At Scooter, we like sharing the stuff we’ve learned — not locking it away in some vault.
With that in mind, here are five of the biggest lessons we’ve learned about small business accounting over the years. These tips are designed to help you save time, avoid the classic mistakes, and get a great accounting system in place.
Tip #1: Keep your personal and business finances separate
If we had to offer one piece of all-purpose, this-will-make-your-life-a-lot-easier accounting advice to every business owner out there, this would be it.
While most people know it’s not a good idea to mix their personal and business finances together, it’s one of the main problems we see at small companies year-in and year-out. Typical mistakes include:
- Moving personal funds in and out of the business without keeping any records;
- Combining personal and business expenses together on the same credit card; and
- Paying for blatantly personal expenses (like Nordstrom purchases and vet bills) from the business checking account.
From an accounting perspective, these problems are costly and time-consuming to fix. Furthermore, they can cause serious problems if you ever get audited or sued.
A far better approach is to get separate bank and credit card accounts for your business right at the start, then pay all your business-related expenses through those two accounts. Cell phone bills, marketing, office supplies, rent, travel, everything.
That way, 95% of your accounting transactions will be neatly contained in two accounts — and this will make your accounting a heck of a lot cheaper and easier to deal with (trust us on this).
Tip #2: Choose the right accounting software
If you own a small business today, you have a better range of accounting options than ever before. In addition to popular desktop programs like QuickBooks, you can choose from an amazing lineup of cloud-based systems like QuickBooks Online (QBO), Xero, and FreshBooks.
What’s more, hosting is now widely available for more powerful programs like QuickBooks Enterprise and Sage 50, which are typically used by manufacturers and businesses with complex inventory needs. This means you can now have an enterprise accounting system without maintaining your own network or server. Hooray!
Unfortunately, the wide array of options makes choosing the right system a lot harder than it used to be. If you’re not familiar with what’s out there, we’d recommend looking at the six products we just mentioned.
However, we’ll also cut to the chase and tell you that, in our opinion, cloud-based systems are now the go-to choice for most small to midsize businesses. In addition to being lighter and easier to deploy than desktop systems, they allow you to automate huge portions of your bookkeeping work by using bank feeds, bank rules, and integrated apps.
Whichever software you choose, it’s critical to do your homework up front and select one that’s going to be a good long-term fit for your business — because changing accounting systems later is a giant pain in the ass.
Tip #3: Keep your chart of accounts as simple as possible
Whenever we start working with a new business, the first thing we look at is their chart of accounts. Why? Because the chart of accounts tells us in one glance how well (or poorly) the accounting system was designed, and how knowledgeable (or inexperienced) the prior bookkeeper or accountant was.
Basically, the chart of accounts is the list of all the accounts in your general ledger. It’s the foundation for your entire accounting system.
A well-designed chart of accounts is lean, clean, and easy to understand. Everything’s in the right order, the accounts are all properly named (in a way that anticipates both the financial statements and the tax return), and there’s nothing extraneous. It’s like looking at the kitchen of an experienced chef: everything's been laid out with a sense of purpose, and you know the food's going to be good just based on the environment.
A bad chart of accounts is exactly the opposite. It’s long and confusing, bogged down with nonsensical accounts, and doesn’t jibe with the financial statements. It looks like a bad plumbing job that was pieced together by four different contractors.
Long story short, a well-organized chart of accounts saves tons of time because it’s user-friendly and produces clean, owner-ready financial reports. And at the end of the day, that’s what you really want: a compact, straightforward accounting system that’s easy to work with and helps you get the numbers you need as efficiently as possible.
Tip #4: Build a monthly reporting package
Most business owners are so busy doing other things that accounting and financial management tasks often get pushed to the bottom of their to-do list.
That’s why building a monthly reporting package is such a useful idea. Instead of running your business based on hunches or looking at your numbers “every once in a while,” you can create a set of key reports that get automatically generated every month.
What reports should you have in your monthly package?
The starting point will be your Balance Sheet and Profit and Loss (P&L). These are the two primary financial reports for any business, whether you’re Amazon or Dancing Turtle Yoga Studio.
From there, the basic idea is to add supporting reports that drill down on key accounts and specific areas of the business you're interested in. Typical examples include: accounts receivable (A/R), accounts payable (A/P), inventory, sales trends, cost of goods sold (COGS), and any expense accounts you want to keep a close eye on (advertising, payroll, travel, etc.).
We’d suggest that you begin with a few of the areas mentioned above, then start customizing your package from there. It does take some trial and error to figure out what reports you really need, but once you get a good package in place, the job of "staying on top your numbers" becomes a lot easier and less time-consuming.
Tip #5: Close your books
“Closing the books” is another one of those phrases that accountants tend to throw around a lot, but never really explain. That’s unfortunate because it’s an important concept that all business owners should be aware of.
In short, the main purpose of closing your books is to ensure that your accounting and financials are accurate and complete for a given period (typically last month, last quarter, or last year). It’s a multi-step process that generally involves reviewing your accounting from top to bottom, fixing any problems you find (by correcting transactions and/or making journal entries), preparing a Balance Sheet and P&L, then locking down your numbers for the prior period.
We’ve worked with many small businesses that rarely — if ever — closed their books, and the results can be pretty horrifying. Therefore, we’d recommend that you close your books at the end of every year at least, to wrap up the prior year properly and file an accurate tax return. We’d also recommend hiring a professional accountant to handle the journal entries and closing process, because some technical skill is required.
And for gosh sakes, don’t forget to set a closing date in your accounting system. If you overlook this, then all that hard work you just did can get messed up if somebody deletes a few transactions or makes a couple of unwise mouse clicks (we’ve seen it happen a million times).
summary: It’s Not Brain Surgery
At the end of the day, accounting isn’t as difficult as most people think. Yes, it requires hard work (just like every other part of your business) and there are some basic concepts and vocabulary you have to learn.
But you don’t have to reinvent the wheel or do anything extraordinary. On the contrary, the best accounting tends to be plain, conservative, and somewhat boring by nature. Like a good bowl of oatmeal.
In our opinion, the three things that most small businesses should focus on are:
- Designing a simple, effective accounting system right at the start (preferably in the cloud);
- Building a set of basic procedures that will help keep your day-to-day accounting operations running smoothly (for billing customers, paying vendors, running payroll, etc.); and
- Putting together a set of key financial reports that will tell you what’s happening with your business, and then looking at them on a regular basis.
If you can get a handle on those three elements, everything should flow from there. Hopefully, the tips we’ve provided in this short article will help you do just that.