Cash accounting records transactions at the time cash actually changes hands and is usually only recommended for businesses which do business strictly in cash payments. The accrual method uses the matching principle to record revenues and expenses in the period they occur, regardless of when payments are made or received.
The accrual method can be a bit more complicated, but is usually the best choice for any business which will be invoicing clients. Another acceptable option is modified cash basis, which is between cash and accrual. Modified cash basis means you are on cash basis except you record bills in Accounts payable and you send out invoices to clients which means you have Accounts Receivable on the books.
You should determine which system is appropriate for your business before you conduct your first transaction. You should keep a thorough record of all your business expenses. This means saving and recording receipts on at least a weekly, if not daily, basis.
Without a solid core accounting software system like QuickBooks and cloud-based expense technologies, daily bookkeeping tasks will put a major strain on your time. Without using technology, this burden will only become greater as your business grows. When you determine which accounting software you will use, do not simply consider whether it meets your current bookkeeping needs.
You should also evaluate each software system and technology for its ability to scale with your business as it grows and your back office needs expand. For service businesses: Instead of entering timesheet information into the system by hand, you can choose to automate these processes. With time-tracking and payroll automation by adopting an automated system for capturing project-related costs and employee time, you can easily feed this information into your bookkeeping system.
We set it up to code time at the economic unit, the customer or job level, so you can generate true profitability reporting by tagging each job. Most businesses have a simple, alphabetical chart of accounts to track expenses for tax and compliance purposes. Make the most of your cash on hand by impeccably maintaining your AP and AR.
Pay the right amount on time to avoid late fees and to take advantage of early payment discounts. Send invoices promptly and follow up on any past due accounts to reduce days sales outstanding.
Do not let your bank statements pile up. Balance them regularly and resolve any discrepancies immediately. Take a minute to review when they come into make sure there are no unauthorized disbursements. Elevate your back office from bookkeeping to management accounting by leveraging your financial statements , management reports and KPIs.
Build a monthly reporting package that helps you understand the drivers of your business and profitability. This will allow you. Keep in touch with your tax accountant on a regular basis to make sure you are doing everything you should to maintain records and track expenses, so when it comes time to file, you have everything you need already organized.
Staying organized, with regard to taxes, will also help you make strategic decisions throughout the year to reduce your overall tax burden and avoid costly penalties. Speaking of taxes and compliance, are you ready for an audit? After filing your taxes, you cannot toss out your old records and start a new year.
The IRS has established guidelines for the length of time businesses are expected to maintain copies of their tax returns and records, such as expense receipts, applicant information, payroll tax records and operational records. The general rule of thumb is at least seven years, but the actual requirements vary. Keep a list of back office questions and check in with your accounting or bookkeeping company on a regular basis — not just at tax time — to get answers and advice.
This will ensure you are tax-ready at the end of the year and will also help you avoid major money pitfalls along the way. At GrowthForce , our bookkeeping experts scale our services to meet your growing company's needs. We provide basic service plans that help you establish sound bookkeeping and accounting practices with the best technology tools available to assist you with monthly tasks. These basic services can be scaled up until you reach a full-service management accounting option that includes a dedicated team of bookkeeping and accounting professionals who handle daily, monthly and quarterly tasks.
With a strong back office, your business will be able to foresee and mitigate risks and market challenges, streamline operations, optimize pricing and increase profit margins to achieve ongoing success. Have a question? An accountant can bring a range of benefits to any startup. A good accountant should do more than just balance the books. As a business owner, your time is your money. Hiring an accountant buys you time to focus on your business. A useful rule of thumb is to compare your hourly rate to the cost of an accountant.
Can you afford all of that time and the penalties and fines if you miss a deadline? If the answer is no, an accountant is a legitimate business expense.
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The tax code is also quite complicated. So while you have created a business entity, you will not reap the tax benefits unless you understand the tax code. The tax code also changes often so even if you understand something now, in a year, the code may be different. Your accountant knows the tax code and stays up-to-date on changes to it and will ensure that you are getting the maximum benefits.
Throw a business into the mix, and it gets even harder. Your accountant can help you monitor your expenses and help you keep personal and business expenses separate. The IRS does not look kindly on business owners who mix the two. Doing so may trigger an audit, and the burden of proof is on you to show the questionable expenses were indeed business related. Growing the business is the priority for all business owners.
Your business is your baby, and that can affect your objectivity.
When should you manage your accounts yourself?
Your accountant will take a dispassionate view of your business and can give you objective advice on the best ways to grow it. Here is an example of a few of those services:. Your accountant will discuss your business objectives, finances, and circumstances to recommend which will be the most beneficial for you.
see Some accountants will also make sure you have filled out the forms correctly and file them on your behalf. Incorrectly filled out or filed incorporation papers can cause unnecessary delays to taking advantage of the tax benefits of incorporating. To calculate your federal quarterly estimated tax payments, you estimate your adjusted gross income, taxable income, taxes, deductions, and credits for the calendar year.
Your accountant can provide you with reports throughout the year so you can monitor your financial progress and make adjustments where necessary.
Waiting to do a big year-end review means you will not be aware of things like outstanding invoices when they happen. Chasing client money is always a chore but chasing money that is nine months late is much more problematic than chasing money that is one month late. Once your business becomes profitable, you will want to pay yourself. You can draw a salary and or a draw based on the structure of your business. Doing so will require withholdings for Social Security, Medicare, federal income taxes, and state income taxes if your locale requires them.
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This adds another layer of complication to your taxes which your accountant can help you navigate.