What is accounting?
Accounting tracks money as it comes and goes from a business. Some of that information is reported to the government to calculate taxes. But mostly the information helps you manage the business better.
Small business accounting basics
Accounting is a massive topic, but for most small businesses it boils down to:
- keeping records of business transactions (basic bookkeeping)
- creating accounting reports to help manage the business
- dealing with taxes
1. Keeping records of business transactions (bookkeeping)
A reliable and up-to-date picture of income versus costs will tell you:
- if you’re profitable (or at least moving in that direction)
- if you have enough cash coming in to pay upcoming bills
- everything you (or your tax agent) needs to know to do tax returns
This record-keeping is commonly called bookkeeping, and it’s critical to good small business accounting. You can learn what’s involved and how to do it in our guide How to do bookkeeping.
Keeping the books: the early days
Keep tabs on your expenses as soon as you start incurring them. Hold onto receipts and write down what each one was for. Create a separate business bank account as soon as you can. Then your bank statement will double as a record of all your expenses.
2. Creating reports to help manage the business
If you’re working in the business, you’ll have a rough idea of how things are going. But you’ll want to base your strategic decisions on something more than instinct and gut feel. Small business accounting gives you the insights you need.
Things to check weekly
Sales: There’s no money without sales, so it makes sense to keep a close watch on them. Just remember to consider the wider context. For example, extra sales often come with extra costs.
Profit: Make sure you get to keep some of those sales dollars after costs and taxes are taken out. Check your net profit margin, too. It shows what percentage of sales revenue becomes profit.
Wages: Wages are probably your most variable cost. It pays to keep an eye on them. Smart staffing decisions can go a long way to improving profitability.
Money owed to you: Check your invoices are getting paid. Late payments mean less money in the bank, which creates all sorts of unpleasant knock-on effects for the business and your personal wellbeing.
Things to check monthly
Budget vs actuals: See if things are going as planned. If not, why not?
Liabilities: Stay on top of what’s owed across loans, bills and taxes.
Cost of goods sold: Stay aware of inventory, transportation and storage costs to get your pricing right.
Last year vs this year: Compare numbers from the same month last year to see if the business is getting stronger.
How to stay on top of the numbers
Your small business accountant or bookkeeper can help pick the most important numbers for your business. They can also get those numbers streamed to a live dashboard on your phone using software like Xero. As a bonus, your accountant or bookkeeper may be able to double as your BAS agent or tax agent, helping with GST and end of financial year returns.
3. Dealing with taxes
Tax is one of the first things that come to mind when you think about small business accounting, and for good reason. Mistakes can be costly. The three most common forms of tax are:
- Income tax: Where you pay a portion of profits to the government.
- GST: Where you add a tax to your sale prices and later pay that money to the government. This only applies if you’re GST registered.
- Employee-related taxes: Where you collect tax from employee pay and send it to the government. Employers in some states and territories may also have to pay payroll taxes.
Lowering your business taxes
Business costs reduce your taxable income and therefore your tax bill, so make sure they’re all accounted for. You need specialist knowledge to work out what all your deductible costs are. Get help from a tax agent.
Get help from a professional
A BAS agent can look after your GST and business activity statements. A tax agent can help with income tax and end-of-year reporting. Find either in the Xero advisor directory.
Disclaimer: Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.
How to start a business
Thousands of new businesses open every day. If all those people can do it, why not you? Here’s what to do, and when.
- How to do market research
Your business idea is clearly inspired. But it helps to check you’re not the only one who thinks so.
- How to write a business plan
Writing a business plan will help nail down your idea and give you a blueprint for executing it.
- Budgeting and forecasting
It’s time to run some numbers on your business idea. Budgeting and forecasting help with that.
- Pricing strategies and cost of goods sold
Your prices can influence the number of sales you make and the profit you earn on each transaction.
- Types of business structure
Your business structure can affect how much tax you pay, and how you're treated by the law.
- Small business accounting
If you’re starting a business, then you’ll need to get familiar with some accounting basics.
- Registering a business and other admin tasks
After all the excitement of deciding to start a business, you’ll have some paperwork to do.
- How to create a business website
Treat your website like an online version of a storefront. It’s the first impression for many customers and prospects.
- Tools and guides for your business
Now that you’re in business, you want to stay there. Xero’s got resources and solutions to help.
Download the guide to starting a business
Learn how to start a business, from ideation to launch. Fill out the form to receive this guide as a PDF.