start-up budget will look like:

• Startup Cost Estimate Template- Use this template to approximate the amount of money you will need to get a business up and running
• Startup Costs Budget Worksheet- This start-up cost budget worksheet will help you to estimate the amount of money needed to start a new business and run it for the first 3 months to a year

In general, start-up business budgets generally contain the following expense categories: product research and development (R&D), facilities, equipment, start-up inventory, and advertising and marketing, as well as an estimate of your upcoming fixed and variable expenses. You should also try to include your expected income for that first year of operation.

Though many of these expenses are pretty straightforward, several key costs are often overlooked by new entrepreneurs. Here is a rundown of the major categories as well as some other, indirect expenses that should also be considered:

Calculating the Pre-Operational Start-up Expenses

The first task is to figure out the costs associated with turning your business idea into an operational entity before the business is even running. Here is a breakdown of the major pre-operation expenses:

• Product Research and Development. This start-up expense includes all the money required to develop a product prototype and eventually produce a marketable version. It also includes any market research. Keep in mind that product R&D can be a significant expense particularly for those who are developing their own products.

• Facilities. You need to include not only the costs of securing a property to operate your venture, but also any costs associated with making it ready for business. Some examples of facilities expenses are: security deposits, furniture and fixtures, renovations, and signage.

• Equipment. This category includes the cost of all the equipment and machinery your business will need to operate during the first year. Depending on the nature of your business and the expense involved, you will need to decide whether some or all of the equipment will be purchased or leased and if items need to be new or if they can be purchased second-hand. Typical items in this category include: office equipment, production tools and equipment, machinery, and shipping equipment.

• Start-up Inventory. Start-up inventory expenses cover the cost of any initial stock of materials, finished products, and/or supplies that you need to begin operations.

• Advertising and Marketing. Many entrepreneurs choose to run pre-launch advertising campaigns or grand-opening promotions to generate advanced interest in their businesses. You should make sure to include any costs associated with these initiatives, such as printed materials, promotional products, and paid for advertisements.

• Other Startup Expenses. Make sure to include any additional costs associated with establishing a new business, such as licenses and permits, professional fees for the services of an attorney, accountant, or other professional consultant, insurance deposits, and fees to set up the business structure.

Determining Fixed and Variable Expenses for the First Year

Aside from the expenses incurred before operation, you should also estimate the monthly fixed costs and variable expenses that your business may incur during its first year of operation. You should be more clear about this information as you make various decisions regarding your new business, such where the business will be located, what kind of structure it will have, and who you will hire.

Your fixed expenses are the ones that do not change in response to sales volume. Here are some of the most common fixed expenses:

• Rent
• Utilities
• Phones
• Equipment Lease Payments
• Office Supplies
• Dues/Subscriptions
• Business insurance
• Professional fees
• Employee Compensation
• Business Loan Payment

Variable expenses on the other hand are ones that vary according to production and sales volume. Some common variable expenses include:

• Sales commissions
• The cost of raw materials
• Wholesale price of goods to be re-sold
• Packaging and shipping costs
• Income taxes

The Indirect Expenses of Small and Home Business Start-up

As I mentioned above, new entrepreneurs should take some time to figure out what their living expenses will be and how they will be covered while they are busy starting and building up their businesses.

Here are a few things to keep in mind:

• What are your current average monthly living expenses?
• What is your expected income during this time? (Will you be taking time away from a job to focus on your business?)
• Do you have any assets to rely on before the business becomes profitable?

Why Should You Hire an Accountant For Your Small Business?

It is common among bootstrapping small and home-based business owners to tend to the DIY approach when it comes to accounting; if they do hire someone, then they bring on a bookkeeper- the cheapest option. While these business owners may think that they are saving themselves a great deal of money, the truth is that many of them may be shooting themselves in the foot.

What many entrepreneurs and new small business owners in particular do not realize is that an accountant is one of the most important business professionals to work with- and not just at tax time.

Many accountants are qualified to do much more than file tax returns, maintain financial records and generate reports. They are also business consultants. A good accountant will be able to interpret the financial and operational data of a business and be able to offer valuable advice regarding operations and growth.

Here is a rundown of what an accountant can do for your business:

• General Bookkeeping Duties. All accountants are trained to maintain a business’ financial records and to generate standard financial documents or reports. They can also assist in opening a business bank account and setting up a direct deposit system for vendor payment and payroll.

• Compliance with Government Legislation. The legislative landscape is constantly changing… and getting more complicated. Many accountants, especially if they are Certified Public Accountants (CPA), are familiar with corporate and tax law, and they keep up to date with any pertinent changes to the legislation. This can help the small business owner in several ways including: determining the appropriate business structure for a venture and assisting with its setup, taxation registration and lodgement, and filing corporate tax returns with all the necessary deductions.

• Tax Planning and Reporting. In addition to standard tax reporting, a good accountant should be able to offer general tax planning advice to maximize business tax deductions. This is particularly important to small and home-based business owners who may not be fully aware of what they can and cannot claim, and it’s one area where the act of hiring an accountant can basically pay for itself.

• General Financial Consulting. As I mentioned above, an accountant can act as a business consultant providing advice on cash flow management, inventory management, price control, and business financing.

• Advice on Technology. There are several, versatile accounting software applications, services, and business tools on the market these days that specifically target the needs of small businesses. But knowing which one to choose can be confusing. A good accountant should be familiar with the major accounting software and services and should be able to offer advice on how to bring this technology into a business.

• Networking. If the accountant is located in the local community, and has been there for a significant amount of time (at least three to five years) , then he or she can be a good source of business and financing contacts as well as other community connections.

How to Save Money on Accountant Fees in a Small Business

Many small business owners shy away from hiring an accountant, fearing exorbitant fees. But the truth is there are several ways to keep the cost at a minimum, including doing some research, keeping the lines of communication open, and freeing the accountant to do those things that are the most vital to the business. Small business owners can follow the tips below to reap a significant savings on their accountant fees:

• Look for smaller firms or private individuals. Small accounting firms and self-employed accountants will generally charge you less for their services. But make sure you look into their experience, credentials, and any references they provide.

• Be clear about the price. Ask the accountant about his or her fee structure before you agree to work with this person. Most accountants these days are paid on an hourly rate, which, as I explain below, is something you can use to your advantage. Be sure to also find out what is the average amount of time that is required to complete each task.

• Take on what you can or hire a bookkeeper. One surefire way to keep your accounting fees low is to ensure you are not making your accountant spend time on tasks that you or your staff can easily do yourselves, such as recording transactions and organizing financial documents. Alternatively, you can hire someone to do your bookkeeping. In any case, you should make sure to consult with the accountant beforehand so that you present all of your data in a way that the accountant can easily access and use.

• Make sure your books are in order. As a follow-up to the tip above, it is vital that you send the necessary business documents and information to your accountant in an organized way. There are several points to keep in mind here:

1. Missing documentation will slow down your accountant and cost you money.

2. Many small and home-based business owners make the mistake if combining business transactions with personal ones, so do yourself a favor and open separate accounts and credit profiles.

3. Even if you are already working with a bookkeeper or an accounting software package, make sure to ask your accountant for advice on how transactions should be recorded and what accounting systems should be used.

• Include the accountant in business decisions. Before making any major decisions in your business, make sure that you first consult with your accountant. By doing so you can avoid losing significant amounts of money and/or getting yourself into trouble.

• Regularly check in with your accountant. Many small business owners make the mistake of only contacting their accountant come tax time. In order to maximize your investment, make it a habit of contacting your accountant every few months to discuss your business’ operational and financial performance. This will also help you to identify potential pitfalls before they happen and before they end up costing you a small fortune.

Bottom line: investing in an accountant can significantly help your small business and the advice you receive can quickly make up for the cost in accounting fees, but to enjoy these benefits you have to make an effort to do it right- from the beginning.

Below is the Frugal Entrepreneur’s guide finding a good small business accountant:

What Does an Accountant or CPA Do for a Small Business?

Before discussing the strategies for locating a suitable person, you should be aware of what you are looking for in the first place. Accountants and CPA’s (Certified Public Accountants) offer a broad range of services that go beyond simple bookkeeping and financial reporting. For those tasks, a qualified bookkeeper would typically be more than adequate. What gives accountants and CPA’s more value (and thus a higher price tag) are other areas of input, such as investment advice, retirement planning, strategic planning, and tax return preparation.

How to Choose a Good Small Business Accountant

Once you are clear what the needs of your business are, you can then go about finding an accountant who serves your individual needs. But how can you sort through all the accountants and CPA’s in the phone book or advertising online and be able to separate the wheat from the chaff? 

• Recommendations: Ask your friends who seem financially sound for referrals. Ask them specific questions about the accountant’s bedside manner. Does the accountant answer phone calls? Listen to each customer’s needs? Or does he/she apply a boilerplate approach, simply punching numbers into a pre-existing computer program without creativity? You, too, can buy a tax computer program, so paying a number-puncher is a waste of money. You need someone who knows the ins and outs of tax clauses, and will apply them to recoup the maximum possible tax return for you.

• Credentials: If the friend route yields no winners, try the yellow pages/online listings. Pursue only those with the letters, “CPA” following their names. The CPA (Certified Public Accountant) credential indicates extensive education and training and continual re-certification.

• Interview: There’s nothing like a first-hand opinion. As an educated customer, take the time to vet the person whom you are going to trust with your personal information. Choose two or three candidates, and contact them to request an interview. You can easily pass on those who don’t respond to your phone calls quickly and professionally. During the interview, the accountant should show interest in your financial goals. Watch for questions about your savings plans, retirement needs, and charity interests. If you are seeking an accountant for your business, look for someone who has knowledge about your area of work.

• Consider size and age: Of the firm, not the accountant. An older, more established firm has probably built a reputation that you can rely on. On the other hand, the company reputation is worthless if you are unimpressed with the accountant assigned to you.

• Assess the overall package: After you have collected the above information, compare the contenders. Zero in on the one who is pleasant and responsive. Your accountant should be able to answer all your questions clearly and thoroughly.