Is Accounting Really Important for a Small Business?
Small businesses are the backbone of the global economy, and while one small business alone doesn’t look like much, they actually account for 90% of all businesses worldwide.
These businesses are often the brainchild of highly passionate entrepreneurs who have a brilliant business idea but lack the skills required to keep a business ticking along smoothly.
For example, a tech entrepreneur will be able to skillfully develop a software product but won’t know how to perform basic accounting.
Further, business owners often view accounting in small business as an unnecessary expense, and many entrepreneurs overlook the importance of keeping accurate financial records.
As startups grow, so do their accounting small business needs. Without proper accounting and associated records, no investor is going to touch them with a ten-foot barge pole.
So let’s uncover the true importance of accounting for small businesses and why you – as a small business owner – need to get a financial professional on your team.
What is Unique About Accounting for a Small Business?
As a small business owner, you face a unique set of challenges when it comes to accounting.
It is likely that you have limited financial resources, and every penny counts when your business is in the early stages of its life. Therefore, it is essential for you to track your expenses and manage your income accurately to ensure that you are not wildly overspending or undercharging your customers.
Secondly, most entrepreneurs start from their homes or garages and nearly always lack the infrastructure and necessary software to support vital financial functions. This can result in errors, missed deadlines, and penalties for non-compliance with tax regulations. Something you definitely want to avoid.
Finally, many small businesses are often subject to cash flow constraints, which can affect their ability to pay their bills and invest in their business unless cash flow is managed appropriately. Nothing makes a business lose its reputation faster than the non-payment of bills, especially to vendors.
What are Common Financial Mistakes Small Companies Make?
One of the most common financial mistakes small businesses make is failing to keep accurate financial records.
Many small business owners tend to rely on their memory to keep track of their expenses and income, which leads to errors, missed deductions, and unpaid bills. This can result in overpaying taxes or failing to take advantage of any available tax deductions.
Another common financial mistake small business owners make is failing to separate their personal and business finances and lumping everything together in the same bank account. This leads to a huge amount of confusion since it is often impossible to tell what is a business transaction, what is personal, and how much of the balance is for the business.
Finally, many business owners fail to plan for taxes and often find themselves in a bind when tax season arrives. Burning one’s head in the sand is often preferable to dealing with taxes, but it’s, unfortunately, a task that cannot be avoided. By doing so, you run the risk of receiving penalties, interest charges, and a damaged credit score.
What are the Top Priorities of an Accountant in a Small Business?
The top priorities of a small business accountant is to:
- Ensure that the business is compliant with tax regulations
- Help the business manage its cash flow effectively
- Provide financial insights that can help the business make better decisions.
- Help the business with payroll and employee taxes
Ultimately they help you keep financial tasks and requirements on the straight and narrow and ensure you remain in the black.
What are the Benefits of Accounting for a Small Business?
Accounting provides many benefits for small businesses, including the following:
Keep Track of Your Expenses and Income for Tax Purposes
One of the most significant benefits of having an accountant is that it allows you to keep track of your expenses and income for tax purposes. By keeping accurate records of your finances, you can reduce your tax liability and avoid those pesky penalties for non-compliance with tax regulations.
Get an Understanding of Where Your Business is Financially
You also get a clear understanding of your financial position and where you can go from there.
By analyzing financial statements, you and your accountant can determine how much money you have available, how much is owed, and how much other people owe you.
This information is crucial if you want to make informed decisions about your operations, such as investing in new equipment, expanding your services, or hiring new staff.
Make Better Business Decisions Based on Data Analysis
An accountant will provide you with the data you need to make wiser decisions about your business and its various operations.
For example, accurate financial statements allow you to identify trends, patterns, and areas where you can apply improvements. If you know exactly where all your cash is and what it is doing, you will also understand how much you have to play with and what you could potentially do with it.
In a similar vein, if you are overspending, the data will enable you to learn where you need to scale back and make savings.
Prepare for Potential Audits
No one enjoys an audit, and small businesses that keep accurate financial records are much better prepared if one rears its ugly head.
By maintaining complete and accurate records of your finances, you can quickly provide auditors with the information they need to verify your tax returns and financial statements. Not only will the entire process be over and done with before you know it, but you won’t be stung for non-compliance penalties.
Easily Manage Payroll and Employee Taxes
If you have staff, then your accountant has the skills to take on the business’s payroll function. Accountants can also help you set up a payroll system, calculate payroll taxes, and prepare tax filings.
This can save you time and money, and better still, keep your staff happy when they are paid on time and accurately.
Access to Credit and Loans When You Need Them
This is super important because small businesses and startups are likely to need a cash injection or investment at some point, particularly in the early stages.
However, no bank, investor, or credit facility is going to look at you twice if you don’t have your financial house in order. If investors don’t know the financial state of your business, how can you possibly give them confidence that they will see a decent return or that you have the ability to pay back any loans?
Lenders and investors rely on financial statements to evaluate a business’s financial health and viability, so it’s going to be the first thing they ask for.
If your finances are organized and documented, you are far more likely to be approved for credit and loans when you need them. Well-maintained and accurate financial records demonstrate your creditworthiness and increase your chances of obtaining financing.
How Should a Small Business Get Started with Accounting?
Accounting for small businesses is a skilled profession that takes many years to become qualified in, and accounting tasks can be complex – impossible even – without the right skillset to manage them.
Therefore, if you want to get started in accounting, you should ditch the idea of trying to do it yourself and get a qualified professional on board.
When Should You Hire a Professional Accountant?
You should consider hiring a professional accountant when you start to recognize the following issues:
- Your business is growing, and your finances are becoming more complex
- You are getting overwhelmed with financial admin and cannot see the wood for the trees
- Vendors are angry because you’re not paying them on time
- The books never balance
- You don’t understand the financial health of your business and how much cash flow or liquidity you have
- You would rather swim with sharks than deal with taxes
Where Can You Find a Reputable Accountant?
The million-dollar question. There’s no shortage of accountants out there, but for most small business budgets, the salary they command is out of reach.
Furthermore, most startups simply don’t have the requirement for a full-time staff member. This is typically only required when a business grows to medium size.
So what to do?
In recent times, this problem has been recognized in the industry, and this has led to a growing legion of virtual accountants that provide essential financial services to small businesses without the high price tag or the requirement to hire someone full-time.
Instead, virtual accountants will typically take on several clients and provide accounting services on a “needs” basis or in accordance with an agreed service level.
For example, at EvolveCFO, we specialize in providing experienced accountants to startups and small businesses, and we have affordable price plans to suit all levels of business.
What Questions Should You Ask a Professional?
Any accountant, even virtual ones should be a great fit for your business. After all, they’re going to be handling sensitive data so it’s crucial that you feel comfortable with them and their business practices.
When interviewing potential accountants, here’s some good questions to ask them:
- What services do you offer?
- What experience do you have working with small businesses?
- Are you familiar with my business niche?
- How can you help my business grow?
- How do you communicate with your clients and keep them updated?
- What software do you use, and how will you keep my data secure?
- What is your approach to problem-solving?
- Can you provide references?
What are Some Small Biz Accounting Resources?
There are many resources available to help you with your accounting needs, including online accounting software, free accounting templates, and online courses.
Some popular resources include QuickBooks, FreshBooks, Xero, and Wave. There are also many financial professionals on Etsy that sell spreadsheets and other financial aids.
How Much Should Professional Bookkeeping Cost?
The cost of professional bookkeeping services varies depending on the size of your business, the level of service required, and how many financial responsibilities you want them to take on.
According to a survey conducted by the National Society of Accountants, the average hourly rate for a small business accountant is $180 per hour. However, at EvolveCFO, our price plans range from $299 – $499 per month, which is far more affordable.
How to Get a Quote for Accounting Services
EvolveCFO plans also have a range of optional add-ons available so you can truly tailor the service, so it’s perfect for your requirements.
Getting in touch is easy. Either contact us via the online form or use our booking widget to book yourself in for a 20-minute discovery call.
Summary
In conclusion, accounting is essential for the success of any small business – even yours.
It’s clear that you face unique challenges when it comes to accounting, such as limited financial resources, lack of infrastructure, and cash flow constraints.
However, accounting provides many benefits, such as accurate tax filings, financial insights, and access to financing, so it’s essential that you get yourself an accounting professional to take on the job properly.
If you’re still in doubt, go take a look at non-compliance penalties, and you’ll see how having an accountant quickly becomes the more affordable option.
For trusted virtual accounting services for startups, get in touch with EvolveCFO now.