Inventory, assets, liabilities, expenses, revenue. These are words that make business leaders excited yet nervous. They are a promise of growth, as well as a guarantee of significant responsibility, all of which can be summarized by the dreaded phrase, “business accounting.”
Whether you’re running your first business out of your garage or managing your fourth startup as a decades-strong veteran of your industry, business accounting requires your attention. Just because it’s demanding, however, doesn’t mean it has to be difficult. If you can offload complicated financial tasks with the right tools, accurate business accounting can become another asset to your competitive edge.
This article explores accounting for small business, including basic terminology, best practices, and the best accounting software to help you track expenses, file taxes, send invoices, manage cashflows, and more to create a competitive business accounting system for 2024 and beyond.
In addition, we will discuss how you can track multiple inventory locations and regulate inventory turnover, both of which are outside the scope of accounting. However, there are other solutions that can help with them, and they have a profound effect upon your accounting processes.
Asking the simple question “What is business accounting?” is an honest place to start for any business looking to learn more. Simply put, business accounting includes everything that a business needs to do to be financially responsible. This includes:
- Asset tracking
- Liability calculations
- Inventory costs
- Investment records
- Inventory shrinkage
- Bookkeeping
- Tax preparation
- Financial reports
As noted above, inventory management is not a part of accounting. But they are closely aligned. It is important for your accounting system to track inventory costs when products are bought and sold, for example.
When managed properly, business accounting tasks and inventory management tasks help your company remain profitable, compliant, secure, and scalable.
Despite the complexity of the tasks, many small business owners (by choice or necessity) find themselves managing all of them. It’s not hard to see why: hiring different personnel for every task becomes expensive and complicated very fast.
Yet, each task needs to be done properly for businesses to remain accountable for their finances. For example, it doesn’t matter how well you manage your inventory if you’re vulnerable to theft. It also doesn’t matter how much profit you make if you don’t file a proper tax return.
This is why businesses, of any size, can benefit from the business accounting basics.
To get everyone on the same page, here are 12 terms for the business accounting basics that every business should know:
- Liabilities: Any financial obligations your company has accrued, including debts, accounts payable, taxes, loans, and wages.
- Assets: Any value your company has accrued, including bank accounts, inventory, accounts receivable, equipment, and real estate.
- Expenses: Money that is paid by your business to satisfy its obligations, including rent and salaries (“fixed expenses”), production and raw material costs (“variable expenses”), outstanding accounts payable (“accrued expenses”), and utilities (“operating expenses”).
- Accruals: When your business records its credits or debts, they are considered accruals until they are fulfilled. Examples of accruals include expenses you have yet to pay or completed sales that have yet to be paid to you.
- Capital: Capital or “working capital” is the money that can be invested back into the business to grow and sustain it. Importantly, capital does not include assets and usually refers to the business bank accounts.
- Accounts payable and accounts receivable: Accounts payable is the money you owe, which is considered a liability (property rent is one example). Accounts receivable is money that people owe to your business for its goods or services, such as when a customer receives an invoice after a job is complete.
- Burn rate: Burn rate is a calculation that shows how quickly a business is spending money. The calculation is simple: subtract your capital at the end of a certain period from the beginning of that period and divide the result by the number of months (or any other length of time).
- Balance sheet: This document refers to the end of a specific period and shows the business’s current assets, liabilities, and equity.
- Profit and loss statement: A document that shows how much your business made and spent over a certain timeframe for tax purposes (Schedule C), sometimes called an “income statement.”
- Equity: Equity is how much money business owners have invested in the business, and it may also include how much the company has increased in value since they purchased it.
- Depreciation: Assets lose or “spend” their value over time, a value expressed for tax purposes as depreciation. For instance, a piece of machinery with a 10-year life span will depreciate by 50% after 5 years of use.
The basic terminology can only get your business so far without actionable strategies for improving and/or streamlining your accounting processes.
Open a bank account for your business
Owning a business comes with financial risks. Opening a small business account for your assets, separate from your personal account can mitigate these risks in the case of lawsuits, bankruptcy, corporate espionage, or audits. Keeping separate accounts can also help you make your financial records more appealing to potential investors or creditors, especially if your personal account has had issues in the past.
You’ll want to set up a checking account for expenses and a savings account for taxes. These will be somewhere around 70/30 for most business owners, but this can vary depending on local tax codes and your business’s size. You’ll also want to open business credit cards under your company name.
The first step is to speak with your bank about the documents you’ll need to set all this up.
Track your expenses and transactions
To monitor how much you’re growing, you need to keep accurate financial statements, track any expenses that will be tax-deductible at the end of the year, get your tax returns ready, and more.
To do this, businesses must organize receipts (for purchases and sales) and other important documents in a centralized accounting system. For very small businesses, this can still be done by hand. However, for most businesses these days, the receipts, bills, slips, and invoices pile up quickly, warranting a versatile software solution to keep track of it all (more on that in a bit).
Determine payment
It may seem obvious, but many new business owners fail to realize that selecting your payment method is a big part of getting up and running. Software solutions like QuickBooks and Xero can help you set up merchants and track payments.
Set up payroll
If you have employees, you’ll need a payroll system, which includes withholding taxes. If you have independent contractors doing jobs while you run the show, you’ll need to track how they’re getting paid and how much. Either way, you’ll need a payroll system to track salaries, benefits, garnishments, deductions, and taxes.
Note that there are state and federal regulations concerning payrolls that small businesses need to know, including deadlines, employee classifications, and tax requirements.
Manage cashflow
Especially for new businesses, figuring out where the money is coming from and getting those first few bills paid is critical.
Cashflow statements complement income statements by showing where the money is going, both to and from your business. This includes the money you spend on inventory, interest, wages, and taxes, as well as the money you collect from sales and accounts receivable.
When done right, this simple statement will allow you to predict and prepare for your expenses in those crucial first quarters.
Calculate COGS and gross margin
COGS (Cost of Goods Sold) and gross margin are two closely linked calculations that businesses of any size need to get familiar with.
The COGS refers to the direct costs of obtaining or producing your company’s products or services, including materials, labor, and equipment. The gross margin is the amount of revenue made from sales after subtracting the COGS and dividing the result by the revenue. This results in a margin (a percentage), which provides a more accurate representation of profit for accounting needs.
Apply for funding and seek out partners
While every business owner wants to make it on their own, the reality is that investors, creditors, and partners will likely play a valuable role in getting your business going. But if investors or lenders aren’t buying, increasing the time and money put into the business, thereby increasing its value, could be the answer.
Understand the required taxes
Calculating your business’s taxes requires multiple key steps, including reviewing year-to-date profits and losses, reviewing inventory, reviewing the payroll summary, and calculating liabilities.
Excise taxes, employment taxes, income taxes, and state-specific taxes overlap. The IRS can give you an overview of the requirements, but every business’s situation is different.
Submit financial reports and tax returns
Depositing applicable income tax, Medicare, Social Security, and disability taxes to the correct agencies is a crucial step in proper business accounting. Centralizing this process in one system, which records inventory records and financial statements across all business locations, is a major advantage of linking an accounting program like QuickBooks to an inventory management solution like Fishbowl.
Review your methods
Industries do not remain stagnant. Business accounting shouldn’t stagnate either. Modern accounting systems that integrate with inventory management and seller platforms point a way forward for businesses invested in adaptability and scalability in their accounting.
Just as you would not retain the identical manufacturing process for years on end, relying on paper methods for business accounting these days puts businesses at a disadvantage. Their competitors are more than likely utilizing modern business accounting software to streamline operations to their advantage, which will soon become the norm across industries.
Accounting solutions can only do so much. To really accomplish everything you need them to do for your business, you must integrate them with inventory management software. Even though they remain two separate solutions, you could refer to them as an integrated inventory accounting solution.
Businesses that go all-in on inventory accounting solutions must ensure that it integrates with their other business software, such as CRMs, EDIs, and shipping apps. A bunch of competing solutions isn’t itself a solution – it’s a new problem.
To fix this, companies are looking for accounting software that offers integration with the tools they know they need. Here are a few examples of the best business accounting software available right now.
QuickBooks
QuickBooks is a leader in business accounting software. The program features streamlined invoicing, expense tracking, receipt organization, and financial reporting systems, as well as the ability to accept online payments. If you’re in the market for a bookkeeping solution, you’ve likely come across them.
Businesses that rely solely on QuickBooks and QuickBooks Online, however, learn that it has gaps in its data accuracy, sales insights, and inventory management processes that prevent it from being a total solution to every business need.
Xero
Xero is a cloud-based accounting tool aimed at small businesses. It integrates with other apps, including Fishbowl, and offers robust invoicing and automated billing features.
Xero is a subscription-based service, which means your pricing tier may determine your features. The entry-level plan, for instance, has limited billing functions. Integrating with something like Fishbowl can fill in those gaps.
Wave
Wave will always come up when looking for free accounting software because it’s among the most robust solutions in that tier, offering unlimited invoicing features with custom templates. It can support unlimited users for free, which is a huge plus for larger organizations.
Unfortunately, Wave doesn’t integrate with other programs or offer its own inventory management functions. Businesses that use Wave will need to make sure their other software solutions have ongoing support for filling its gaps, including customer service, which a Wave account also doesn’t have.
FreshBooks
FreshBooks is an easy-to-use business accounting software that helps small businesses send invoices, accept payments, and more. It works on a subscription system that costs more per user.
FreshBooks is a great accounting solution for small businesses that can afford it. However, while many programs work for businesses of any size, FreshBooks is not suitable for larger businesses.
While FreshBooks is great for tax purposes, it lacks inventory management features. Thus, it is a good idea for most users with increasingly complex inventory needs to choose a different accounting solution that can integrate with their inventory management software.
Fishbowl integration with business accounting
Fishbowl is an inventory management software solution that integrates with QuickBooks and Xero to fill their gaps. Sales and ordering data from Fishbowl syncs automatically with QuickBooks and Xero, which helps verify the accuracy of financial records.
As dedicated inventory management software, Fishbowl has a more versatile approach to inventory replenishment and demand forecasting. When these real-time insights are integrated with QuickBooks’ and Xero’s financial readiness, businesses can achieve a more robust accounting solution than with either program individually.
So, what is business accounting? It is the timely recordkeeping of transactions, taxes, and other financial data for a company. It’s a complex process, one that small businesses think they know without realizing how fast the competitive goalposts are moving. They may have software solutions that lack vital integration with third-party apps, or they may be trying to get by on paper methods alone.
Fishbowl offers real-time inventory management solutions that integrate with QuickBooks, Xero, and other apps to help businesses find a complete solution to their business accounting needs, especially when they integrate with Fishbowl to provide ample inventory management features those accounting solutions lack. At every stage of order fulfillment, the right inventory accounting solution can make all the difference.
To learn more on why thousands of businesses trust Fishbowl’s inventory management solution, you can see Fishbowl in action now.