Basic Accounting Concepts Every Small-Business Owner Should Know

Small-business owners typically have the duty of managing the company's finances, which includes keeping track of receipts and expenditures.

If you are not familiar with basic accounting concepts, it may be difficult to keep track of your company's financial status. Every small business owner should comprehend the key accounting concepts covered in this blog post. We'll also provide tips on effective money management.

Do you manage a small company? Do you feel confused and overburdened by financial information? Don't worry; you're not alone. Even the most seasoned business experts may find accounting topics frightening.

But don't let that stop you from learning what you need to know. This blog post will go over some basic accounting concepts that every small business owner should understand. We'll also give you suggestions on how to make the process easier for you. So keep reading; it's important for your business!

Running a small business is not easy. There are many challenges to think about and manage on a daily basis, ranging from sales and marketing to human resources and product inventory. But one of the most important aspects of running a small business is being able to understand basic accounting concepts. Here are some key concepts that every small business owner has to know.

You are responsible for managing the finances of your small business. This could appear intimidating if you have no prior knowledge of accounting. Don't worry; you don't need to be an accountant to comprehend the basics of accounting.

This blog post explains the key concepts that each and every small business owner should be aware of. If you have a basic comprehension of accounting, you will be able to decide on the company's financial health.

Due to their hectic schedules, small business owners frequently postpone learning the fundamentals of accounting until they are absolutely necessary. But by taking the time to understand a few crucial essentials, small business owners can make sure their finances are in order and keep their enterprise running smoothly. Here are some basic accounting concepts that every small business owner needs to know.

If you manage a small business, it's critical to understand the foundations of accounting. This will help you manage your money and help you decide on smart business moves. This essay covers the most important concepts that any small business owner needs to know. We'll also provide some wise account management guidance. So if you want to learn more about accounting, keep reading!

Do you manage a small business? If so, in order to handle your money effectively, you should be aware of certain basic accounting principles. This requires understanding the various types of financial statements that businesses produce, what each number signifies, and how to forecast future outcomes.

By knowing about these concepts, you'll be able to make better company decisions and increase overall profitability. Continue reading to discover some basic accounting concepts that every owner of a small business should be aware of!

As a small business owner, do you intend to hire your first bookkeeper? Or maybe you're just trying to better understand the financial accounts of your business. If so, you're in luck! In this blog post, we'll go over some basic accounting concepts that every owner of a small business should know.

The numerous account types as well as revenue and expense charges will all be covered. Read on for some helpful ideas whether you're a novice or seasoned business owner!

For many small business owners, accounting is challenging and difficult. But it's imperative to understand at least the basics of accounting if you want your business to prosper.

In this article, we'll go over some essential accounting concepts that every owner of a small business should know. Whether you're just getting started or have been running your business for a while, keep reading for some helpful suggestions!

As a small business owner, it's imperative to understand the foundations of accounting. This will help you manage your money and help you decide on smart business moves.

This blog post covers the key accounting concepts that every small business owner needs to know. We'll also provide money management guidance. Read on for helpful suggestions whether you're just starting out or have been in business for a while!

Then let's move forwards!

Small business bookkeeping vs accounting

Sometimes, the phrases accounting and bookkeeping are used synonymously. They don't, however, mean the same thing.

What distinguishes bookkeeping and accounting from one another, then?

Simply said, bookkeeping is the process of monitoring all of the financial transactions that take place within an organisation. The task that historically required entering data into ledger books is now completed by most organisations using cloud accounting software, hence the term.

In addition to keeping track of all income and expenses, bookkeeping tasks may involve collecting and maintaining financial information such as invoices, bank statements, and receipts.

It includes data entry, employee and bill payment, bank reconciliation, and tax payment. Every business, from enormous, global corporations to sole proprietors, must execute bookkeeping chores.

Because bookkeeping falls under the category of accounting, it's typical to conceive of it as the initial step of a longer process.

Business accounting involves deciphering complex financial data and applying it to the creation of reports and projections, usually with the goal of understanding the state and performance of the company's financials.

Even if your business is still very small, it is important to focus on learning the essentials of bookkeeping because you are legally required to maintain financial records.

Although managing your finances should come first, business accounting will surely be essential in the long run.

Tips On How To Keep Books For A Small Business

Bookkeeping may seem difficult due to the complexity of tax laws and accounting terminologies. However, the procedure is actually quite straightforward. Monitoring the amount of money entering and leaving the business is the key priority. Keeping track of this information allows ATO to calculate how much tax you owe.

You can find all the information you need about small business bookkeeping right here.

1. Record all transactions

Keeping an accurate record of every transaction is essential for small business bookkeeping. Every time you get paid or make a transaction, you must record this information.

This would have typically been entered into a ledger book or a spreadsheet, but cloud accounting software streamlines the process.

Every time a consumer makes a purchase, you must keep track of the amount. It's beneficial to keep track of what customers bought if you offer anything.

You should keep track of everything you spend money on for your business, including paying suppliers and staff. Take note of the amount deducted from the company bank account as well as the type of purchase that was made.

Keep track of all of your receipts for at least six years.

The legislation mandates that companies maintain transaction records. But there are also other reasons:

Keep an eye on your spending and keep track of the revenue and costs for your business.

To gain a comprehensive image of your income, keep a watch on your finances.

keeps organised records of all purchases and receipts, which eases the load of tax preparation.

Legally, sole proprietors must maintain accurate financial records, while limited corporations must preserve records for six years (bookkeeping).

Even though an increasing number of business owners choose for accounting software, many begin with a simple process using spreadsheets.

Here are some suggestions for running a small business's finances.

Manual bookkeeping

You may control your cash flow by using Excel-compatible spreadsheets.

Even while manual bookkeeping may seem straightforward, it can be time-consuming and requires constant checking for errors and duplicate entries.

Bookkeeping using software

By using cloud accounting software to manage your bookkeeping, you might reduce time, expense, and human error. Additionally, you can use inexpensive, user-friendly software to automate record-keeping.

To avoid having to manually enter each transaction, you can utilise it to automatically pull transaction records from your bank account.

A capable accounting system can handle all of your crucial business data and present it in an easy-to-read style to help you make the best decisions.

You can modify your reports based on your priorities at any given time. For example, you might like a succinct daily summary that concentrates on the important details for that day.

You can save a tonne of time by tracking costs and revenues in real time. Your accounting software can come with an app that can be used to quickly record revenue and expenses while travelling.

The best accounting software comes with features that make it simple to keep track of the specifics, such as saving receipt photos so you don't have to save paper copies.

2. Reconcile transactions

Reconciling your transactions, which is normally done at the end of the month, is the second crucial bookkeeping task for small business owners.

When you conduct bank reconciliation, you look over your monthly company bank statement to see if the credits and debits match up with your financial records.

Reconciliation aims to give you a clear picture of your company's financial situation. You can use it to help you spot problems like multiple payments or illogical spending, for instance.

You should be able to determine the reason for any erroneous transactions or charges with the help of bank reconciliation.

Manual reconciliation could be difficult to do. However, using accounting software can streamline and drastically reduce the time required for bank reconciliation procedures.

Your bank statement's income and expenses can be matched up automatically by the programme with the invoices and purchases you've created and sent.

3. Manage your cash flow

The ability to manage finances in a small business is an essential skill for any entrepreneur. The good news is that there are ways to make things easier, such as using cloud accounting software or hiring an accountant to do some of your work.

It's also crucial to keep in mind that you can work along with an accountant while utilising your accounting software, enabling them to monitor your financial information in real-time and offer suggestions and insights that will assist your organisation to expand.

What is cash flow?

Cash flow refers to the amount of money that enters and exits your firm.

The money coming in includes all of your clients' bills (plus government grants). Rent, utilities, employee wages, and supplier invoices are among the costs being paid.

If your company has a steady flow of income, you can keep paying your payments. But if the money flow stops, you won't be able to make payments.

And it would mean that your business would quickly lose the ability to function.

Although the principles of effective cash flow management are straightforward, many businesses struggle in this area.

Prior to leaving the house, make sure you have more money coming in. Money must also arrive on time in order to pay vendors, invest in the stock, and buy supplies.

Additionally, having access to cash gives you more bargaining and purchasing power, which will ultimately lead to financial savings. Naturally, it's also essential to make plans for conceivable cash shortfalls.

You can therefore come up with emergency cash flow plans, such as extending loans.

Here are our top ten recommendations for maintaining a small business's cash flow.

Tip 1: Have a good credit control system

Setting up a trustworthy credit control system doesn't have to be challenging.

The foundations include sending invoices promptly, establishing clear credit limits and payment requirements for your clients, and actively pursuing any outstanding debts.

Tip 2: Use sales forecasting

Sales forecasting is crucial to foreseeing future occurrences and preparing for ups and downs in cash flow. You can start predicting cash flow once you have a month's worth of sales under your belt.

Utilizing your market expertise, determine demand by taking into account your pricing, the pricing of your rivals, the state of the economy, and other factors.

Always remember that being cautious is better than being optimistic. This is the best strategy for avoiding unwanted surprises.

Tip 3: Cut unnecessary costs and spending

When it comes to keeping your cash flow strong, think lean and mean.

Check each purchase thoroughly. By being conscious of where your money is going, you can always get the most value.

Just make the purchases required to support or grow your business.

Taxes will be reduced for some costs. The Australian government website provides a detailed explanation of qualifying purchases and how to substantiate them.

Do your homework because restricted companies are governed by distinct laws.

Tip 4: Negotiate good terms with suppliers

Examining your suppliers' payment terms is typically a good idea. After all, if you can pay your payment in 60 or 90 days rather than 30, you get to keep your money in your possession for a little while longer and maintain cash flow management.

If you're considering making a large purchase, always haggle. Additionally, consider alternatives to paying off all of your debt at once, such as setting up a monthly payment schedule.

Tip 5: Manage your stock

By periodically checking the stock and only ordering what you need, you can prevent tying up money needlessly. To sustain a steady revenue, figure out what sells rapidly and profitably.

It's not a good idea to spend money on goods that move slowly or are hard to sell. If you suddenly need money, consider offering discounted prices on any remaining unsold or outmoded products.

The greatest advise is to use your accounting software to manage your stock levels.

Tip 6: Apply for government grants and low-cost loans

You should make an effort to utilise the generous assistance provided. This covers cost-free subsidies, government loans, tax advantages, and help with investments.

Keep an eye out for opportunities to apply for any government aid you might be eligible for.

Tip 7: Keep on good terms with lenders

It is important to keep good communication with your bank or other lenders because hard times may come. Keep your books up to date at all times so you can provide your figures if you ever need to borrow money.

If you're having problems paying your payments, talk to the bank rather than hiding your head in the sand.

Tip 8: Consider alternative finance

It is important to keep good communication with your bank or other lenders because hard times may come. Keep your books up to date at all times so you can provide your figures if you ever need to borrow money.

If you're having problems paying your payments, talk to the bank rather than hiding your head in the sand.

Tip 9: Spot the warning signs

It is important to keep good communication with your bank or other lenders because hard times may come. Keep your books up to date at all times so you can provide your figures if you ever need to borrow money.

If you're having problems paying your payments, talk to the bank rather than hiding your head in the sand.

Tip 10: Step back and review your business's financial position

Sometimes you have to take a step back to see things clearly. Consider why your cash flow statement is weak if you routinely run into financial issues.

Are your sales too low?

Are the prices correct?

Could you be more aggressive in pursuing payments?

Regarding the potential of your company, be realistic. If you're not making a profit, you may want to reevaluate your plan.

4. Stay on top of late payments

Late payments are one of the key reasons for a company's problems. The most common explanations for late payments are as follows:

• Suppliers who alter the terms and conditions
• Customers deferring payment to assess the level of service
• Suppliers abruptly terminate the credit when customers want a payment discount that was not initially agreed upon
• Customers that decline to pay because they are unhappy with the service or delivery timing

Considering the best method to handle a client who pays later than expected? The following tips on how to be paid are provided by British Psychological Society member and business psychologist Mike Guttridge:

• When pursuing an unpaid debt, you must be extremely clear about what you want to happen. Make sure the client understands your point of view. Describe how you submitted an invoice 30 days ago (or in accordance with your payment conditions), that it is currently past due, and that you expect to get paid by the end of the week (or by whatever timeline you define).
• Be courteous. Be calm, yet resist giving up readily. Some customers may push you to the back of the line if they think you'll take it. Know what you want to achieve.
• Reiterate the details numerous times. Mention the terms of payment and the date you gave the buyer an invoice. Never misrepresent the truth. If you gloss over the facts or, even worse, get them wrong, you will lose credibility and become more difficult to ignore.
• Make direct contact with the employer. It's quite difficult to fire someone when you've already worked with or gotten along with them. Use your connections in the financial department or ask to talk with the boss.
• Be persistent. Make frequent calls to your contacts. Support a meeting. Be in touch frequently.
• If you have to communicate with the accounting department, be cordial. Find out the person's name and try to understand their point of view. Do they, for example, only make payments on certain days? Is the company having problems? Everyone deserves respect, even the least seasoned assistant. It helps.

Know Your Business Expenses

It might be difficult to predict what costs you would pay and which expenses will be tax-deductible when beginning a business.

For instance, tax deductions are available for expenses related to your income generation and business operations. You cannot, however, add products that you buy just for yourself to your accounts.

You do not get an endless supply of credit for purchases when you combine your business and personal accounts. To begin, you must assess and appreciate what can be claimed under Australian tax regulations. Consult a qualified public accountant or your local tax office if you're unsure of what counts as a deductible purchase.

Create Regular Reports

Sound bookkeeping procedures are essential for tax preparation as well. If you maintain track of your incoming and outgoing money, performing regular financial checks is simple. Using the right accounting software, you can guarantee that all of your customers pay their invoices on time and avoid any reporting discrepancies.

Even if completing checks on a monthly basis is a good idea, you might want to take a closer look at your accounting and bookkeeping records at the end of each quarter. Pay close attention to trends like declining or increasing revenue, large expenses, or indications of clients who are paying their invoices late. An accurate review of your numbers will make it simpler to plan for future cash flow improvements.

Track Cash Payments

When you first start a firm, it's easy to forget about this, but you need to keep track of your cash payments.

All monies received by the company, including for business-related purchases, must first be put into the corporate bank account. Even while it could be tempting to utilise the money today to buy supplies, doing so could easily cause your bookkeeping process to become disrupted.

To avoid having to contact the consumer again, remember to record who made the payment when documenting cash payments. If you're unsure of how to manage the specifics of a cash payment, go to a bookkeeper who can assist you in correctly configuring and utilising your accounting software.

Budget for Tax Payments

Few things are as nice as realising your business is profitable. As soon as you start to notice a profit, you can decide to put all of your extra cashback into the company.

Profitable investments in product development, marketing, and other expansion strategies can help your business stay on track, but you shouldn't jump in headfirst.

Remember that at the end of the year, you will need to set aside a portion of your income for tax-related charges. You should set aside at least a percentage of your salary, say 20%, to guarantee that you have enough cash to pay your bills. If it's tough for you to keep this money in your business account, use a different savings account.

Know the Basics

Many business owners think they can avoid learning about accounting and tax regulations if they hire a professional to manage their books.

If you use an automated accounting application, you might even believe that. Even while these assets reduce your risk of tax problems, it's always wise to be aware of your tax obligations.

Go online and read every article pertinent to the kind of business you run. Recall that registered businesses have different rules for partnerships and sole proprietors. Consider your ongoing expenses like GST registration and corporate tax. You might be able to avoid paying some severe fines if you have a basic understanding of how taxes work.

Outsource to a Professional Bookkeeper

Cloud-based software like Xero, Quickbooks, and Reckon make accounting easier for small business owners. However, it still remains necessary to hire a qualified bookkeeper. Hiring a qualified book-keeper has a number of benefits, such as:

• Preserving your precious time
• Make sure your books are organised and current
• Save money
• Fulfilling all of your compliance requirements, such as your tax obligations

When your books are correctly organised, you can easily assess how your business is doing financially and make important business decisions.

Make Your Books a Priority

Last but not least, while it may not be the most fun aspect of running your business, keeping track of your spending must be a top concern.

One error on a tax return or one carelessly handled set of invoices in your bookkeeping records might completely upend your existence. Make sure you have a plan in place for keeping your books organised and current from the very beginning.

You should be organising your financial data at least once a month, even though you don't absolutely need to balance everything at the conclusion of each working day.