View Padgett President Roger Harris' congressional testimony on the impact of the Corporate Transparency Act and the BOI reporting requirements here.
Owning and operating a successful small business is complicated. It is imperative that you have the proper structure in place—including comprehensive financial reporting systems.
At Padgett, we provide personalized, reliable accounting services for small businesses. Our team wants to ensure that entrepreneurs and small business owners have the knowledge and resources that they need to set the foundation for their company’s financial health. Here, you will find a condensed business accounting guide.
For small businesses, maintaining comprehensive and accurate financial reporting systems is essential for long-term commercial success and stability. Among other things, a well-designed accounting process can help business owners make informed decisions, maximize profitability, and stay compliant with applicable state and federal regulations. The main reasons small businesses need accounting systems to operate effectively include:
For small business owners, knowledge is power. The right accounting practices will help small businesses track their income and expenses. This enables small businesses to make better financial decisions. With the most accurate and up-to-date accounting information, business owners and business managers can monitor their cash flow, identify areas where costs can be reduced, and plan for the future.
Small businesses need to comply with state and federal regulations. Tax violations can result in penalties, fines, and even more severe consequences. Accurate accounting helps businesses keep track of their income, expenses, and tax payments, making it easier to file taxes correctly and on time. Beyond that, accounting systems can make it easier for small businesses to manage their payroll.
Small business owners are decision-makers. Accurate financial records provide business owners with valuable insights into their commercial operations. By analyzing the latest financial data, owners can identify opportunities to grow their business, make informed decisions, and prioritize spending.
Selecting a business structure is the first step in establishing your accounting system. A small business can be structured as a:
Each legal structure has its own advantages and disadvantages. The decision will influence your financial documentation, tax obligations, and personal liability. A small business advisor can help you understand the accounting implications of entity selection.
Every small business should have a dedicated bank account—potentially even multiple bank accounts. A business bank account is necessary to keep personal and commercial transactions separate. Your small business may benefit from a checking account(s), savings account(s), and even credit accounts. Setting up the right business bank accounts can make the accounting process simpler (if your personal and business banking isn’t comingled) and more effective (for example, if you already have a line of credit ready for potential cash flow shortages as you grow).
Small businesses should always keep detailed, well-organized records of all financial transactions. Among other things, this includes receipts, invoices, payroll records, tax documents, bank statements, and any other relevant financial information.
You should strongly consider implementing a document management system to store and easily retrieve these records. Accurate records can make a big difference.
It is important to be consistent. There are two primary accounting methods:
Which accounting method is the better choice for your company? The answer depends on a number of case-specific factors. The size and nature of your business can help determine the best method. Small businesses often start with cash accounting due to its simplicity. But they may graduate to the accrual method to access more robust financial information.
Broadly speaking, accounting systems track all the financial transactions that your business engages in. This goes beyond reporting sales and expenses. For example, you may purchase or sell assets, repay, or take on more debt, and pay dividends or receive additional case from investors.
Each period, your accounting system will generate reports that help owners evaluate financial performance. You may need to share this information with lenders and other stakeholders. Accounting information can be used to identify problems that require corrective action and opportunities to build value.
It’s especially important for growing and seasonal businesses to monitor cash flows regularly. Temporary shortages may happen because there’s generally a lag between when cash is paid to cover operating expenses and when cash is received from customers. A line of credit can help bridge the gap.
Regularly tracking income and expenses is crucial for maintaining a healthy cash flow. A comprehensive financial reporting system will record all transactions, categorize them appropriately (e.g., utilities, payroll, sales revenue), and provide reports that allow you to review your company’s financial performance regularly. Managing income and expenses is a key element of an effective accounting system. Doing so will help your small business identify trends, manage costs, and maximize profitability.
There are three financial statements that should be prepared and reviewed: 1) the income statement, 2) the balance sheet, and 3) the statement of cash flows. These provide an overview of your business’s financial health showing income, expenses, assets, liabilities, and cash flow. Reviewing these monthly helps in making informed business decisions, spotting potential issues early, and planning for the future.
While these are all important recommendations to consider, working with an accountant is the best way to put your business in the right financial position. At Padgett, we support small businesses nationwide. Our team is committed to providing cost-effective, reliable accounting services. If you have any specific questions about small business accounting, we are here to help. Give us a call now, or contact us online to find out more about what our small business accounting team can do for you and your company.
