7 Essential Accounting Tips for New Business Owners
As a new business owner, accounting might feel like the last thing you want to deal with, but it’s one of the most critical aspects of running a successful business. Neglecting your finances can lead to cash flow issues, missed tax deadlines, and even business failure. The good news? You don’t need to be a financial expert to master the basics of small business accounting. In this post, we’ll cover seven essential tips to help you manage your finances like a pro.
1. Separate Business and Personal Finances
Picture this: tax season rolls around, and you’re scrambling to separate personal expenses from business ones. Stressful, right? This is one of the easiest mistakes to avoid!
Problem: Many new business owners mix their personal and business finances, which can lead to confusion and, worse, problems with tax authorities.
Solution: The first step to proper accounting is opening a separate business bank account and credit card. Not only does this simplify bookkeeping, but it also protects you from liability in case of audits or legal issues. Keeping your business transactions separate from personal ones makes it easier to track cash flow, calculate profit, and file accurate tax returns.
Action Tip: Set up a business bank account and credit card from day one. It’ll save you hours of headache later on.
2. Keep Accurate Records
Ever wonder how a company runs out of cash despite being profitable? It often boils down to poor record-keeping. Don’t let that happen to you.
Problem: Poor record-keeping can result in inaccurate financial reports, missed deductions, and tax filing errors. Without detailed records, you may miss out on opportunities to improve cash flow and profitability.
Solution: Maintain clear and accurate records of all business transactions, including receipts, invoices, and payments. Use accounting software like Xero or QuickBooks to organize and track income and expenses. Many modern tools also sync with your business bank accounts and credit cards, making record-keeping a breeze.
Action Tip: Make it a habit to reconcile your accounts at least monthly. Set aside time to categorize expenses and review your financial records regularly.
3. Understand Cash Flow Management
Your business’s financial health is about more than just profit—cash flow is king. It’s what keeps your business running day-to-day.
Problem: Many new business owners focus on profit, but cash flow is the lifeblood of your business. You might be making sales, but if you don’t have cash on hand to pay bills or suppliers, your business can quickly face liquidity issues.
Solution: Understand the difference between profit and cash flow. Track incoming and outgoing cash diligently and create a cash flow forecast to anticipate future cash needs. Stay on top of payment terms with clients and vendors, and always aim to have a cash reserve for emergencies.
Action Tip: Use cash flow forecasting tools or spreadsheets to predict when you might experience cash shortages, allowing you to plan ahead.
4. Stay on Top of Tax Deadlines
Imagine realizing you missed a tax deadline and now owe penalties—ouch! Staying organized with your taxes is easier than you think.
Problem: Missing tax deadlines or underestimating your tax liabilities can result in hefty penalties, which are avoidable with proper planning.
Solution: Know your tax obligations early. Depending on your business structure and location, you may have to pay income tax, sales tax, payroll tax, and others. Consider working with an accountant to set up a tax calendar and file your returns on time. Use accounting software to automatically track tax liabilities and set aside funds to pay them when due.
Canadian Tip: In Canada, you must make GST/HST payments if your business revenue exceeds $30,000 annually. Keep track of provincial tax deadlines as well.
U.S. Tip: In the U.S., businesses often need to make estimated quarterly tax payments to the IRS, so budget for these in advance to avoid penalties.
Action Tip: Set reminders for tax filing deadlines in your calendar and automate your tax payments wherever possible.
5. Choose the Right Accounting Method
Do you know the difference between cash and accrual accounting? The right choice can change how you see your business’s financial health.
Problem: Many entrepreneurs don’t realize there are two accounting methods—cash and accrual—and choosing the wrong one can distort how you view your business’s financial performance.
Solution:
Cash Accounting: Income and expenses are recorded when cash actually changes hands. This method is simpler but may not give you a complete financial picture.
Accrual Accounting: Income and expenses are recorded when they’re earned or incurred, regardless of when money changes hands. This provides a clearer picture of your business’s long-term financial health but can be more complex.
Canadian Tip: Canadian businesses earning over $400,000 in revenue are required to use accrual accounting for tax purposes.
U.S. Tip: The IRS requires accrual accounting for businesses with over $25 million in revenue, though smaller businesses can use cash accounting.
Action Tip: If you’re unsure, consult an accountant to determine which method best suits your business’s needs.
6. Use Accounting Software
Manually tracking expenses in a spreadsheet? It’s time to upgrade! Accounting software will change the way you run your business.
Problem: Using manual methods like spreadsheets to track your finances can lead to errors and wasted time, especially as your business grows.
Solution: Invest in accounting software like QuickBooks, Xero, or FreshBooks. These tools automate much of the accounting process, making it easier to send invoices, track expenses, manage payroll, and generate financial reports. Most software also allows you to sync with your bank accounts and credit cards, ensuring accurate and up-to-date data.
Action Tip: Look for accounting software that offers features like invoice management, expense tracking, and tax reporting. Many platforms also integrate with e-commerce and point-of-sale systems if you run an online or retail business.
7. Hire Professional Help When Needed
DIY accounting might save money, but hiring a professional can save your business from costly mistakes.
Problem: Many new business owners try to manage everything themselves, including their accounting, which can lead to mistakes that cost time and money.
Solution: If your accounting becomes too complex, don’t hesitate to hire an accountant or bookkeeper. A professional can help you navigate tax regulations, optimize your finances, and ensure that your books are compliant with laws. While it may seem like an added expense, professional help can actually save you money by reducing costly errors and maximizing tax deductions.
Canadian Tip: In Canada, you may want to work with a CPA who can help with corporate tax planning, especially if your business is growing rapidly.
U.S. Tip: In the U.S., consider working with a CPA or an enrolled agent to help you navigate tax law and optimize deductions.
Action Tip: Reach out to professionals early on, even if just for consultations. They can help you set up your accounting system properly from the start.
Accounting doesn’t have to be intimidating. By following these seven essential tips—separating your finances, keeping accurate records, managing cash flow, staying on top of taxes, choosing the right accounting method, using software, and seeking professional help—you can set your business up for long-term financial success. Whether you’re in Canada or the U.S., these foundational principles will help you maintain control of your finances and avoid costly mistakes down the line.