What New Business Owners Need To Know

This article is for educational purposes and does not constitute financial or legal advice. For specific advice applicable to your business, please contact a professional.

Accounting and bookkeeping are the building blocks for small business growth, yet nearly half of small business owners said bookkeeping was the task they loathed in running their businesses, according to a TD Bank survey. Pushing numbers to the bottom of the to-do list can have negative consequences. In fact, poor cash flow management is one of the top reasons small businesses fail. Especially in these challenging times, knowing the basics of business accounting and bookkeeping can set you up for success.

READ MORE: Tools That Will Keep Your Cash Flow Positive

Bookkeeping 101

Bookkeeping is the process of recording and organizing your business transactions that yields a snapshot of the present. This process may sound onerous and tedious at first, but today’s bookkeeping apps vastly simplify and expedite the process.  

Basic bookkeeping is also the minimum threshold for qualifying for loans, grants, and federal programs such as the Paycheck Protection Program (PPP). All of these require that your company’s bookkeeping is both accurate and up to date.

Here are some (but not all) bookkeeping items that new businesses may need to record and track:

  • Assets: Generally, what a business owns, itemized on the balance sheet (cash, inventory, equipment, etc.)
  • Liabilities: Generally, what a business owes, itemized on the balance sheet (debt, wages owed, taxes owed, etc.)
  • Revenue: Revenue, or gross sales, is the income from the sale of products and services.
  • Expenses: The costs of doing business: staff, inventory, insurance, rent, marketing, and more.
  • Net income: Net income, or net earnings, is revenue minus expenses, taxes, and interest. This is a key component to understanding profitability and cash flow.
  • Equity: The difference between your company’s assets and liabilities. Equity is your company’s net value.

Business accounting 101

If bookkeeping is the recording of financial data, business accounting is the forward- and backward-looking analysis of that collected data. Accounting is a measurement tool that allows small business owners to manage their progress. The knowledge gleaned from just basic accounting can help sellers answer such questions as:

  • Which customers are more profitable?
  • What business lines are the most successful?
  • When should I hire a new employee?
  • What is my cash flow?
  • What is the forecast for the next 12 months?

DIY: What you can do yourself

Software advancements have empowered small business owners to do a lot themselves. For retailers and enterprises, such functions as payroll, invoices, and cash management are now available with the touch of a screen. Merchant services providers, such as Square, offer tools that can automate otherwise time-consuming bookkeeping processes:

  • Payroll: Track digital employee timecards and upload them to be paid. Also, automatic tax filing from payroll allows business owners to focus on sales and marketing rather than tax law.
  • Invoices: Send digital invoices from anywhere and get paid faster. Getting paid faster improves your cash flow.
  • Cash management: Keep track of sales, transactions, and balances in real time, all in one place.

Running a business without knowing the basic levers of bookkeeping and accounting is a bit like getting into the driver’s seat without knowing where you’re going and how long it will take to get there. Only half of businesses make it past the first five years, according to the Small Business Administration. New business owners who learn the basics of bookkeeping and accounting will chart a more direct and informed path to the winning half. 

6 ideas for getting started with business finances

1. Record all transactions 

Big and small transactions are equally important. Small expenses add up over time and can become a significant burden to a business owner. Expense tracking technology can accurately and automatically record every transaction and help you avoid errant spending. 

READ MORE: Which Receipts Do You Need to Keep as a Small Business Owner?

2. Separate business and non-business expenses

The line between business and personal can be blurred for entrepreneurs. Get a copy of and keep all receipts for your business and personal expenses. Consider putting written standards in place for company expenses and personal expenses. Expense apps can help you define which expenses qualify for business and which don’t.

READ MORE: Why You Should Separate Your Business and Personal Finances

3. Communicate regularly with your bookkeeper/accountant

Technology has brought us many ways to communicate across a business. However, important messages can get lost in the cracks between text, email, voicemail, and chat. Consider choosing one channel of communication with your financial staff so that important communication doesn’t end up in the lost and found. Of the businesses that failed, more than 65% of these owners said financial issues were the root cause. Getting closer to your bookkeeper or accountant, if you have one, can help. 

4. Reconcile your books with your bank accounts

A regular financial reality check comes from reconciling what you know with what your bank accounts reflect. Consider scheduling a regular reconciliation, whether it be monthly or more frequently, depending on the volume of transactions. A rise in fraud during the pandemic is another reason to regularly reconcile accounts. 

5. Budget for new projects

New projects come with excitement and promise but can be at odds with existing resources. To put each new project in a better perspective, create a budget for it.. This process will help define its relative value to other projects and your ongoing business expenses. Additionally, make sure that you’ve budgeted for an emergency fund, which, as 2020 has taught us all, is critical.

READ MORE: How to Create a Business Continuity Plan

6. Turn to a pro if you don’t have the bandwidth

Accounting is one area that, when done right, will pay for itself many times over. For example, deciding on the right business structure can be tricky and subjective and come with big tax implications. If you have the resources and really don’t want to do this yourself, an accountant can save you time, money, and hassle in finding the right structure to put you on the most tax-efficient path. Accountants can also help you set up your bookkeeping software so the right things are being collected and tracked from the beginning. This pays off when you go to apply for a loan or enter programs such as the first-come, first-served PPP.

Square has the tools to run your business — even when it’s not business as usual. To help businesses make the shifts they need, we partnered with Forbes to assemble a team of expert advisors. By sharing firsthand experience, our advisors are helping businesses build skills and plan for what’s next. See how Square works, and learn more about the Small Business Advisory Team.