Accounting Basics for Small Business Owners

In a study by U.S. bank, it’s reported that 82% of businesses fail with the source of the problem being poor management of cash flow. Proper accounting practices are essential for any small business owner to manage their finances effectively and set their business up for success.

Small business accounting includes financial practices to track, manage, and understand the finances of a business, like inventory and cash flow tracking. Read on for a walkthrough of the fundamental accounting practices small business owners need to know. 

To illustrate this, we’ll use the example of Sarah, a solopreneur who just launched her own ecommerce business selling handmade jewelry through Squarespace. With some basic accounting knowledge, Sarah can track her income and expenses, analyze her cash flow, and make smart financial decisions to help her business thrive.

1. Choose an accounting software 

When choosing an accounting software for your small business, it’s important to consider certain factors. 

• Affordability: Consider how many people need to access your accounting software and the features you need relative to the cost. Ideally, you want to choose an accounting software that can grow with you. 

• Integrations: The integration capabilities of the software you choose can save you time spent on manual accounting or inventory work. For example, software that integrates with customer service, inventory management software and can sync sales from Squarespace automatically. 

• Cloud-based options: Cloud-based accounting software is financial software that securely stores your accounting details online. Cloud-based accounting software is beneficial if you have other employees or a hired accountant or bookkeeper because they also have the option of being able to log in from anywhere.

Popular cloud-based accounting options such as Xero and MYOB, have features designed for small business owners, like reports that allow you to have easy oversight on all areas of your business. By connecting other business apps, these accounting software options can act as the center of your digital ecosystem.

Choose integrations for your accounting software

Choosing the right accounting integrations can help you maintain accuracy and save time. This can be especially helpful if you’re a solo business owner like our example, Sarah, since integrations can act as a second check on any numbers you track.

For example, with Amaka’s accounting integrations, you can seamlessly sync your Squarespace transactions directly into your accounting software. This eliminates manual entry and ensures important information like sales, fees, payments and taxes are up-to-date across both systems. Accurate real-time data helps you to upkeep accounting best practices and properly track cash flow and stock levels. 

At tax time, you can have peace of mind that your accounting software already has up-to-date, detailed sales records. For a solopreneur like Sarah, managing data accuracy and tax rates is an important part in maintaining tax compliance, so an integration can simplify the tax preparation process overall. Through Amaka, you’re able to sync Squarespace to Xero and MYOB. 

2. Set up your chart of accounts

A chart of accounts is a way to categorize all transactions for your business. A well-organized and accurate chart of accounts gives you insight into every aspect of your business finances, from how much liquid cash you have to regular or irregular expenses and the status of debt you owe. It consists of five main account types. 

1. Assets: Resources you own that have future economic value, such as cash, accounts receivable, inventory, equipment, real estate, etc. 

2. Liabilities: Debts or obligations that you owe to outside parties, such as accounts payable, wages payable, bank loans, mortgages, etc.

3. Equity: The claims held by your business’ owners/shareholders; the interest in assets after deducting liabilities

4. Revenues: Income earned from your business activities, including sales, services, interest, dividends, etc. 

5. Expenses: Costs incurred to generate revenues, such as employee wages, raw materials, advertising, rent, utilities, etc.

When starting your chart of accounts, different financial categories will fall under one of the five main account types. Some of the key categories you might need to consider include: 

• Cash (Assets)

• Accounts receivable/accounts payable (Liabilities)

• Inventory (Assets) 

• Cost of goods sold (COGS) (Revenues) 

• Sales tax (Revenues) 

• Shipping/delivery revenue (Revenues)

• Shipping/delivery costs (Expenses)

• Packaging costs (Expenses)

For example, for Sarah, some important accounts for her jewelry business include shipping and packaging costs, shipping income, fees for payment gateways, and subscriptions. 

Having a chart of accounts set up properly will make tracking your business finances much easier. If you’ve connected Squarespace to your accounting software with Amaka, the integration will automatically create all relevant account types and subcategories. These accounts can also be customized based on your store's unique needs. 

3. Track income and expenses 

Proper record keeping is critical for small business owners to track their finances. It's important to document everything—all income, sales, expenses, invoices, bills, and more. For example, say Sarah takes the time to set up an at-home work station for her business or has lunch with someone who runs a local small business fair. She should keep the receipts from those purchases—and note what the purpose of the expense was. 

With clear documentation, Sarah can easily create key financial statements like an income statement to track her revenues and expenses, a balance sheet to summarize her assets and liabilities, and a cash flow statement to see money coming in and out of her business. Checking in on your income and expenses regularly helps you ensure your cash flow is being used where you most need it and make adjustments if it’s not. 

Note that you may be required to use a specific accounting method, based on where you do business and your revenues. You can use the cash method, where revenues and expenses are recognized when they’re received or paid. Or you can use the accrual method, where revenues and expenses are recognized at the time of the transaction, even if cash hasn’t left or come into your bank yet. Check specific regulations for where you do business. 

With an accounting integration, a lot of this becomes automated because your integration will automatically pull in sales data, fees, and deposits. Although it can seem daunting at first, record keeping, with the help of automation, becomes a seamless process, helping you stay in control of your income and expenses.

4. Analyze and manage cash flow

Carefully analyzing your cash flow is important, since the cash you have available dictates the decisions you make for your business. By looking at income and expense data over time, you can start to forecast future cash flow. This helps you identify potential cash shortages well in advance so you can take action to avoid problems. Or you can anticipate when you’ll have more cash on hand to invest back in your business.

For example, if Sarah sees a significant increase in her sales around the holidays, she can then prepare and allocate finances for when the sales may slow down after the holiday period is over. After the holidays, Sarah can analyze her total sales and popular performing items. That way, she can forecast next year's holiday period. This may look like hiring a seasonal team member to help her manage the influx in sales, if the budget allows for it. 

Staying on top of inventory with accounting tools can also improve your cash flow. The key is using financial data to create strategies that increase return customers, ensure you haven’t over or unordered stock, or set aside emergency funds for seasonal dips.

For example, seeing which products are regularly bought together can help you identify products you can recommend to existing customers to encourage return purchases. Or you can see how different products perform throughout the year to better plan your inventory.

With frequent cash flow analysis, you can spot issues before they occur and keep your business financially healthy. Try checking in monthly or bi-weekly, if not more frequently.

Interested in taking your small business strategy to the next level? Explore more resources on the Squarespace blog. Or visit Amaka’s blog for more information on e-commerce and financial integrations. 

Note: This Making It article was created in collaboration with Amaka. It is not meant to be construed as professional financial or legal advice. Refer to local regulations and a financial professional to understand your obligations.