Accounting is an important part of any business, but accounting for small businesses is simply indispensable. However, some entrepreneurs put off accounting for a later date thinking that there have to be some sales to account for first.
Though it’s easy to get caught up in the glitzy tasks that come with operating a business, accounting is the meter with which one can gauge how the business is going.
Ignoring the financial side of the business is the sure-fire way for things to go downhill. Without a clear idea of your margins and cash flow, you might not even realize that you’re operating at a loss. Consider learning basic accounting as taking responsibility for entrepreneurship.
Two basic accounting methods
There are two basic accounting methods for your business: the cash basis and the accrual basis.
Accrual Accounting Method
The accrual basis works on a record-per-occurrence basis: income and expenses are taken note of as they occur, regardless of whether or not cash has actually changed hands. The moment an invoice is generated—regardless of whether the cash is actually collected—the sale enters the records. According to the Generally Accepted Accounting Principles (GAAP) Regulations, the accrual method is required for corporations that are publicly traded or whose sales revenue over a three-year period exceeds $25 million.
Cash Basis Accounting Method
Startups, cash-based businesses and small service companies, however, would do well to consider learning the cash accounting method.
The cash method is simpler: the records match only the actual flow of cash in and out of the business. Income is recorded when it’s on hand, and expenses are taken note of when they are actually paid. This setup would work better for sole proprietors and businesses with no existing inventory yet.
Accounting 101 for Startups
Now that we have discussed the importance of accounting for startups, you’re probably thinking of where to start. There are some basic accounting disciplines you would do well to learn and practice.
- Have a record of all your assets. Take note of everything your company owns. From cars and computers to furniture and plants—make a listing complete with the model number, registration number, warranty period, service center, and date of purchase. Start from the moment you acquire them, so it would be easier to update.
- Write a cashbook. Take note of both the physical cash in the box and the signoff. You may keep a basic excel with a balance column formula, or create multiple excels when you are dealing with different petty cash sources coming from different people from different locations.
- Keep a detailed list of your expenses. Keep original copies of bills in a file. Avoid bills without tax registrations. You may also ask yourself: what if you do not have the capability to do your own business accounting? Well, you could always dip a toe into cloud accounting – and you can keep a very detailed and updated list of your expenses and access them anywhere and anytime.
See Here: How Does Cloud Accounting Work?
- Consider using cloud accounting software. The cloud platform offers a wide array of possibilities, especially when combined with bookkeeping and accounting. If you're a startup trying to get on your feet, you may want to check out the tremendous capabilities that cloud-based software proffers— all from automating manual bookkeeping tasks to providing integrations that expand functionality outside accounting work.
- Seek professional help. Another smart way to handle your business finances is by hiring a professional who knows the ins and outs of F&A processes. With their expertise in accounting, plus their prowess in maximizing cloud-based software, managing your numbers will be as cost-efficient and structured as possible.
Accounting outsourcing for small business —Yes or No?
When it comes to accounting, the services provided by an accountant are imperatives. As a start-up entrepreneur, you have two options when it comes to this: hire an in-house accountant or outsource a business accounting service. You can check out our blogs if you want to know more about outsourcing your functions to a reliable partner.
Need help with accounting for your small business? Check out D&V Philippines' suite of finance and accounting services or you can grab a copy of our whitepaper Outsourcing: How to Make it Work to know how we can make outsourcing engagement work for your growing business.
This post was first published 4 December 2014 and edited 27 January 2022.
Edited by: Maria Katrina dela Cruz