Nuts and Bolts: Our Top Five Accounting Tips for Small Businesses

At Vanilla, we like sharing the stuff we’ve learned — not locking it away in some vault.

With that in mind, here are five of the best lessons we’ve learned about small business accounting over the years. These tips are designed to help you save time, avoid the classic mistakes, and get a great accounting system in place.

Tip #1: Keep your personal and business finances separate.

If we had to offer one piece of all-purpose, this-will-make-your-life-a-lot-easier accounting advice to every business owner out there, this would be it.

While most people know they shouldn’t mix their personal and business finances together, it’s probably the #1 problem we see at small companies year in and year out. Typical mistakes include: 1) moving personal funds in and out of the company without keeping any records, 2) owners using the same credit card for their personal and business lives, and 3) people paying for blatantly personal expenses (such as Nordstrom purchases and their dog’s vet bills) from the company checking account.

These problems are time-consuming to fix and they wreck your financials, because you have to weed out all the personal activity to get a clean P&L. More importantly, they can cause migraine-level headaches if you ever get audited or sued.

A far better approach is to get a separate business checking account and credit card right at the start, then use those two accounts to pay for all your business expenses. Cell phone bills, office supplies, rent, utilities, travel expenses, everything. That way, 95% of your accounting transactions will be neatly contained in two financial accounts.

Even if you don't do a great job maintaining your books for the first couple years (and many startups don't), doing these two things will save you tons of headaches and accounting fees down the road (trust us).

Tip #2: Choose the right accounting software.

Let’s start with the good news: If you own a small business today, you have a far better range of accounting software options than ever before. In addition to popular desktop programs like QuickBooks, you can choose from an amazing lineup of cloud accounting systems like Xero, QBO, and FreshBooks.

What’s more, hosting is now widely available for more powerful programs like QuickBooks Enterprise and Sage 50, which are typically used by manufacturers and businesses with advanced inventory needs. This means you can now have an enterprise accounting system without maintaining your own network or server. Hooray!

Unfortunately, the wider variety of options has made the job of choosing the right software a lot harder than it used to be. If you’re not familiar with what’s out there, you can read our brief overview of small business accounting systems here

However, we’ll also cut to the chase and tell you that, in our humble opinion, cloud accounting systems are now the go-to choice for most small businesses because they’re lighter, faster, and easier to deploy than desktop systems. In addition, they enable you to automate many of the boring, repetitive tasks that traditionally plague small business accounting by using bank feeds and auto-coding rules.

Whichever software you choose, make sure you do some research up front and select one that’s a good fit for your business, because changing accounting systems later is a huge pain in the ass (we’ve done it many times, it’s no fun).

Tip #3: Keep your chart of accounts as simple as possible.

Whenever we start working with a new business, the first thing we look at is their chart of accounts. Why? Because the chart of accounts tells us in one glance how well (or poorly) the accounting system was designed, and how knowledgeable (or inexperienced) the prior bookkeeper or accountant was.

Basically, the chart of accounts is the list of all the accounts in your general ledger. It’s the foundation for your entire accounting system.

A well-organized chart of accounts is lean, clean, and easy to understand. Everything’s in the right order, the accounts are all properly named (in a way that anticipates both the financial statements and the tax return), and there’s nothing unnecessary. It’s like looking at the kitchen of an experienced chef: Everything’s been laid out with a sense of purpose, and you know the food’s going to be good just based on the environment.

A bad chart of accounts is exactly the opposite. It’s long and confusing, bogged down with duplicate accounts, and doesn’t jibe with the financial statements. It’s like a bad plumbing job that was pieced together by four different contractors.

Long story short, a well-designed chart of accounts saves tons of time because it’s user-friendly and produces clean, owner-ready financial reports. And at the end of the day, that’s what you really want: a compact, straightforward accounting system that’s easy to work with and helps you get the numbers you need as efficiently as possible.

Tip #4: Build a monthly reporting package.

Most business owners are busy juggling 17 different things at the same time. Unfortunately, this means accounting and financial management tasks often get pushed to the bottom of their to-do list.

That’s why building a monthly reporting package is such a useful idea. Instead of running your business based on hunches or looking at your numbers every once in a while, you can create a set of key reports that get automatically generated every month. For businesses that don’t have a Controller or CFO, this is a great way to start formalizing your financial management.

What reports should you have in your monthly package?

The starting point will be your Balance Sheet and Profit and Loss (P&L). These are the two primary financial reports for any business, whether you’re Amazon or Dancing Turtle Yoga Studios.

From there, the basic idea is to add supporting reports that drill down on specific accounts and key areas of the business you're interested in. Typical examples include: accounts receivable (A/R), accounts payable (A/P), inventory, sales trends, cost of goods sold (COGS), and any expense accounts you want to keep a close eye on (marketing, payroll, travel, etc.).

We’d suggest that you begin with a few of the areas mentioned above, then start customizing your package from there. It does take some trial and error to figure out what reports you really need, but once you get a regular package in place, the job of "staying on top your numbers" becomes a lot easier and less time-consuming.

Tip #5: Close your books.

“Closing the books” is another one of those catchphrases that accountants tend to throw around a lot but never really explain. If you’re a small business owner who wants to stay hands-on with your accounting, you can add this to the list of things you need to understand and keep an eye on.

In short, the main purpose of closing your books is to ensure that your accounting and financials are accurate and complete for a given period (typically last month, last quarter, or last year). It’s a multi-step process that generally involves reviewing your accounting from top to bottom, fixing any problems you find (by correcting transactions and/or making journal entries), preparing a Balance Sheet and P&L, and then locking down your numbers for the prior period. 

We’ve worked with many small businesses that rarely — if ever — closed their books, and the results can be pretty horrifying. Therefore, we’d recommend that you close your books at the end of every year at least, to wrap up the prior year properly and file an accurate tax return. We’d also recommend hiring a professional accountant to handle the journal entries and closing process, because some technical skill is required.

And for gosh sakes, don’t forget to set a closing date in your accounting system. If you overlook this, then all that hard work you just did can get messed up if somebody deletes a few transactions or makes a couple of unwise mouse clicks (we’ve seen it happen a million times).

Summary: It’s Not Brain Surgery

At the end of the day, accounting is a lot more straightforward than most people think. Yes, some hard work is required on the front end and there are some basic concepts and vocabulary you’ll have to learn. But you don’t have to reinvent the wheel or do anything extraordinary.

On the contrary, the best accounting tends to be boring, predictable, and routine by nature. Like a good bowl of oatmeal.

In our opinion, the three main things that most small businesses should focus on are:

  1. Designing a simple, effective accounting system right at the start (preferably in the cloud);
  2. Putting together a set of basic monthly procedures that will help keep your regular accounting operations running smoothly; and
  3. Building a set of key financial reports that will tell you what’s happening with your business, and looking at them on a regular basis. 

If you can get a handle on those three elements, then solid and reliable accounting should flow from there. Hopefully, the tips we’ve provided in this short article will help you do just that.

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Legal stuff: This information is provided for educational purposes only and does not constitute advice for your specific situation.