Top 10 Small Business Accounting Tips For 2024

Above all else, small business owners succeed or fail based on their ability to generate revenue and minimize costs.

Positive cash flow is the lifeblood of a new business and demands more than entrepreneurial spirit; it requires a meticulous approach to accounting and bookkeeping.

With 21% of businesses failing within the first year and only 35% lasting a decade, the importance of sound financial management cannot be overstated.

We’ve compiled a list of 10 invaluable accounting tips to strengthen your business against cash flow challenges and tax pitfalls, paving the way for growth.

Here are our recommended top 10 small business accounting tips:

10. Embrace Technology With Digital Apps

Digital apps can significantly enhance any small business's efficiency, productivity, and overall operations by providing up-to-date information on all key areas of concern.

Numerous apps can assist in accounting for startups by keeping track of income, expenses, stock, assets, and liabilities.

Point Of Sale Software

Implementing POS systems like Square or Lightspeed allows for efficient in-store or online transactions that integrate with Quickbooks, Xero, and other inventory systems.

Cloud-based accounting software allows you to streamline financial processes, track expenses, manage invoices, generate real-time financial reports, and share information easily with your bookkeeper.

Inventory Management Systems

If a small business owner carries stock, then it is best that they utilize an inventory management system such as Zoho Inventory or TradeGecko.

These programs allow you to manage your orders and optimize your inventory control, which will help prevent overstocking or stockouts.

 Customer Relationship Management (CRM) Systems

Implementing a customer relationship system (CRM) such as HubSpot or Salesforce will make it easier for a small business owner to manage customer interactions.

The software helps a business owner and their staff track leads, streamline sales processes, and help build and maintain strong customer relationships.

9. Prioritize Profit And Loss Statements

Paying close attention to Profit and Loss (P&L) statements is crucial for small business owners to understand their financial performance and make informed decisions.

While your cash flow may look good on the surface, when there is cash in the bank, you need to ensure that you are operating profitably.

Here are steps to prioritize Profit and Loss Statements effectively:

Regularly Generate Profit and Loss (P&L) Statements

Your bookkeeper must produce a P&L statement regularly, typically on a monthly basis, to provide a timely snapshot of your business's financial health.

Familiarize yourself with key components of your P&L statement, including revenue, cost of goods sold, gross profit, operating expenses, net income, and other relevant categories.

Your P&L statement should include a monthly and year-to-date column and a comparative budget column highlighting any variances.

Large monthly variances should be investigated to allow you to take corrective action, either adjusting your budgeted expectations or fixing problem areas in your business.

Analyze Revenue and Sales Trends

Evaluate your revenue and sales trends over time to identify which products or services contribute the most or least to your revenue.

By analyzing the various factors influencing sales fluctuations, you will be able to identify products and services that require attention.

Monitor Gross Profit Margin

Track the gross profit margin, which is the percentage of revenue retained after deducting the cost of goods sold (COGS) to see that it is in line with expectations.

A healthy gross profit margin indicates efficient cost management and allows you to adjust prices when needed, or it may highlight stock issues.

If small business owners' gross profit margin is less than expected, it could be due to increases in input costs or a lack of adequate stock management.

Control Operating Expenses

By scrutinizing operating expenses, such as rent, utilities, marketing, and salaries, you can identify areas that can be optimized without compromising business operations.

Having the figures in front of you regularly helps evaluate different cost categories, highlighting variable and fixed costs that may offer cost savings.

They will also help you understand how production or sales volume changes impact overall costs, which affect your bottom-line profit.

Assess Net Income and Profitability

By analyzing net income and determining the overall profitability of the business, you can identify opportunities to increase revenue or reduce costs to enhance profitability.

Over time, you’ll recognize any seasonal patterns in revenue and expenses that will help prepare for seasonal fluctuations by adjusting business strategies.

You can compare your business's financial performance against industry benchmarks to provide context for understanding how well the company performs relative to your competitors.

Together with the use of financial ratios derived from your P&L data, your accountant can analyze your return on investment, gross margin, and operating margin.

These ratios will help you and your team manage your business by highlighting how efficiently it is using its resources.

Communicating Your Results Effectively

Using your historical P&L data helps you forecast future financial performance and set realistic financial goals through strategic growth plans.

Your accountant can help accurately interpret P&L statements so that you can implement cost control measures based on P&L analysis.

This may involve negotiating with suppliers, optimizing inventory management, or finding more cost-effective operational solutions to improve your financial performance.

A smart financial tip is to share your P&L results with key stakeholders, such as investors or lenders, fostering trust and alignment with your objectives.

8. Create A Budget

Creating a detailed revenue and expense budget is a crucial step in managing your small business's financial health and sustainability.

Using basic accounting principles, you should collect all the relevant financial information, including past income statements, balance sheets, and cash flow statements.

This will help you to form an accurate picture of your financial position and understand your company’s historical financial performance.

List Your Sources Of Revenue

Extracting a list of the sources of income, including sales, services, and other revenue streams, gives you a realistic estimate of your future income.

You can use the monthly fluctuations in income to project your expected revenue with due regard to market conditions and historical data.

Business owners can also make allowances for changing market conditions, planned expansion projects, or additions to their product lines or services.

Outline Your Fixed Expenses

Identify all fixed expenses that remain fairly constant each month, such as rent, utilities, insurance, salaries, and loan repayments, taking into account contracted escalation clauses.

These are the essential costs that you need to cover regardless of business fluctuations and constitute an easily calculated monthly expense.

List All Variable Expenses

Variable expenses are those costs that may change based on your business activity, such as marketing costs, supplies, and maintenance.

While these expenses may vary each month based on your sales activities, you can use your historical data to estimate these amounts fairly accurately.

Consider One-Time Expenses

You should also account for any upcoming one-time or irregular expenses, such as equipment purchases, marketing campaigns, or facility upgrades.

This category should be planned for, and sufficient financial resources should be put in place to ensure that it does not adversely affect your cash flow.

Once you have assembled all your figures, you can determine your profitability goals and allocate resources based on your priorities.

Monitoring Your Budget

You should then enter your budget into your accounting software and monitor and adjust it based on any monthly or quarterly variances.

Include some contingency funds in your budget to account for unforeseen circumstances or emergencies, thus ensuring financial flexibility and resilience.

Creating and maintaining your budget is an ongoing process that requires diligence and adaptability but serves as a valuable decision-making tool.

7. Understand State Sales Tax Laws

It makes sense to stay up to date with state sales tax laws as it is crucial to ensure compliance and avoid potential legal issues.

Your tax prep checklist should include instructions to your accountant to research sales tax laws applicable to your state and inform you of changes.

Becoming a member of your local business association helps you stay updated on legislative changes and connects you with peers facing similar challenges.

Implement sales tax automation software that automatically calculates and applies the correct sales tax rates based on the latest regulations.

This applies specifically to economic nexus thresholds that may require your business to collect sales tax in states where you have a significant economic presence.

You should also ensure that your staff, especially those involved in sales and finance, are educated about state sales tax laws.

6. Prioritize Cash Flow Management

As we mentioned earlier, prioritizing cash flow management is crucial for any small business's ultimate success and sustainability.

You should develop a detailed cash flow statement outlining all incoming and outgoing cash, including operating, investing, and financing activities.

Once your cash flow statement is in place, keep a close eye on accounts receivable and payable and implement efficient invoicing and billing processes.

This will help to shorten the receivables cycle and ensure that your debtors do not extend their credit terms beyond their payment terms.

Clearly Define Your Payment Terms

Clearly define your payment terms with customers and clients and encourage early payments by offering discounts or implementing penalties for late payments.

Negotiate favorable payment terms with your suppliers and aim to extend the payment period for as long as possible.

Build and maintain a cash reserve to cover unexpected expenses or periods of low revenue. This reserve acts as a financial safety net during challenging times.

Optimize Your Inventory Levels

Set inventory level targets to prevent overstocking or stockouts; regularly assess inventory turnover rates and adjust your orders accordingly.

This will help you avoid tying up too much of your cash in excess inventory, allowing you to utilize it elsewhere to better effect.

Minimize Any Unnecessary Expenses

Plan to evaluate your expenses regularly and identify areas where costs can be reduced without compromising the quality of products or services.

You should prioritize spending on essential items and investigate the most cost-effective ways to reduce or eliminate any wasteful expenditures.

5. Automate Invoicing

Automating invoicing for a small business can streamline the billing process and help improve efficiency and improve receipt of accounts receivables.

Select an invoicing software or accounting system that suits your business needs, such as QuickBooks, FreshBooks, Zoho Invoice, Xero, or Wave.

Make sure that you input client details into the system accurately and confirm contact information and billing details before generating personalized invoices.

Design professional and branded invoice templates within your accounting software, including your company logo, payment terms, itemized charges, and any other required information.

Set Up Recurring Invoices

For regular clients or subscription-based services, set up recurring invoices so that the system automatically generates and sends invoices at specified intervals.

Integrate the invoicing software with payment gateways like PayPal, Stripe, or credit card processors, making it easy for clients to make payments.

Utilize your accounting software’s automation rules to trigger actions based on specific conditions, sending payment reminders for all overdue accounts.

Don’t rely on the postal service; rather, send electronic invoices directly from the software to accelerate the delivery process and reduce delays.

Schedule Regular AR Meetings

Schedule regular accounts receivable reporting weekly or monthly with your accountant or bookkeeper so that problem accounts are identified early.

It is usually best for collections to be handled by your administrative staff rather than salespersons to help maintain a good relationship with your debtor.

4. Track Every Business Expense

Tracking business expenses is crucial for maintaining financial transparency and making informed decisions and is best done using accounting software, spreadsheets, or dedicated expense-tracking tools.

Keep a record of all receipts using a mobile app that scans and stores receipts directly in the accounting system.

This will help you to record expenses as they occur to prevent delays or overlooking transactions and provide real-time tracking.

You can link business bank accounts and credit cards to automatically import transactions, thus streamlining the process and reducing the chance of manual entry errors.

3. Use Bookkeeping Software

By selecting suitable cloud-based accounting software, you can streamline your financial processes, track expenses, manage invoicing, and generate real-time financial reports.

While the choice of accounting packages is vast, two of the most commonly used bookkeeping programs are Quickbooks and Xero.

The decision of whether to use Quickbooks vs Xero is best made in conversation with your accountant as they may have a preference.

Closely aligned with your accounting software is your Point of Sale (POS) software, as the two programs need to communicate with each other.

You can use the POS built into your accounting software or use a proprietary system that is best suited for your business needs.

2. Choose An Accounting Method

The Internal Revenue Service (IRS) in the United States generally allows small businesses to choose between two primary accounting methods: cash-basis accounting and accrual-basis accounting.

However, the IRS has certain guidelines and requirements regarding which businesses are eligible to use each method, one of which is annual revenue.

Cash-Basis Accounting

Generally, businesses with annual gross receipts of $25 million or less in the three prior tax years can use the cash method.

Exceptions apply to certain types of businesses, such as inventory-based businesses, C corporations with average annual gross receipts exceeding $5 million, and certain tax shelters.

Income is recognized when received, and expenses are deducted when paid, making it a straightforward way to track cash flow.

Accrual-Basis Accounting

Accrual-based accounting is available for businesses of any size, and income is recognized when earned, regardless of when the payment is received.

Expenses are recorded when they are incurred, regardless of when they are paid, and this method is best suited for businesses with more complex transactions.

Businesses that carry stock are generally required to use the accrual method for income related to the purchase or sale of inventory.

Consistency is important for tax reporting, and the chosen accounting method should align with how the business operates and plans to report its financial results.

1. Separate Business & Personal Expenses

Our top accounting tips include separating your business and personal finances, as it is a critical practice for small businesses.

You should open a separate business bank account exclusively for business transactions and totally avoid using it to pay personal expenses.

This helps to maintain a clear distinction between business and personal financial records, simplifying the tracking of business-related income and expenses.

You should obtain a separate business credit card and use it exclusively for business-related purchases to establish a credit history for the business.

Avoid using personal funds for business expenses and vice versa, as it can lead to confusion, hinder accurate accounting, and impact tax deductions.

Clearly define which expenses are business-related and personal so they don’t get erroneously classified as business expenses.

Summary

Revenue generation and cost minimization play a crucial role in a small business’ success, highlighting the need for sound financial management.

By separating business and personal expenses, embracing technology, prioritizing profit and loss statements, and creating a budget, you’ll avoid becoming another statistic.

With 65% of businesses failing to last over 10 years, prioritizing cash flow management is a sure way to survive and thrive in any industry.