Small business accounting

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Small business accounting

If you’re starting a business, then you’ll need to get familiar with some accounting basics. Let’s look at the main tasks, some time-saving tricks, and find out who can help with your small business accounting.

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?

Seesaw with ball and square to represent budget and actuals

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.

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.
Sales tax
Where you add a tax to your sale prices and later pay that money to the government.
Employee-related taxes
Where you collect tax from employee pay and send it to the government. In some countries, the employer is also expected to pay extra taxes.

Get help from an accountant or bookkeeper

A professional can make tax time so much simpler. They can also produce financial reports to show how the business is doing. Find one in the Xero advisor directory.

Find advisor

Chapter 7: Registering a business and other admin tasks

There is some paperwork to file before you can launch your business. Here’s how to register a business with the right authorities and keep out of trouble.

Read chapter 7