Accounting is by far, one of the most important aspects of starting and operating a successful business. It’s so easy to get caught up in the glamorous tasks of designing a business card or choosing a business name, yet without a solid understanding of the numbers, you will not survive.
The streets of entrepreneurship are littered with former business owners who ignored the financial side of their business only to discover too late they were operating at a loss, not a profit.
Without a firm grasp of your margins and cash flow, you can price yourself right out of the market.
The Small Business Administration (SBA) complies a list of the 11 reasons that cause small businesses to fail. Of those reasons, four concern the financial structure of the company, and one is "believing you can do everything yourself."
Hiring an Accounting Professional
Unless you are a numbers wiz or have a degree in accounting, you will need to employ the services of a professional to set up your accounting system. To get a grasp on your small business accounting and financials, should you hire a bookkeeper or an accountant?
Each start up situation is unique but generally, most start ups can begin with a bookkeeper. A bookkeeper's services make sense for average start-ups with no plans on building an empire. The bookkeeper will help you start off with a good record keeping system, handle financial transactions, and produce financial statements.
Hiring an accountant makes sense for growing companies, businesses with more complex business structures (such as limited liability companies) and when you add additional employees to your company.
Initially, you may start your business part-time or at home to keep expenses low. The cost of an accountant on a monthly basis can be too much for a one-person business.
Either prepare the books yourself or have a bookkeeper involved in the process. Use the accountant for your year-end tax planning.
Methods of Accounting
There are only two generally accepted accounting methods: cash accounting and accrual accounting. Some small businesses have the option of choosing between these two, while other kinds are legally required to use the accrual method.
The accrual method shows your real-time financial health and most accounting software packages simplify the process of accrual accounting. Moving from the cash system to accrual can be as easy as checking a box in your accounting software, which will do the rest for you. However, if you run a simple and low-revenue business, don't feel pressured to adopt the accrual system.
When you do plan to hire an accountant or bookkeeper, remember to find one you can trust and build a solid relationship with because you need their advice and guidance in steering your business now and in the future. Let them help you select the accounting method that works best for you, and listen to their interpretation of the numbers and their subsequent advice.