For many small business owners, accounting can be a daunting task. With limited resources, it’s crucial to manage finances effectively to maintain a stable and profitable operation.
However, before you dive into bookkeeping and accounting, there are several crucial steps you need to take to set up your business for success.
This process is known as pre-accounting, and it involves organizing and managing financial records before they are entered into accounting software.
In this article, we will discuss 10 various steps and processes that small businesses should take up before accounting.
Set Up Your Chart of Accounts
It’s essential to set up your chart of accounts before you start bookkeeping so that you can accurately record your business transactions.
By simplifying your chart of accounts and categorizing transactions efficiently, you can streamline the annual report process and save time and effort.
Your chart of accounts should include categories such as income, expenses, assets, and liabilities. You can create your chart of accounts using accounting software or a spreadsheet.
Organize Your Financial Records
Collecting all your receipts, invoices, bank statements, and other financial documents falls under organizing your financial records.
Make sure you have a proper filing system in place to keep all your records in one place. This will help you save time and ensure that you have all the information you need when it’s time to prepare your tax returns.
Set Up Your Budget
Setting up a budget is one of the most important steps involved in pre-accounting. A budget is a financial plan that outlines your expected income and expenses for a given period.
By creating a budget, you can track your spending and make all necessary adjustments to ensure that you’re not overspending. You can also use different software to create a budget or keep it traditional with a spreadsheet.
Choose Your Accounting Method
Cash and accrual accounting are the two types of accounting. Whereas accrual accounting records transactions when they happen, regardless of when cash is exchanged, cash accounting records transactions when cash is received or paid.
You must decide as a small business owner which accounting strategy will benefit your company the most.
Set Up Your Accounting Software
Accounting software can help you streamline your financial management while saving you time and money.
With so many various accounting software options like QuickBooks, Xero, and FreshBooks, choose the one that suits your business needs and budget.
Track Your Expenses
Tracking your expenses is important when trying to understand the financial health of your business. You need to keep track of all your business expenses, including rent, utilities, supplies, and payroll.
You can use different accounting software to track your expenses or keep a manual record using spreadsheets or a journal. Whatever method you choose, make sure you keep your records up-to-date.
Reconcile Your Bank Statements
The practice of comparing your bank transactions to your accounting records is known as reconciling your bank statements.
This verifies that your records are correct and that no transactions are missing. Reconciling the statements will assist you in identifying any discrepancies or inaccuracies in your records and making the required corrections.
Hire an Accountant
Your business tax planning, financial reporting, and all other financial management tasks are assisted by an accountant.
They can help you navigate complicated tax laws and regulations and make sure you follow all relevant guidelines.
It’s crucial to find an accountant who you get along with and who has good communication skills when choosing one.
Moreover, be careful to select someone who is knowledgeable about your sector and has experience working with small businesses.