Small business accounting 101

Running your own business is a journey of ten thousand miles, and you’re about to take the first step. But before your business really gets off the ground, you need to make sure you have your accounting administration set up properly.

Accounting may seem like the most mundane aspect of running a business, but it’s also the most essential to keep on track—especially during the early stages. Before your business can take off, you need to know how to track and manage your money effectively, which parts of your business you can outsource or automate, and which professionals you should turn to for the advice you need to help you succeed.

This guide is brought to you by Bench, an online bookkeeping service. At Bench, we’re experts at helping small business owners succeed. With this guide, we’ll walk you through the methods, apps, and services that will help you set up your financials and put your new business on the path to success.

1. Open a business bank account

The moment you get your business registered, it’s time to think about where your income will be going.

Corporations and LLCs are required to keep their business finances separate from the personal accounts of their owners, while sole proprietors do not face such restrictions. But even though sole proprietors can legally co-mingle their personal and business expenses in the same account, we always advise against it.

Keeping your personal and business finances separated in business and personal bank accounts will make tax season far less complicated. When tax time comes around, you won’t need to worry about untangling your personal and business finances; they will be contained neatly in separate accounts. Not only that, but managing your money in different accounts allows you, your bookkeeper, and your accountant to more easily monitor the progress of your business.

If it’s your first time setting up a business bank account, choose a bank that meets your needs. Does it have a local branch that’s easy to access in person and online? Does it work well with your POS system? Will it integrate easily with the apps and online services you’re using to manage your business’s finances?

Starting off with two business accounts—one savings, one checking—will help you keep your money organized. For instance, you could put revenue in your checking account, while leaving a percentage in your savings account to pay off taxes at the end of the year.

Once you’re up and running, consider a business credit card. In addition to helping your business build a solid credit rating, the right card can help you accrue points, rewards, and cash back bonuses that you can use in other areas of your business.

2. Track your expenses

Many small business expenses are tax deductible, including certain startup expenses. But in order to claim these deductions, the IRS requires you keep records of everything you spend.

You should take special care to hold on to the following:

  • Receipts
  • Bank and credit card statements
  • Bills
  • Canceled checks
  • Invoices
  • Proof of payments
  • Financial statements from your online bookkeeping service, or your bookkeeper
  • Previous tax returns
  • W2 and 1099 forms
  • Any other documentary evidence that supports an item of income, deduction, or credit shown on your tax return

The IRS makes tracking expenses easier by requiring only that you keep records of bills valued at $75 or more. However, to make things simple, we recommend you get into the habit of keeping every document. Doing so will prevent you from accidentally shredding the wrong piece of paper.

Thanks to expense-tracking apps, capturing and storing expenses is now fast and easy. One popular choice for tracking expenses on the go is Expensify. The app lets you snap photos of receipts the moment you get them, and you’ll never have to worry about missing information come tax time.

If you’re just looking for a place to store digital receipts, you have a wealth of options to choose from in the cloud. Box, Google Drive, Evernote, and OneDrive all allow you to store large volumes of data securely online.

3. Establish a bookkeeping system

Bookkeeping may seem like a dull, imposing task. Whether you do it yourself or outsource the task to an online bookkeeping service like Bench, every business owner should get it done on a monthly basis.

If you’re not totally sure what bookkeeping entails, read our guide on the difference between bookkeeping and accounting.

Generally, there are three options to choose from to get your bookkeeping done:

  • DIY: For the hands-on approach, a robust Excel spreadsheet or some simple accounting software can help you manage your books.
  • Outsourcing: In order to focus on the most immediate concerns of your business, you may outsource your bookkeeping tasks online, either to a part-time bookkeeper or to a team of professionals through services like our own.
  • Hire in-house support: When your business is large enough to warrant it, you can hire a bookkeeper to work in-house.

The method that’s right for you will depend on your business’s structure, accounting needs, and size.

For example, if you’re just starting out and you have a handful of expenses each month, you could find the DIY method to be a cost-effective option. But when your business grows and you find you’re investing too much of your time on bookkeeping each month, paying a professional do it for you—so you can focus on other important aspects of your business—would be a smart move.

4. Team up with a CPA

Along with a bookkeeper and a lawyer, the services of a Chartered Professional Accountant (CPA) are indispensable to a small business. A good CPA can help you with lease negotiations, cash and treasury management, and ongoing cash reporting—especially one who specializes in working with businesses in your particular niche.

A professional CPA should be willing to meet with you for a free consultation, so don’t be afraid to shop around until you’ve found an accountant who can service your business’s needs, and who you feel will work well with your business. Most accountants charge by the hour, but some accept a monthly retainer fee.

To learn more, check out this guide to finding and working with an accountant.

5. Determine how you’ll get paid

These days, it’s not likely you’ll be doing all of your business transactions in cash, so you will need to choose a payment setup that works best for you. That means determining whether you’ll be accepting payments online, through a POS system, or in person.

  • POS system and in-person payments: If you plan on doing both, look at using a mobile system like Square. This is the right option if you don’t plan on processing a large number of in-person payments every day.
  • POS payments only: For in-person payments, look into either a POS system, which accepts transactions alongside a cash register or a standalone credit card reader, which is independent of any other system. For either option, you’ll need to open a merchant account with your bank. This account will act as an intermediary between the payment system and your business account, depositing and withdrawing funds.
  • Online payments only: For transactions that only take place online, Stripe is quickly becoming the standard platform, while Shopify is a great platform for ecommerce businesses specifically.

6. Set up a payroll system

As your business grows, you may find yourself hiring contractors and employees.

Similar to bookkeeping, payroll is a necessary task that can drain your time and energy, distracting you from running your business. One of the most effective solutions for this problem is Gusto. Its cloud-based platform connects you with payroll and benefits experts who file payroll taxes and send employees pay stubs and W-2s, meanwhile integrating benefits and workers’ comp into the process.

Before you bring on any new team members, make sure you categorize them correctly as either employees or independent contractors. Mixing this up can result in penalties from the IRS.

7. Determine your tax obligations

What the IRS requires from you in terms of tax filings will depend on the structure of your business. For instance, the self-employed—sole proprietors, or heads of LLCs and partnerships—usually claim income on their personal tax returns. They must withhold taxes from their income and, if the law requires them to pay more than $1,000 in taxes per year, they must do so in estimated quarterly payments.

Corporations, on the other hand, are separate entities, and their taxes must be filed independently from their owners’. Depending on how much they earn, however, they will also be required to file quarterly estimated taxes.

The majority of sales-oriented businesses end up having to pay sales tax as well. Sales tax can be a tricky subject. To learn more about it, check out this guide to sales tax for small business, and talk with your CPA to make sure you’re doing everything right.

8. Keep on top of your gross margin

One of the best ways to grow your company’s income is to increase its gross margins. To calculate your gross margins, you’ll need to understand how much it costs to produce your company’s goods or services. This becomes easier when we define Cost of Goods Sold (COGS) and gross margins themselves.

  • Cost of Goods Sold (COGS): The direct costs incurred by a company during production. It includes both the price of raw materials and labor.
  • Gross Margin: A percentage expressing the total revenue a company collects after factoring in the COGS.

Here’s how gross margin is calculated:

Gross Margin % = (Revenue – COGS)/Revenue

Your business’s ability to sustain itself depends on the difference between the price of a product and the cost incurred producing it.

9. Keep refining your methods

Continued growth should be part of any business model, and growth means change. Once you’ve got your small business off the ground, it’s up to you to continually review—and, if necessary, modify—how you manage your accounting tasks. Creating an efficient system that helps you maintain profitability and improve your bottom line will ensure the long-term success of your business.

Make no mistake: the first few years running your own business are bound to feel overwhelming at times.

When you get off on the right foot with an accounting setup that saves you time, supports growth, and reduces your workload, you’ll avoid getting dragged down by details—and you’ll have more time to focus on the thrill of the journey.

View our Business Management Guide today!
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Bryce Warnes
Bryce Warnes

Bryce Warnes is a writer for Bench, the online bookkeeping service that pairs you with a team of professional bookkeepers who do your bookkeeping, so you don’t have to.