Why is Accounting for Small Businesses or Startups Important?
The Role of Accounting for Small Businesses or Startups
Accounting for small businesses or startups can be decisive in business life. What is accounting? Accounting is the process of recording the financial transactions of a business. There are mainly three types of accounting: financial accounting, managerial accounting, cost accounting. The ultimate goal of all methods is to maximize profit and ensure the healthy operation of the business. How can you display the financial health of your business to your stakeholders without accounting? You need to be organized for banks or financial organizations and potential investors if attract more money for your business.
Financial management lets you track earnings, set a budget for running your business, make future planning. There are a few financial instruments such as a balance sheet, cost-benefit analysis (CBA) that you can use to analyze your business.
A balance sheet operates as a snapshot of your business’s financials. It is a tool that you track assets, liabilities, and equity. Accounting for costs like employees, sales, and supplies you can analyze segments, structure, and prospects of your business.
You can also use a cost-benefit analysis (CBA) to measure the strengths and weaknesses of a business decision. A CBA“is a process businesses use to analyze decisions. The business or analyst sums the benefits of a situation or action and then subtracts the costs associated with taking that action.”
Accounting for small businesses or startups is vital
Accounting for Small Businesses or Startups, Failures and Accounting
Millions of new small businesses are created each year, even if there are some very successful ones such as Le Marche Leather, but most of them fail. The main reasons for failure can be expressed as insufficient funds, bad location, and bad management. Lack of accurate financial records can expose your company to negative consequences, up to bankruptcy. U.S. Small Business Administration The Office of Advocacy defines a small business as an independent business having fewer than 500 employees. According to a very recent statistic published by the US Small Business Administration (SBA) in October 2020, there are 31.7 million small businesses in the U.S. Small businesses comprise:
- 9% of all firms
- 5% of exporters (285,334)
- 0% of known export value ($473 billion)
- 1% of private sector employees (61 million)
From 2000 to 2019, small businesses created 10.5 million net new jobs while large businesses created 5.6 million. From 1994-2018, the ten-year survival rate was 33.6%, and the fifteen-year survival rate was 25.7%. These rates show why accounting for small businesses or startups is important. In 2017, about one in six (17%) of business owners with employees were immigrants. The industries with the greatest share of immigrant owners were Accommodation and Food Services (37%) and Retail Trade (23%).
Choose a Method of Accounting
Businesses generally use either the cash or accrual methods of recording purchases. Many small businesses, certain professionals, such as doctors, lawyers, accountants, and individuals use the cash basis of accounting to maintain their books and records. The cash basis is known to be more simplistic. Revenues for the sale of goods or services are recorded in the books and reported on your tax return in the year actually received. Expenses are not recorded in the books and reported on your tax return until paid out.
The accrual basis puts revenues and expenses on the books immediately upon completing the sale of the product or service.
Two accounting principles of accrual-basis accounting are:
- The revenue realization principle
- The matching principle
The accrual method creates an immediate snapshot and can reduce the tax burden. On the other hand, it is more complex to manage and has potentially deceiving figures.
The cash method shows cash flow clearly and is easier to understand. Unfortunately, it limits the predictive value and has less long-term clarity. Cash basis accounting can be better accounting for small businesses or startups.
According to IRS rules, you must consistently use an accounting method that clearly shows your income and expenses for the tax year. It means that you must use the same accounting method to keep your books and to figure your taxable income.
A change in accounting method is required to obtain the consent of the Commissioner through the timely filing of a Form 3115. But IRS warns that “ Examiners should also contact the Methods of Accounting & Timing Practice Network for assistance regarding ongoing developments in this area, as well as determining the taxpayer’s compliance with the proper procedures for changing the accounting method and computing the adjustment pursuant to § 481(a).”
An Ordinary Accounting Service Coverage
Ordinary accounting for small businesses or startups service includes:
- Track income and expenses
- Manage cash flow
- Maximize tax deductions
- Invoice and accept payments
- Run reports
- Send estimates
- Track sales and sales tax
- Organize and keep receipts
- Manage and pay bills
- Track project profitability
- Manage inventory
- Customize access by role
- Batch invoices and expenses
- Business analytics and insights
- Automate workflows
- Backup company data
Accounting helps you determine the overall business performance
Why is Accounting for Small Businesses so Important?
The accounting typically monitors the money that comes in and the money that goes out closely by recording transactions, analyzing transaction patterns, and dealing with things like payroll and taxes.
The accounting department helps you understand that
- employees are being paid,
- taxes are correctly fulfilled,
- trends that affect your businesses profits and losses are being analyzed,
- inventory management is on the track. Inventory management aims to minimize the cost of holding inventory by helping business owners know when it is time to replenish products or buy more materials to manufacture new products. Accounting for small businesses or startups ensures good inventory tracking.
- inventory management helps you avoid spoilage, deadstock and save on storage costs,
- your business is not losing unnecessary money,
- you can attract investors and secure bank loans.
Separate business and personal accounts
Separating business and personal accounts is crucial to keeping track of your business’ finances, however small your business is. Never forget that confusing business and personal expenses can lead to unwittingly committed fraud or even business failures.
Having an accurate accounting of your business is indispensable for maintaining your company’s limited liability status. Failure to do so may lead to your personal assets being at risk in the event of a legal dispute.
In a Nut Shell …
Consequently, the accounting department helps you determine the health and efficiency of your business and increase profitability by analyzing cash flow and inventory. Tracking business performance is vital to the health of your business. Accounting for small businesses or startups helps you determine the overall business performance, financial forecasts, and longevity of your business. Accounting management reports, such as cash flow statements, accounts payable, accounts received, budgets, and expense reports play a crucial role in your business life. As many business people know very well that tax returns are a very complicated subject.
Due to constantly changing financial and tax rules, it is more important than ever to ask for professional help for your business success. The world is getting smaller if you want to expand your horizons beyond the conventional border and business, you need to think big, work with the professionals and be prepared to compete in various regions of the world as well in various business scenarios.
To start and run your business in the US, you need a lot of documentation to be prepared. Legal procedures and accounting for your startup can be time-consuming and detailed. You cannot be an expert in every subject you need. An expert consulting firm you can trust will save you time and money.
Comprised of experienced business attorneys, marketing experts, business advisors, and blockchain professionals, Liberty Business has the answers to any questions or needs a blossoming business may have.