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. Once data is entered correctly, the system generates financial reports. 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. You won’t have to figure out how to record it after an outside service processes it. Recording the information is critical and not as simple as it may seem.
If you have payroll and hourly employees, it’s best to have a time-keeping system that integrates into your payroll system. This reduces entry errors. It helps ensure employees are paid correctly. There are intricate requirements regarding paying employees correctly, so use a time-keeping system that follows your area’s requirements. 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 keep extra on hand, then you must track your inventory. Inventory is an asset of the business. It 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 yours.
POINT OF SALE (POS)
If you have a storefront or sell products retail, then you will need a POS system to record 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. Get one that integrates into your accounting program to avoid having to manually enter the data into your accounting.
Selling products directly to the consumer (as opposed to a third party selling to the consumer) requires charging a sales tax in most states. Sales tax requires understanding nexus (that’s a whole other topic), tracking your sales, and the amount due on the properly. Sales tax is one of the most complex pieces of accounting. Avoid sales tax audits and fines by doing it correctly. Either your POS or your main accounting system will handle this.
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 must issue them a 1099 at the end of the year if you paid them over $600. This is an oversimplification, but you need to request that any new service providers complete and return a W-9. The completed form provides the information you need to issue the 1099 to qualifying vendors. Having an accounting system that handles tracking 1099 vendors and knowing how to prepare the forms at the end of the year are critical components of small business accounting requirements. This is missed more often than any other piece. A professional would handle this best.
ACCOUNTS RECEIVABLES (A/R)
As you issue invoices to your clients, you will need to track and follow up on your accounts receivables. Generally, your main accounting program handles this process. Some industries may need a specialty program. 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, 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 ensures that your invoicing and contract match so you can collect everything owed to you. There is also a huge advantage in estimating and progress invoicing. 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.
ACCOUNTS PAYABLES (A/P)
Generally, tracking A/P is optional. If you have a low number of bills that you pay, it may not be necessary. Perhaps you have a large number of vendors that bill you for products or services (including your operating expenses). Entering bills will be a huge benefit, which is how A/P is generated. An A/P Aging Summary report helps monitor your cash flow and determine when you have enough money to pay bills. Usually, your primary accounting system includes 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. If you are audited and cannot produce supporting documentation, then the expenses will not be allowed, and you can’t 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. This is allowable by the IRS. Some accounting systems now include this feature, but if not, there are many apps available for your phone. You can snap pics quickly before the receipts blow away or end up on the floor of your truck.
Sometimes this area is woefully neglected. If you face an audit, provide proof of business miles taken as a deduction or your vehicle’s expenses. The only way to prove what you record is with a mileage log. It should show when and where you drove for business and how many miles you traveled. The easiest way is to do this with an app on your phone that you record after every trip. It’s easy to use; the hard part is remembering to do it.
If you have any business loans (vehicle, building, line of credit, etc.), you will need them set up as liabilities. And if you are paying interest, record it 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. You can track them within your main accounting program, but you may need a professional to handle them correctly.
Besides inventory which not all businesses have, most businesses have assets of some kind. Record these correctly within your main accounting program, and annually calculate and enter depreciation. I recommend professional assistance to ensure 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. Some will be required for every business, but not all of them. 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’re a service-based business without employees, you may only need a basic system, 1099 vendor tracking, and A/R. Of course, receipt capture and mileage tracking would be best practice as well. However, neither would add significantly to your accounting requirements.
So, the long and short of it is, the size of your accounting depends on your business. Accounting can be complex. Sometimes it is 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 are audited and your accounting isn’t clean, it could be very expensive. And two, if you want your business to survive and grow, accurate accounting will get you there.
I encourage you to work with a professional to determine the accounting needs for your business. Then evaluate the best systems to use to produce the end results you need to meet the above two requirements.
Sherry Lutz Herrington is the owner of Sherrington Financial Fitness, a business consulting and accounting firm specializing in strategic business planning and solid financial accounting for businesses. She is also the author of Strong Women Thriving (https://strongwomenthriving.com/), a blog which focuses on empowering women to be financially savvy, particularly after experiencing financial abuse. Sherry is currently writing a new book that both shares her personal story and addresses financial abuse. She can be reached at firstname.lastname@example.org.