If you’ve just started or are about to start your small business, congratulations!
However, you have just begun. One truth that a fresh Small Business Owner realises is that owning a small business is not a 100-metre dash. It is a marathon race.
A business of your own comes with a continuous stream of things you must do for the business to survive and thrive. When the business is up and running, you must immediately switch your attention to the accounting that is associated with it.
As a Small Business Owner, you must know the importance of tracking and recording the transactions of your business, particularly its expenses and income. Here are five steps for tracking the expenses and income of your business:
1.Set Up Business Bank Account: Step number one in tracking the expenses and income of your business is the opening of a bank account for the business. This ensures the separation of your business and personal funds, and helps to avoid the mixing of personal and business expenses. A separate bank account also helps to organise the trading records of the business. This assists the business when filing its tax returns, since it makes it easy to tell the difference between a taxable and tax-deductible expense/income.
2. Choosing Method Of Accounting: A key step in tracking the expenses and income of a business is the choice of a method of accounting. The business has to choose between the two main methods of accounting, namely, cash basis and accrual basis.
In the course of trading activities, cash basis accounting records income when the business receives money and records expenses when it makes a payment. In accrual basis accounting, the business records expenses and income when they occur, regardless of when it pays or receives money.
While cash basis accounting is simple, accrual basis accounting is not, because it uses additional accounting categories. This is why, given the size of their operations, cash basis accounting is arguably the method of first choice for Small Business Owners.
3. Adopting System Of Accounting: The primary accounting challenge for a Small Business Owner is how to record the expenses and income of the business, in the form of data that gives an accurate snapshot of the financial condition of the business.
The options for achieving this run from use of a Spreadsheet, through hiring a Bookkeeper or Accountant, to utilising an Accounting Software.
The business can track its expenses and income with a spreadsheet, through the do-it-yourself effort of its Owner or a hired Bookkeeper or Accountant. An online accounting software can, however, streamline the process, save time and enable the business track its expenses and income in real time.
As the business grows, the Small Business Owner must assess the efficiency and effectiveness, measured by time and money, of using a spreadsheet to track the expenses and income of the business himself or herself, or hiring a Bookkeeper or Accountant, or deploying an automated accounting software.
4. Keeping Track Of Expenses: The next task, after deciding the system for recording the expenses and income of the business, is to track the expenses of the business on a regular basis.
The tracking of expenses shows what the business has spent over a given period. It also shows the items purchased. The business can use its expense records as a guide if it needs to moderate its expenses.
A timely recording of expenses tells where the business stands at each point in time. It also allows the business to monitor its growth, produce up-to-date financial statements, track its deductibles and ready its returns at tax time.
With this system in place, the business will be able to organise its expense receipts for business-related purchases by the Owner and/or employees. It will understand such tax-deductible expenses like phone, vehicles, entertainment, etc.
5. Keeping Track Of Income: Just as it is important to track the expenses of the business, it is even more important to track its income. The business must track its income on a regular basis, whether daily, weekly, monthly, quarterly or yearly.
The business must review its accounts to know how it is performing and where its income stands. The timeliness of this information will let its owners and managers know whether the business has enough income to meet its expenses, and how to make adjustments if there are signs of drop in income.
The income of the business is an indicator of the success, or otherwise, of the business. Monitoring the expenses and income of the business from the beginning, to ensure that income always exceeds expenditure, is a step that will set the business on the road to success.