Six Key Tips to Simplify Accounting for Your Small Business

According to CB Insights, of the 65% of small businesses that fail within ten years of startup, 38% of that figure shut down because they ran out of money—either they exhausted their cash reserves, failed to raise more funding, or went cash flow-negative.

That’s why any conversation around growing your small business needs to factor in accounting—you need to keep your hands on your business’s pulse, track income and expenses, continually explore opportunities to reduce spending, and create more revenue channels.

This article will help you understand where intelligent accounting sits in your startup’s growth strategy and how to use the right workflows to put your small-business accounting on autopilot, whether you’re a one-person business or co-op with a dozen employees.

TL:DR: Accounting for small businesses

• Record every transaction, no matter how insignificant and maintain separate business and personal accounts.
• Group your transactions to help you claim tax deductions and forecast income and expenses.
• Manage your cash flow proactively—negotiate better accounts payables’ terms and tighten your collections.
• Reserve cash every month for major (recurring) expenses.
• Familiarize yourself with the accounting cycle.
• Document repetitive accounting tasks so you can hand them off to employees and accountants as you scale.

6 ‎accounting tips for small businesses

Accounting for your small business will revolve around a few (recurring) processes designed to help you track cash movements and maintain a healthy blueprint of your business’s financial position.

To help you avoid common mistakes, here are the top tips for small business accounting:

1. Keep records of all business transactions.
2. Categorize your expenses and income sources for tax purposes.
3. Manage cash flow proactively.
4. Plan for major expenses such as taxes, equipment and facilities.
5. Keep records of all business transactions.
6. Familiarize yourself with the accounting cycle.
7. Document your accounting processes.

1. Keep records of all business transactions

Business expenses are generally split into:

• 1. Cost of goods sold (COGS).
• 2. General operating expenses, including rent, taxes, salaries, permits, utilities, etc.

For a small business, tracking expenses tend to be straightforward:

1. Create a separate business bank account with corporate expense cards. Commingling your personal funds and business finances can jeopardize personal liability protection and affect your credit history if you need to raise an SBA loan.
2. Keep track of your receipts—accounting software for small businesses like FreshBooks, Wave, Xero, and Bonsai can help you scan and export paper receipts into your accounting software.
3. Choose a method for tracking your expenses—use a spreadsheet, relational database (e.g., Notion or Airtable) or dedicated accounting workflow software.

Recording expenses and income ensures a digital trail for every dollar that comes in or leaves your business, without exception.

2. Categorize your expenses and income sources for tax purposes

Your business expenses will fall into different brackets for tax purposes, and splitting them up helps you maximize your tax position and take advantage of every write-off or tax credit available. Depending on your company’s scale, you can deduct expenses such as:

• Rent: Brick-and-mortar spaces, buildings, warehouses, or your home office.
• Salaries and benefits: Bonuses, commissions, and any allowances you pay friends and family to assist you.
• Startup costs: You can deduct up to $5k worth of legal and filing fees during tax season.
• Depreciation: If you’ve purchased any equipment or facility with a serviceable lifetime longer than a year, you can write off a portion of its value (up to $1,080,000) over a few years.
• Education: including seminars, books, workshops, classes, and courses.
• Legal and professional fees.
• Taxes and licenses, etc.

Likewise, tracking your income sources helps you forecast trends, avoid feast-or-famine cycles, and target more profitable niches that bring in the bulk of your business’s revenues.

3. Manage cash flow proactively

Small businesses live and die by their cash flow, and even a few of your major clients holding onto receivables for, let’s say, NET 90 can have devastating effects on your reserves or keep you struggling with bridge loans, especially early into your journey.

Some tips that can help you convert AP to cash faster and reduce delinquency with your receivables include:

1. Charging late payment fees or incentivizing early payments with discounts.
2. Accepting multiple payment methods (ACH, card, international wire, etc.) gives you more options to collect pending receivables.
3. Using a NET 30 billing cycle to convert invoices to cash faster.
4. Charging an upfront deposit (e.g., 40% - 60%) to fund supplies if your business is capital-intensive.
5. Not making significant cash outlays unless you’ve built up your reserves to cushion the expense.
6. Following up on invoices, both manually and using automated reminders.

4. Plan for major expenses such as taxes, equipment and facilities

Saving proactively for significant cash outlays or recurring obligations will help you structure your finances accurately and prevent avoidable financial emergencies when you’re more likely to make unwise decisions.

For example, if you can’t make a significant capital investment without dipping into your reserves precariously, consider lining up alternatives such as SBA loans, term loans, or revenue-based capital.

Likewise, you might need to set aside a specific percentage of your income for taxes, rent, savings, salaries, emergency funds, growth and expansion initiatives, insurance, debt servicing, equipment, and utilities.

Setting up dedicated strategic reserves helps you limit expenses and build enough savings to buffer significant capital investments.

5. Familiarize yourself with the accounting cycle

The accounting cycle includes all the steps required to record your transactions in your financial books and ensure no discrepancies. This includes measures such as:

1. Identifying, analyzing and grouping transactions by value, date, vendor, etc.
2. Recording transactions to your accounting software.
3. Posting figures to your ledger.
4. Preparing trial balances to detect errors, confirm accuracy, and assist internal controls.
5. Adjusting entries to match when transactions occurred vs. when cash changed hands.
6. Verifying financial statements.
7. Closing books.
8. Preparing post-closing trial balance.

We’ve published an in-depth eight-step guide to understanding the accounting cycle, how it clarifies your financial ops, and how it differs from your small business’s basic operational cycle.

6. Document your accounting processes

‎As your small business scales up, you’ll need to start handing off responsibilities to your employees and help them create an efficient accounting process, especially if you’re keeping your bookkeeping in-house.

Some of these processes you can hand off include:

• Receiving, verifying and processing invoices.
• Capturing (digital and paper) receipts to your bookkeeping software.
• Matching bank statements with your internal records to identify and solve any discrepancies.
• Creating and sending outbound invoices, accounting for volume discounts, special pricing, etc.
• Processing expense reports and reimbursing workers for out-of-pocket expenses.
• Generating regular (monthly, quarterly, and annual) financial statements and forecasts.
• Compiling the paper trail needed to file your taxes.

💡 ‎Check out our list of the top accounting document management software to help you store, organize and manage documents.

Process documentation tools for accounting processes

To save time, we recommend using a process documentation template or tool. For example, Scribe helps you capture standard operating procedures for accounting for repetitive tasks, like:

• Invoicing SOPs to ensure that invoices are always sent out on time and accurately reflect the goods or services provided.
• Reconciliation SOP to ensure your bank statements match your accounting records, which can help to prevent fraud and errors.
• Financial statements SOPs to help you prepare accurate and timely financial statements.
• Payroll SOP to ensure employees are paid correctly and on time.

Here's what small business founder and business manager Quantel M. has to say about Scribe: 

"Scribe's been a real game-changer for me, no more having to stop and take screenshots while I'm working. The best part? It's all automatic. No more manual documentation for me—that's a huge win in my book."

‎Create AI-powered accounting SOPs for free ➜

Process documentation template for accounting SOPs

You can also kick off your accounting process documentation with a template. Here's a Standard Operating Procedure (SOP) Template you can use.

‎Or ask Scribe's ChatGPT to write your accounting manual, add titles, descriptions, additional context and more.

📌 ‎Related resource: An Essential Guide to Accounting Documents

Ho‎w to manage small business accounting with limited resources

With a limited budget and workforce, it can be challenging to handle accounting responsibilities effectively. Here are some best practices that can help you manage accounting tasks efficiently, even with limited resources.

1. Use accounting software: Invest in accounting software designed for small businesses. Look for software with bookkeeping, invoicing, expense tracking, and financial reporting features. Cloud-based or AI accounting software allows you to access your financial data from anywhere, making it convenient for remote work or on-the-go business owners. Check out of list of the ‎top AI tools for accountants for more options.
2. Outsource non-core accounting functions: Outsourcing tasks like payroll processing, tax preparation, and financial statement preparation can free up your time to focus on core business activities.
3. Implement effective cash flow management: Monitor cash flow regularly to ensure you have enough funds to cover expenses and invest in growth opportunities. Offer discounts for early payments, negotiate favorable payment terms, and manage accounts receivable and payable.
4. Simplify and automate bookkeeping processes: Bookkeeping can be time-consuming if not managed efficiently. Simplify your bookkeeping processes by organizing your financial documents and automating repetitive bookkeeping tasks such as data entry and bank reconciliations.
5. Regularly review and analyze financial reports: Review profit and loss statements, balance sheets, and cash flow statements for insights into the financial health of your business. Understanding your financial data will help you identify areas for improvement, allocate resources effectively, and plan for future growth.
6. Create standard operating procedures (SOPs): SOPs for accounting can help you streamline their accounting processes, improve accuracy, ensure compliance, facilitate communication and accelerate training.
7. Invest in employee training: Provide employee accounting training to ensure they understand financial concepts and can assist with day-to-day accounting tasks. You can use AI-powered tools like Scribe to create SOPs that quickly get your employees up to speed and make them an indispensable part of your accounting workflow.

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Ac‎counting software vs. accountants: what to consider

Small business owners often struggle to decide whether to handle their own accounting with accounting software or hire a professional. Hiring an accountant or using cloud-based accounting software can ensure accurate record-keeping and financial statements. Here are a few things to consider.

Accounting software

Small businesses can benefit from using accounting software for efficient bookkeeping.

• Accounting software offers several advantages, including:
• Automating tasks like data entry and calculations.
• Accurate calculations and compliance with tax requirements.
• Business reporting.
• Integration with other office management programs
• Performance tracking.
• Time savings and error reduction.

However, there are some drawbacks to consider.

• Security risks are a concern, especially with cloud-based services. Accounting software costs can be high, particularly for desktop-based installations.
• Some software is only available as a subscription service.

Small business owners should also be cautious about relying solely on basic accounting software, which may leave you vulnerable to IRS audits due to inaccurate reporting.

Popular accounting software for small businesses includes AccountEdge, FreshBooks, QuickBooks, and Xero. Ultimately, choosing accounting software depends on your specific needs and budget.

📌 ‎Related resource: 6-Step Guide: How To Use QuickBooks

Hiring an accountant

Here are some signs that it's time to seek professional assistance.

• As your business grows, your finances become more complex. An accountant can help manage expenses, income streams, payroll, tax returns, and financial planning.
• If you're considering investments, an accountant can assess which ones align with business goals and make financial sense.
• When applying for a business loan, an accountant can ensure the business is in a favorable financial position.
• As your time becomes limited for core activities, outsourcing accounting functions to a qualified accountant allows you to focus on other tasks.

When deciding how to handle your accounting, consider your company size, accounting technology, your team's understanding of basic accounting, budget, data security, and industry-specific requirements.

Accounting for small business FA‎Qs

Can you do your own small business accounting?

Yes, small business owners can do their own accounting, but you should consider the complexity of the task and the potential risks involved.

• Doing your own accounting can save money, but it requires a good understanding of accounting principles and software.
• It's crucial to keep accurate records, track income and expenses, and prepare financial statements.
• If your business has complex financial transactions or if the owner lacks accounting knowledge, it may be wise to hire a professional accountant.
• Even if you decide to do your accounting, consulting with an accountant periodically to ensure accuracy and compliance with tax laws is still a good idea.

How to do basic bookkeeping?

Bookkeeping is an essential aspect of managing the financial records of a small business. Small business owners can effectively manage their financial records by maintaining accurate and up-to-date books by:

• Establish a system for recording transactions using journals, ledgers or accounting software.
• Recording transactions in a general journal.
• Categorizing transactions into different accounts.
• Summarizing transactions in a general ledger.
• Maintaining a chart of accounts, which lists all the accounts used to record transactions.
• Organizing and categorizing transactions based on their nature, such as revenue, expenses, assets, and liabilities.
• Reconciling bank statements by comparing transactions recorded with the bank statement to ensure accuracy and identify discrepancies.

St‎reamline your small business accounting processes

Managing accounting for small businesses can be challenging work for entrepreneurs. By following these tips and best practices, you can streamline your accounting processes and focus on activities that increase your bottom line.

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