Chapter 6

Small business accounting

If you’re starting a business, then you’ll need to get familiar with some accounting basics.

 Person talking to an accounting professional.

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:

  1. keeping records of business transactions (basic bookkeeping)
  2. creating accounting reports to help manage the business
  3. 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 sales: 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. You can both also get those numbers on a live dashboard 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.
  • VAT: Where you add a tax to your sale prices and later pay that money to the government. This only applies if you’re VAT registered.
  • 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.

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 small business accountant.

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.

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.

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