By Sherry Lutz Herrington
If you have a small business, then your accounting is small, right? And if you have a large business, then your accounting is large, right?
Although that would be an easy assumption to make and most people do, it’s not necessarily true.
Every business has different accounting needs. It’s a custom fit, not a generic one size fits all situation. What you need in your accounting depends on what you are selling, how you are selling it and a number of other factors.
There are many parts to accounting some you may need, and some you may not.
Let’s take a closer look.
First, you need an overarching system for recording all your transactions. This is non-negotiable. This is where you keep track of your assets, liabilities, equity, income, cost of goods sold and expenses. You generate your financial reports out of this system once the data is entered correctly. It needs to be an accounting program, not just an Excel worksheet to provide the necessary financial reports.
Next, are the add-ons, some of which may be optional depending on the specifics of your business.
If you have employees, you will need to have payroll service as part of your accounting. It’s best to have it integrated into your accounting, not handled separately. This way, all the information will be recorded correctly into your books and not be something you have to figure out how to record after it’s been processed by an outside service. Recording the information is critical and not as simple as it may seem.
If you have payroll, and have hourly employees, it’s best to have a time keeping system that integrates into your payroll system. This will reduce errors in entry and help ensure that employees are paid correctly. There are intricate requirements regarding paying employees correctly, so best to use a time keeping system that is programmed to the requirements in your area. There is a huge risk of lawsuits from disgruntled employees if you do not pay them correctly. Don’t leave this to chance.
Some businesses sell products, some sell services. If you sell products, and you keep extra on hand, then you have inventory that needs to be tracked. Inventory is considered an asset of the business and is part of the value of the business so it’s important to keep accurate records. The program used to track this may be part of your main accounting or it may be an outside program that integrates into your main program.
POINT OF SALE (POS)
If you have a storefront, or sell products retail, then you will need a POS system to record your daily transactions. These are usually separate from your main accounting system and sometimes specific to different industries. Often, they can also track your inventory and your sales tax. It’s best when possible, to get one that integrates into your accounting program to avoid having to manually enter the data into your accounting.
If you sell products directly to the consumer (as opposed to a third party who sells to the consumer) you are required in most states to charge sales tax. Sale tax requires understanding nexus (that’s a whole other topic) and tracking your sales and the amount due on the properly. Sales tax is one of the most complex pieces of accounting and if you are required to collect and pay it it’s critical you do it correctly to avoid possible sales tax audits and fines. Either your POS or your main accounting system will be designed to handle this but getting it set up correctly is critical.
1099s are one of the most misunderstood requirements of small business ownership. Yet, they are important. If you hire anyone who is not from a corporation to perform a service (as opposed to purchasing products) you are required to issue them a 1099 at the end of the year if you paid them over $600. This is an oversimplification but suffice it to say, you need to request that any new service providers complete and return a W-9 to you. The completed form provides the information you need to issue the 1099 to qualifying vendors. Having a properly set up accounting system that handles tracking 1099 vendors and knowing how to prepare the forms at the end of the year are critical components of most small business accounting requirements. This one is missed more often than any other piece and really is best handled by a professional.
ACCOUNTS RECEIVABLES (A/R)
If you issue invoices to your client’s then you will have accounts receivables that need to be tracked and followed up on if not paid on time. Generally, this process can be handled within your main accounting program though there are some industries where a specialty program may be needed. If you need an outside program, then be sure that it integrates into your main program to avoid complications. Once you have invoiced your clients, then you need to be sure to monitor your A/R and follow up on any overdue invoices.
ESTIMATES AND PROGRESS INVOICING
Not every business that invoices their clients needs to send estimates or to invoice in steps. But if you do, it’s critical to have it built into your accounting program. You start with an estimate and then generate an invoice for each portion of the job as you complete. This will ensure that you match your invoicing to your contract and collect everything that is owed to you. There is also a huge advantage in estimating and progress invoicing in that you can see further ahead, or as I like to say, you can see your sales pipeline. This makes planning and estimating cash flow much easier and gives you a huge advantage. Whether this is required for your business or is just best practice, I would encourage you to use this tool but use it within your accounting program.
ACCOUNTS PAYABLES (A/P)
Generally, tracking A/P is optional and if you have a low number of bills that you pay, it may not be necessary. However, if you have a large number of vendors that bill you for their products or services (including your operating expenses like utilities, rent, etc.) then it will be a huge benefit to enter bills which is how A/P is generated. Using an A/P Aging Summary report, you can monitor your cash flow and determine when you have enough money to pay the bills that are due. Usually, your primary accounting system will include this option, you just need to decide if you want to use it or not.
One requirement that is tricky to comply with is maintaining receipts for all expenses in case of an audit. This frequently falls through the cracks but if you are audited and cannot produce supporting documentation, then the expenses will not be allowed, and you will not be able to count them as deductible. This could be quite costly. Luckily there are many apps that allow you to take pictures of your receipts and save them digitally which is allowable by the IRS. Some accounting systems now include this feature, but if not, there are many apps that can easily be added to your phone so you can snap pics right away before the receipts blows away in the wind or ends up on the floor of your truck.
This is another area that gets woefully neglected. Again, if you face an audit, you will need to provide proof of business miles taken as a deduction or expenses for your vehicle logged to the business as a percentage of your miles. The only way to prove what you record is with a mileage log showing when and where you drove for business and how many miles it added up to. The easiest way is to do this with an app on your phone that you record after every trip. Easy to use, the hard part is remembering to do it.
If you have any kind of business loan (vehicle, building, equipment, line of credit, etc.), then you will need to be sure they are set up as liabilities and if you are paying interest, that needs to be recorded as an expense, not as part of the liability. This is an area where I see tremendous mistakes so don’t leave this off your list if you’re determining what your accounting needs include. They can easily be tracked correctly within your main accounting program, but you may need a professional to be sure they get handled correctly.
Besides inventory which not all businesses have, most businesses have assets of some kind. These need to be recorded correctly within your main accounting program and depreciation needs to be calculated and entered at least annually. Again, I would recommend professional assistance to be sure the information is maintained accurately.
Whew! Are you as exhausted by all this as I am?
Yep, you may need all of these, or you may only need some of them. It truly depends on your business. Obviously, some will be required for every business but not all. And, unfortunately, it does not depend on the size of your business per se.
If you are a new retail business, for example, you may not have any sales yet, but you will need to have a POS, inventory management of some kind, sales tax tracking, and likely you’ll need payroll and time tracking. And that doesn’t even go into your loans, assets, receipt capture, A/R and A/P.
However, if you are a service-based business with no employees, you may only need a basic system and perhaps some 1099 vendor tracking and A/R. Of course, receipt capture and mileage tracking would be best practice as well, but neither would add significantly to your accounting requirements.
So, the long and short of it is, the size of the accounting that you need is completely custom depending on your business. Accounting can be complex and is sometimes treated like the ugly stepsister and relegated to the “oh, I’ll get to it someday” pile. Unfortunately, this is a short-sighted attitude to have if you are a business owner for two primary reasons.
One, if you get audited and you do not have clean accounting it will most likely be very expensive. And two, if you want your business to survive and grow, accurate accounting is the foundation that will get you there.
I would encourage you to work with a professional to determine the accounting needs for your business and then evaluate the best systems to use to produce the end results you need to meet the above two requirements.