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Chapter 6

Small business accounting

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Small business guides > Your guide to starting a business > Small business accounting

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: 

  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.

Stack of coins representing sales

Bar chart of profit
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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.


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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.

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Woman holding wages

Back side of credit card
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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

Bomb with fuse lit
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.

Price tag

Calendar with day highlighted
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. Filing business tax returns

Tax is money that you’re legally required to pay the government. It’s applied to a lot of the things we buy, it’s taken out of people’s regular wages each payday, and your business will need to pay tax too.

Business tax comes in many forms and some businesses run into more than others. But three of the most common 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.

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

This guide is intended as general information only. Always check with a professional for advice.

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