Basic Small Business Accounting Best Practices Every Business Owner Should KnowBy Randy Legair on Thursday, September 2, 2021
No business owner has ever said, “I can’t wait to get to the office to do some accounting!”. Well maybe a few, but they are a rare breed. The reality is that most small businesses owners would much rather focus on generating more revenue for their company than spend time learning the best practices of small business accounting and how to balance their books for themselves. For some, hiring an accountant to handle their small business accounting makes the most sense. While that is a viable option we will discuss in a later article, many small business owners find themselves assuming the role of accountant. If you find yourself in this situation, it is important to know a few basic best practices for small business accounting.
So what are the basic best practices that small business owners playing the part of “number cruncher” should be aware of? Well, you should start with the following list of small business accounting best practices:
- Learn basic accounting terms
- Choosing the right accounting software
- Tracking expenses
- Using resources for basic small accounting information
Each of these basic best practices listed here will make it easier for you to conquer your small business accounting woes. Shall we begin?
The first and most important best practice for small business accounting is to familiarize yourself with basic accounting terms. You won’t get very far in your small business accounting journey without knowing what the following terms mean.
An asset is a term you will immediately run into once you begin to take charge of your small business’ bookkeeping. In general, an asset is anything that your company can convert into cash. More specifically, assets for your company will be things that support its growth and production. For example, if you run an HVAC field service business, and you own the work vans used to perform your HVAC services, each van would be an asset as well as any machinery used for those services. Any office equipment, the office itself, and the land your office is located on can be assets if your business owns them. The assets that were just described are known as fixed or long-term assets. They are tangible assets that can be physically touched. These differ from “current assets”, which are equivalent to cash or easily converted into cash within a fiscal year. If your company owns any treasury bills or certificates of deposit, these would be considered “current assets”. Other examples are inventory and accounts receivables. Knowing what your assets are will help you gain an understanding of the health of your company and how well your company is managing its resources.
The next concept you will likely need to define is “liabilities”. What are liabilities? Simply put, liabilities are any debt that your company owes. These can take the form of mortgages, bank loans, accounts payable, wages owed, and unpaid bills. Much like assets, liabilities can fall into two categories, long-term and current liabilities. Long-term liabilities aren’t due for more than a year whereas current liabilities are due within the next 12 months. In combination with your companies assets, liabilities will give you insight into how “liquid” your company is, or how capable your company is of paying its debts.
Owner’s equity is a bit more involved than the previous terms we’ve discussed so far. It is ultimately what is left over after liabilities are subtracted from total assets and can include many different elements such as the owner’s contribution (your personal investments into the business), company earnings, and money taken from company funds by anyone authorized to do so (commonly known as drawings). Once you have your mind wrapped around the previous 3 concepts you can begin to understand the accounting equation that we will discuss later in this article. For now, we will move on to some more basic terms you should be familiar with!
The accounting equation
The accounting equation is a critical part of understanding the health of your business. It is defined as:
Assets = Liabilities + Owner’s Equity
When you are aware that this equation exists, it is easy to know when something is amiss with your books. When using the widely adopted double-entry bookkeeping method, this equation should remain balanced, meaning that the amount of one side of the equation equals the other. If there is an imbalance, you need to take a closer look at your books and find where your discrepancy lies.
The “general ledger” is a concept that makes sense to anyone who has studied accounting and used the double-entry bookkeeping method but might not have any meaning to someone just getting started. The general ledger is the tool that your company will use to track all business transactions. As your company conducts business, you will need a way to track where your money is going and where it has come from, and you do that by keeping precise records in your general ledger. It is the foundation of your companies accounting system and necessary for building any form of financial statement you will need in the future. If your company is using the double-entry bookkeeping method for accounting, each credit entry into your general ledger will be accompanied by debit entry and vice versa. This ensures that your records remain balanced and makes finding mistakes easier. To ensure you can see exactly how funds are flowing through your company, the ledger is broken down into sub-ledgers or accounts based on your company’s chart of accounts. What is a chart of accounts you may ask? We will cover the concept in more detail further in a later article, but in short, your company’s chart of accounts is how you separate and record your company’s revenue, expenses, assets, liabilities, and equity. The most important thing to keep in mind when using a general ledger is that records must be kept using debits and credits, which we will discuss next!
Debits and Credits
Simply put, a debit is a record of money flowing into an account, while a credit is a record of money flowing out. When using the double-entry bookkeeping method, it is important that each debit transaction is balanced by a credit transaction. For example, you have a cash account as well as an equipment account in your general ledger, and you buy some new machinery for your company’s workshop for $1000. To keep your books balanced, you would need to enter a credit record of $1000 into your cash account, indicating that you paid for the machinery. You would then need to enter a debit record into your equipment account for $1000, showing that you now have $1000 more worth of equipment. This concept gets a bit more complex when you start adding records for equity and debt accounts, but this article from Bench.co does a great job of explaining the concept in an easy-to-understand way!
Revenue & Income
When you’re company generates money from any of the goods or services your company offers, this is called revenue. Income is similar but involves subtracting various expenses from the total revenue such as manufacturing and labor costs. Let’s say your company sold $10,000 worth of services last month. Put simply, your total revenue would be $10,000. If you had to pay your technicians $2000, and you paid another $1000 for advertising that month, your income would be $7000 ($10,000 revenue – $3000 expenses). Investopedia goes into more detail on the difference between revenue and income.
We briefly discussed expenses in the last topic, but to provide a little more of an explanation, expenses are generally defined as the cost of doing business. For example, the building that you conduct your business in likely requires electricity, water, and perhaps security. These are monthly expenses that you have to pay to continue doing business at that location. This goes for office supplies and advertising costs as well. Expenses can get murky when they start to fall into higher dollar amounts. Let’s say you purchase a new set of office furniture and new computers for your dispatchers. Are those expenses or should you record them as assets? This is a business decision you will need to make, usually by setting a cap on the cost associated with expenses. You can say that anything that costs under $1000 will be considered an expense, and anything that costs more will be recorded as an asset. This ultimately boils down to how you want your books to look and there is no set formula to determine where you should set your cap limits.
Use Accounting Software
Now that we have the basic terms out of the way, it is time to move on to the next best practice for HVAC small business accounting which is using accounting software. All of the concepts we discussed earlier can be handled by various software offerings. As a small business, you will want to use software that can do it all in one place. While there are several factors to consider when selecting an application for accounting purposes, the biggest factor is often ease of use. It doesn’t get much easier than QuickBooks which is why they are our top choice when it comes to recommending accounting software for small businesses.
QuickBooks has a tremendous track record with small field service businesses for both their online and desktop applications. When it comes to flexibility, QuickBooks is the clear leader as you can do virtually everything described and defined in the previous section of this post. From generating invoices to tracking bills and expenses to printing financial statements for your small business, QuickBooks can do it all, and if you’re using the online variety of QuickBooks, you can do these tasks anywhere!
QuickBooks has been helping businesses balance their financials for nearly 30 years, and they get better at doing so with each iteration of their product. They offer the most complete suite of accounting software features that make life a whole lot easier for small business owners. For a small business owner, being able to handle payroll, track inventory, scan receipts, and generate advanced reports all in one place is a huge time saver! And since QuickBooks has been around for so many years, there is an abundance of helpful community-driven resources available to help with just about any task you can complete in QuickBooks!
Use scheduling software
What if I told you that you could take QuickBooks and transform it into a field service management powerhouse? Well, you can! And it’s remarkably easy to do so! By pairing QuickBooks with Smart Service, you can take QuickBooks to a whole new level!
Smart Service is a scheduling and dispatch application that plugs directly into your QuickBooks company file, adding features such as employee tracking, routing, and customer equipment management, These features, along with many others, will make managing your field service company easier than ever. With Smart Service, you can take the customers that already exist in your company file and begin scheduling jobs using their easy-to-use drag and drop scheduler. Instead of juggling cells and spreadsheets to schedule jobs, you will have a scheduler that clearly shows you which team members you have available to handle the jobs coming in from your customers.
Optimize your daily schedule
Smart Service also allows you to optimize your field service business’ daily schedule. This helps ensure that you are dispatching the perfect team member to every job.
Ensure that your technicians can work efficiently
Before they even reach a job location, the Smart Service mobile app will make sure that your technicians are well equipped for the job by providing them access to all kinds of customer and job information that your dispatch team or other technicians have gathered on your customers. For example, if you have a customer that has multiple units that your team regularly services, Smart Service will empower your team by letting them log the make, model, serial number, location, and any other pertinent information of each of your customer’s units so that anyone on your team can review or reference later.
Smart Service has a ton of other features that make accounting for small businesses a walk in the park!
Keep your accounts separate
Tracking expenses is a simple, yet crucial part of properly managing your small business’s accounting books. Tracking expenses will save your company time and money if done correctly, and it is not overly difficult to do! The first step to properly managing your field service business’s expenses is to make sure your personal and business accounts remain completely separated. Most obviously, this means setting up completely separate bank accounts and credit cards. This action must be coupled with prudent management of which accounts get used for every purchase. Having separate accounts will mean nothing if you are using your personal account for business purchases and vice versa. The reason keeping your accounts separate is such a big deal is that it will drastically reduce the time that you spend auditing your business spending when you need to find deductible business expenses. Instead of searching through filing cabinets and folios to track down receipts for transactions you likely made months ago, you can easily see every transaction you’ve made from your business’s bank account online in just a few clicks of a button. This can only be accomplished by strictly keeping your personal accounts completely separate from your business accounts. Keeping your accounts separate also helps to limit potential legal issues tied to your business’s tax returns. Your field service business’s tax return cannot have any personal expenses on it; failure to adhere to this rule can cost you up to 75% of the additional tax owed. Separating accounts is an easy step that can save you tons of money in the future!
Record every single expense!
Like I mentioned before, tracking your small business’s expenses is an easy practice. It’s so easy in fact, many people just assume they are doing it correctly when in reality they are missing steps that will cost them time and money in the long run. One of the steps that is easy to gloss over is recording every single expense. No matter how small the transaction, be sure to record everything that your company spends money on. This will come in handy during tax filing because even though each small transaction may seem insignificant, together they can add up to huge tax savings. For transactions using a credit card, it is easy enough to track each transaction since they are typically recorded online on the bank’s website. Where most field service business owners fail in tracking every transaction is tracking cash transactions. These are tough to track because they require the additional step of keeping receipts. One way to help alleviate this set a strict routine of entering all cash receipts as transactions in your accounting software at the end of each day. Strictly following a routine like this will save you time when tax season comes along, and ensure that you don’t leave any money on the table.
The most important step to tracking expenses is to create a routine or schedule to audit your expenses. This should be something that happens regularly, in varying intervals. For example, at the end of each workday, be sure to enter all cash receipts as transactions in your accounting software. At the end of the week, be sure to double-check that you did not include any personal transactions alongside your business transactions. At the end of the month or quarter, audit your audits, meaning you double-check any random cash receipts that you have laying around at the office or home and make sure they are all entered. This is also a good time to check your personal accounts for any transactions that you may have made for the business and get those entered into your accounting software accordingly. When the time comes for filing taxes at the end of the year, you can rest assured that your numbers are both complete and accurate, because you were vigilant in tracking all of your business expenses!
Use a Reputable Resource
We’ve come to the last basic best practice for small business accounting, which is using resources for small business accounting information. This best practice is a must for field service business owners, but it can be difficult to find out where to start. Don’t worry! We have you covered! The following resources will help you find all the information you need to answer most of your questions regarding small business accounting.
The QuickBooks Community page is an excellent resource for those who are using QuickBooks (which we highly recommend!). This is the go-to destination for any questions you might have regarding QuickBooks, whether it be QuickBooks Online or the QuickBooks desktop application. The page is filled with posts from other small business owners just like you, and since the community has been around for such a long time, there is a good chance that any questions you may have, have already been answered by someone on one of the QuickBooks community threads. QuickBooks Community has a ranking system that helps users have confidence in the answers provided by other users. Users can vote on the helpfulness of each answer, and the most helpful answers find their way to the top of the thread, making them easy to find. Users with the most helpful answers will be denoted by badges they have earned over time; you can trust that the information coming from users with lots of badges is legitimate and useful. Being able to see exactly how other business owners are using the software in the real world is a great resource, and that is exactly what QuickBooks Community allows you to do!
The blueprint is a resource for small business owners provided by The Motley Fool. The Motley Fool has been a staple in the financial world for over a decade and the information from the site has generally been received with positive reviews. The blueprint consolidates the knowledge of their team of entrepreneurs who have worked in a wide range of industries, ranging from freelance photography to commercial crabbers. The service is driven by a desire to support their readers with information and advice that they have used to find success with their businesses. As such, their articles are not inspired or sponsored by an advertiser at all! They cover in-depth every subject on running a small business out there, from accounting software to email marketing.
Investopedia offers financial information and has done so for over 20 years. As their name suggests, their content revolves around all things related to investments. They are focused on providing educational information that helps their readers gain insight into the world of finance. Because the worlds of finance and small business ownership cross over in many places, you can find lots of helpful information on this site on topics related to small business accounting! If there are any terms that you come across while managing your small business’s books, you can search their treasure trove of educational information for in-depth, well-researched definitions. Because their goal is to educate, much of the information provided is easily digestible enough to get the understanding you need in just a few minutes of reading.
That’s it for the basic small business accounting best practices! While handling accounting for your field service business may seem like a daunting task, if you follow the practices discussed in this article, and use the resources provided to fill in any gaps, you will be in a great position to take control of your small business’s accounting tasks.
In a later article, we will touch on more advanced topics such as specific accounting methods, reporting, handling payroll, and more. Be sure to check out our blog for the next post!