Startups & Accounting

Startup Business Best Accounting Practices

Establish the bookkeeping practices and procedures that you will use at the very start. Establish an accounting plan that is forward-thinking, so that you’re business growth doesn’t have to pause while you refigure your bookkeeping methods

Decide upon a Software Package for Your Business

Eventually your business may outgrow Spreadsheets, and you will have to decide which small business accounting software is right for you. You might as well plan ahead for this. That is you might as well plan for success. If you are forward thinking in your bookkeeping practices, you will not be snared into trying to make a laborious transfer of your books from one accounting method to a completely different bookkeeping platform.

Anticipate your bookkeeping needs. There are accounting software packages that focus on project accounting, and there is accounting software that works best for real estate/real property (fixed income accounting). Specialized accounting software is most often more costly than the more generic software packages which are very appropriate for sales of goods, but if you can anticipate where your business is headed, you could choose the appropriate accounting software at the very beginning can save time and money down the line.

How to Select the Accounting Method that Works Best for You

As a self employed small business owner, you’ve some leeway in how you track your financial comings and goings. As you’re no large corporation, it isn’t necessary for you to produce statements in line with Generally Accepted Accounting Principles, or GAAP. For example, you might prefer recording your income when you deposit a payment into your banking account and report the expenses whenever you make out a check to cover an expense. Accountants refer to this accounting method the cash method of accounting. While this means of bookkeeping does not fall in line with GAAP, it is adequate for a small start-up.

As your business grows, then, you might elect to adopt a more sophisticated financial recordkeeping method. At this point, you may need to consider the accrual method of accounting. With this model, you record income when you have an invoice for services provided, rather than waiting to get paid for that service. You recognize a business expense when you receive a bill from a supplier, rather than waiting until you pay the supplies. This method of accounting is preferable because it allows you to more closely match the income your business generates to the expenses you incurred to earn it. For example, you may have received an advanced cash payment before you provided services to a customer. You may want to wait and record that amount as revenue during the year you actually provided the services, rather than the year in which you received the cash.

From an income tax perspective, the IRS is flexible in allowing you to choose an accounting method. According to its rules, you may use any method as long as it clearly reflects income and expenses and you treat all items of income and expenses in the same manner from one year to the next. Though, when you sell, produce, purchase product, special rules apply on when you’ll have to use the accrual method. If your business handles inventory whatsoever, you should consult your accountants to define when to use the accrual method.

Create a Budget

You’ll also want to be certain that the accounting software you choose enables you to produce a budget.

Compare your performance

And you’ll want to choose an accounting software that allows you to compare the current year financial statement with those of the previous year. This could help you set goals, gain insight, and see trends.

By way of example, if your revenue increased by 30-percent for 2011 over that from 2010, whereas your expenses only increased by 10 percent, this indicates that your business model may be super efficient. So it’s wise to ask yourself, were all expenses recorded? Is there a chance some revenue was duplicated? And did you really manage to increase your return on investment? It is critical to understand the base cause of these trends so as to form the proper picture of your business’s performance and to make critical regarding the finances of your small business. On the flip side, if your revenue increased by 10-percent in 2011 over that from 2010, but, to do so, your expenses increased by 30-percent, this suggests a lack of efficiency in your business plan. Are you investing in assets with the greatest return on investment? Or maybe you forgot to supply invoices during the year?

If you’d like, you can visit our tax library for further guidance at:

Self Employed Tax Guide
or
Startup Tax Guide