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Most small business owners are not accountants by trade. But whether they have a background in product development, HR, management, or otherwise, they need to learn the inner workings of accounting.

The good news is that small business accounting is relatively straightforward. Companies that operate in one state and have a simple business structure have three accounting priorities:

  • Ensure that their income exceeds their expenses
  • Keep their books clean
  • pay their taxes

Still, small business accounting can be tricky for executives without any sort of financial background. Use these 11 accounting tips to stay on track.

1. Keep business and personal accounts separate.

One of the messiest accounting mistakes small business owners can make is mixing up their business and personal funds. Although many entrepreneurs contribute their own start-up money, business income and expenses should be kept separate from personal income.

The best solution is to start with a solid business structure. Establish your business as a separate legal entity, such as an S corporation or LLC. Open a business checking account as a financial center and pay yourself a salary each month. Get a business credit card for expenses you can’t or don’t want to pay cash and open a business savings account as a mutual fund or investment fund. Track all business use of your personal items.

2. Properly classify workers.

When it comes time to build a team, you have two choices: employees and contractors. The IRS considers employees to be those over whom you have behavioral authority and financial control, as well as a long-term business relationship with. Contractors, on the other hand, are people who work for your company on a project basis and retain control of their own schedules and business decisions.

Penalties for misclassifying workers are heavy. In addition to the $50 for each W-2 form that the employer of misclassified contractors must pay, the employer pays a fee of 1.5% of wages and 40% of FICA taxes it did not withhold of the employee. The employer must also pay 100% of the FICA taxes they would have paid per employee. If the IRS finds the misclassification was intentional, the employer could be fined up to $1,000 per worker or jailed for a year.

3. Calculate the total cost of labor before hiring.

If you decide to hire employees, be aware that you will have to pay more than their salary. At least once a month, you will have to collect the funds for their benefits and social charges. These costs add up faster than many small business owners realize. According to an OnPay survey, only 43% of those who do their own payroll are confident in their ability to pay their employees on time. The others are either behind on their books or too eager to expand their team.

Don’t put yourself in the position of having to cut pay after hiring. Even if you were generous with your initial wages and benefits, your workers will feel cheated if you cut them. Small businesses cannot afford high turnover, especially among their first hires.

4. Regularly create profit and loss statements.

A profit and loss account is a basic accounting tool that summarizes your business income and expenses over a period of time. All public companies are required to publish them once a quarter. Although small business owners aren’t required by law to set them up, income statements are great ways to see if you’re on track to meet your financial goals.

Follow these steps to generate a P&L statement:

  • Total the revenue you generated during the quarter.
  • Itemize your business expenses. Sort these expenses into two categories: operating expenses and cost of goods sold (COGS).
  • Subtract the total expenses from your gross profit to get your operating profit.
  • Subtract interest and taxes from this operating profit, and you will know whether your business made a profit or a loss this quarter.

While individual income statements are valuable, quarter-by-quarter comparisons are even more important. Are your operating costs increasing? Your profits are decreasing despite the increase in your sales figures? Checking the P&L statements against each other gives this kind of information. [Looking for software to maintain your books? Check out our guide to the best accounting software.]

5. Always get a receipt.

You can claim a good portion of your business expenses as tax deductions. The Bench accounting service lists 16 categories in which expenses are fully or partially deductible. These expenses include meals with clients, advertising campaigns and office rent. However, to claim them, you need receipts for tracking and verification purposes.

Donations are one area where small business owners often forget to get a receipt. Although businesses of certain structures, such as LLCs and partnerships, cannot report charitable contributions as a business expense, the owner often can. Ask recipients of in-kind donations for written confirmation of time spent and use documentation to defend the fair market value of any property donations you make.

6. Keep a close eye on customer accounts.

While it’s important to keep accounts payable under control, they don’t dictate the survival of the business like accounts receivable do. If there is no money coming in, the business cannot continue to operate. Each month, review the percentage and total amount of unpaid revenue. Generally, no more than 10% to 15% of your accounts receivable should be overdue. Contact these customers weekly. Don’t send them to collections on a whim, especially if you want to work with them in the future. But you can’t let them stiffen you either.

One solution is to introduce late penalties. Set a monthly finance charge of 1% or 2% of the principal. If you decide to charge 2% on an upfront fee of $5,000, for example, you’ll add $100 to the bill each month it’s not paid. Be sure to let your customers know in advance: not only is this legally important, but the threat of penalties is often enough to deter bad payment practices in the first place.

7. Invoice accurately and regularly.

Invoicing is a necessary part of owning a business, but it can seem cumbersome and time-consuming. Also, if you make mistakes, it can hurt your ability to get paid. This is why it is extremely important to ensure that you send accurate and regular invoices.

Invoices should be itemized, setting out specific transaction information, and you should send them in a timely manner. You should also follow up with email and/or SMS reminders to increase your chances of getting paid. By keeping detailed and accurate records of your invoices, you can spot customers who don’t pay on time and reward those who are always early.

8. Stay on top of tax deadlines.

As an individual, you pay taxes once a year. However, most small businesses must file estimated quarterly tax payments. Quarterly payments are made on two types of taxes: self-employment tax (which includes Social Security and Medicare taxes) and income tax on profits made by your business.

Follow these steps to decide if you should pay quarterly taxes:

  • Subtract your federal income tax withholding from the amount of federal tax you expect to owe this year. If this figure is less than $1,000, you do not need to make quarterly payments.
  • Take the total federal tax you expect to owe this year and multiply it by 0.9. If you have withheld at least this amount, there is no need to make quarterly installments.
  • Compare your total federal income tax on last year’s return to the amount of your withholding. If it’s at least that much, you don’t need to pay those quarterly taxes.

If you need to make estimated tax payments, here’s when the following four are due:

  • First trimester: April 15
  • Second trimester: June 15
  • Third trimester: September 15
  • Fourth quarter: January 15, 2022

9. Set (and stick to) your own payment terms.

Large companies typically pay on net 60 or even net 90 terms, which means they actually transfer funds two or three months after receiving an invoice. Your small business can manage its cash flow the same way. The key is consistency. Assume you pay on net 30 terms. Make it clear at the time of service that your suppliers can expect you to pay within 30 days. Don’t pay early, otherwise the seller will expect the same next time; don’t pay late or they might not want to work with you in the future.

10. Hire experts instead of do-it-yourself accounting.

Business owners like to be in control of all aspects of their business, but sometimes it pays to outsource processes and functions — like accounting and bookkeeping — to experts. By hiring a professional, you can reduce accounting errors and ensure that your accounting records are accurate and up to date. It will also save you a lot of time. A CPA can review your books to help you identify ways to cut costs and increase expenses in growth areas.

11. Use accounting software.

Accounting software used to be prohibitively expensive for many small businesses, but now you can access robust accounting software for a monthly fee (or even free). Accounting software is becoming easier to use and offers small business owners a ton of features and services, including sales tracking, budgeting, inventory management, financial statements, payroll, and accounts. taxes.

In addition to automating processes and accurately tracking and balancing your books, cloud-based accounting software can often integrate with many other business software you use. Sharing data between applications can reduce errors and save you time manually entering data into your accounting software. [Read more information in our Sage accounting software review.]

Accounting might not be the sexiest part of being a small business owner, but it is an essential part. Mistakes in your books will come back to bite you. Tax problems will only get worse and you may miss a tax deadline. If you’re in over your head, call an accountant. There is no shame in asking for help. [Read related article: What to Do if You’re Behind on Your Taxes]

Donna Fuscaldo contributed writing and research to this article.