Money matters, but for small businesses, matters of money aren’t always easy to navigate: Payroll, accounting and bookkeeping can be causes of stress. Alicia Jeffreys of Shampooches Dog Grooming in Alton, Illinois, was struggling to understand the financial aspects of running a business. As the owner of one of six businesses selected to receive a makeover from Small Business Revolution — Main Street, she got the training she needed to take control of her finances.
We’ll walk through what Jeffreys learned from the Deluxe team, and what you need to know to get your books and payments in order today.
5 things to know about small business accounting
1. You need to track revenue and expenses
While you’re running the day-to-day, it’s easy to push the more monotonous tasks to the side. But it’s crucial to track the money coming in and going out of your accounts.
Jeffreys was too busy grooming dogs and serving clients to organize her books. As a result, she had no idea how much cash was coming into the business or how much she was spending on expenses.
Tracking revenue and expenses gives you a picture of your profits, especially if you’re just starting out. You’ll be able to predict future financials based on past trends and manage your financials. Plus, during tax season you’ll be able to save yourself from stress.
2. Balance sheets are your friend
When tracking where your money goes, balance sheets are essential. A balance sheet is a financial statement where you can lay out what you own and what you owe. It’s a great tool for understanding the financial strength of your company, and it highlights one of the reasons to pay bills on time.
3. Income statements are important, too
Income statements are a record of your revenue (money coming in) and expenses (money going out). You can use these statements to see how your business is doing over time, such as a quarter or a year.
4. Additional terms to be familiar with
- Return on investment (ROI): The amount of money your business makes compared to how much it spent; often shown as a percentage
- Margin or profit margin: Measure of how much money your business makes
- Gross profit margin: Profit after you take cost of goods/services from revenue
- Net profit margin: Profit after going through all expenses; best way to see if your business is making or losing money
5. The 10 accounts that are typically included in a balance sheet or income statement
- Cash: When you make or receive payment
- Inventory: Products or materials you have in stock
- Accounts payable: Money that you owe vendors
- Accounts receivable: Money that you are owed
- Payroll: Money paid to yourself and your employees
- Sales: Revenue made from selling goods or services
- Purchases: Things bought for your business
- Loans payable: Money you owe on loans
- Owners’ equity: Amount of money each owner has put into business
- Retained earnings: Profits reinvested into the business
Everyone, even one-person businesses, must have a system for payroll. Despite employing two groomers, Jeffreys lacked a formal system for paying her employees. Deluxe set her up with a professional service that handled payroll, start to finish. Beyond the positive tax implications, there are three options for paying yourself and your employees:
1. Do it yourself (DIY)
You or someone who already works for you takes care of payroll. It’s the most affordable option and allows you to have a deep understanding of how you’re paying employees. But it will eat up a lot of time and put you at risk for costly penalties if you accidentally violate any local, state or federal payroll laws — which can change often.
2. Hire someone else
You can hire a professional bookkeeper or accountant to do your accounting for you. The best thing about this is that they’ll know the laws around employment and taxes, and they’ll keep up to date for any changes. When it comes to payroll accounting, you’ll save a lot of time by hiring a professional to keep up on things. Keep in mind, though, that hiring an accountant can be costly.
3. Outsource it
In this case, a third-party payroll solution for small businesses handles every part of your business’s payroll. This is a full-service option that can include payroll management and, sometimes, human resources help. You get peace of mind knowing that you’re complying with the latest rules and regulations. Most likely, your third-party service will have an online portal that lets you easily see your business’s payroll information, employees’ hours, earnings and other important information. Often, a third-party service costs less than an accountant.
Always get advice from an accountant or lawyer if you need more help deciding what’s right for you. Additionally, consider the convenience of eChecks QuickBooks integration to be able to easily pay employees.
Bookkeeping is the sometimes tedious but always essential task for handling financials. To do business bookkeeping, you must record all of your transactions, like making a sale or purchasing a machine, in chronological order. Anything that goes in and out has to go in your books. Keeping careful records enables you to understand your financial health and will be a big help come tax time.
If you haven’t done so already, it’s important to set up a business bank account. Separating your business and personal finances is a smart way to prevent an overly complicated financial system that causes a number of headaches at tax time.
1. DIY vs. hiring
Hiring a professional bookkeeper can save you time and ensure that your records are accurate, but those services do cost money. If you choose to do most of your bookkeeping yourself, you may still want to consider hiring a professional around tax season or for a few hours a month to make sure you’re on the right track.
2. Manual bookkeeping
Many companies choose computer accounting programs, but some people record and calculate their business’s finances by hand to save money (granted, this approach takes a lot longer than on a computer). You can buy a bookkeeping journal — a book filled with ruled, columnar worksheets designed to help document finances. Like a journal about your day, all transactions go here first.
3. Bookkeeping by spreadsheet
Spreadsheets allow you to keep track with the convenience of a computer and without the price of accounting software. Microsoft Excel and Google Sheets are both good options; this method essentially works the same as manual bookkeeping but is more legible and with mathematical functions designed to save you time. Additionally, it’s easier to share the information and convert it into graphs or charts for visual representations.
4. Software for bookkeeping
Software is often shown to improve accuracy and manage cash flow while saving you time. Software is a great option for more established businesses that just don’t have the time to keep doing it on their own. A popular option for small businesses is QuickBooks (here are some handy tips for making QuickBooks quicker). There is also Xero, Zoho Books and FreshBooks, to name only a few. Software can often track employee timesheets, require less manual entry of data, automatically download transactions and much more.
How to keep the books
Choose a bookkeeping method: double-entry or single-entry. Double-entry bookkeeping is based on the fact that every transaction requires you to use one asset to acquire another. It is based on the understanding that every transaction affects both your credit and debit balances. So if you spend cash acquiring new inventory, for example, there will be an increase in revenue once that inventory is sold. However, there will also be a decrease in inventory. The sum of the debits and credits in your books should be equal.
On the other hand, single-entry bookkeeping requires that transactions are only recorded once, and not as credits and corresponding debits. This form of accounting is usually only used for personal finances (such as balancing your personal checkbook) and by very small, cash-based businesses. Most small businesses do not use single-entry bookkeeping.
Small business accounting might not be the most romantic part of running a business, but it is an important thing to get right in order to keep your business on the right track. Now that Shampooches has systems in place for financials, the business is ready for growth.