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Why Accounting Is Vital To Your Small Business

David Auer CPA

Almost all business owners do not go about the process of opening a business with a wealth of experience and knowledge in accounting. However, that doesn’t mean you should be oblivious to learning or gaining experience in accounting, as it is the foundation of your business. Accounting can show you your costs, revenue, profit, the amount of taxes you pay, and can even predict future revenues/profits based on past patterns. Thankfully, accounting is simple to learn and you only need to know the basics as a small business owner. There are three things you need to ensure your business is operating smoothly: revenue must always be greater than cost of goods sold, make sure you are using fair accounting practices, and pay your fair share of taxes. Listed below are 4 principles of accounting to practice in your business to make sure you are on the right path.

Divide your personal and business account:

When you start a business, it’s natural to use a personal account to manage not only your personal finances but your professional finances as well. Although this may seem like a good idea at the beginning, it’s important to start a business account to better understand your personal expenses and your business expenses and keep them separate. Before opening a business banking account, you must have the legal entity form that shows what your business is listed as (C Corp or LLC as an example) and a form from the IRS stating you are a legal business. When using a credit card, make sure you do not a personal one. Sign up for a business credit card to earn rewards on purchases and use it anytime you don’t want to pay for something with your bank account or debit card.

Identify workers properly:

There are two categories of workers you are able to hire for your company that you need to consider: employees and contractors. According to the IRS, employees are classified as individuals who you have behavioral authority and financial control over in the long-term and have a working relationship with. On the other hand, contractors are individuals you hire on a short-term basis for a project while they retain control of their schedule and business decisions. Before hiring any of these individuals with the two categories, it’s important to note you must classify them properly otherwise the IRS will institute a heavy fine. Not only will you be charged $50 for each incorrect W-2 you filled out for a contractor, but you will also be subject to paying 1.5% of wages and 40% of federal insurance contributions act or FICA tax if you did not pay the tax to the employee or 100% if you did. Mistakes do happen, but if at any point the IRS finds you intentionally misclassified your workers, the fines increase substantially up to $1,000 or one year in prison.

Watch your accounts receivable:

Most business done today is not an upfront cash payment. More often than not, there is an agreement made between a debtor and the company to pay the funds back within a given timeframe. Accounts receivable is another method besides sales to determine how much income is coming into the business, and without any recurring income entering the business it will surely crumble. Though having a constant amount of accounts receivable entering the business, every month analyze what percentage is still in your accounts receivable. You typically do not want a high balance month over month, as that indicates the turnover rate is low and you are not receiving enough income to sustain your business and pay your expenses. Ensuring you collect the total amount due from your current clients and future clients will allow your business to remain profitable. If you don’t receive the full amount of an accounts receivable balance from a client, work with them to settle the balance. The last thing you want to do is send a client to a debt collector, as that will strain the current relationship and any future relationship you may have with the client. Enforce a fee on late payments, and notify clients in advance if they do not pay on time so they can avoid paying late or not at all.

This article was originally published on davidauercpa.com

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