One of the biggest issues that small businesses face is financing. In order to have competitive pricing, companies must buy in bulk and scale their company quickly. However, few people have the funds to invest in their business. Having a solid base of financing is essential to growing a company.
If your business needs a loan, you will also find that small business accounting and keeping great financial records is an excellent way to show investors that you are a good investment by giving them a clear understanding of what is happening with the money in your business. Knowing the state of your financial affairs back to front is one of the best ways to make sure the cash keeps flowing and your small business stays healthy.
Sound financial management is the key to growing your business, and luckily there are numerous bookkeeping and accounting services for small businesses that can help. In addition to the help received by outsourced business bookkeeping services, small business owners should prepare for a successful business loan with the following tips:
#1. Separate your business and personal accounts
When you open a business, one of your first tasks should be to open a business bank account. It is important to keep your business banking separate from your personal banking. It’s not enough to just keep separate records. You should actually keep the money physically separate in different bank accounts, one set up as a business checking account. You also want to open a separate business credit card and put ONLY your business expenses on it.
One reason for this is tax time. Imagine your checkbook and your bank statement if you mix your business and personal transactions. Now imagine that over the course of a year. That’s what you would have to deal with at income tax time if you mix your personal and business finances. When tax season rolls around it will be much easier to have everything on one separate account. If your small business ever needs a debt consolidation loan, you will need to verify each business expense and having a separate expense will save you the hassle and the headaches. It is important that you do not have personal charges on the credit card since you will not be able to accurately attribute your charges to the business.
If your business is incorporated, the IRS requires that you keep a separate business bank account. It doesn’t matter if your business is a corporation or a partnership or an incorporated sole proprietorship. If you’re incorporated, you must have a separate account.
#2. Set up a bookkeeping system
Whether you’re a one-man show with a handful of clients or a medium-sized enterprise with multiple employees, you need to turn small business accounting into a habit. Organizing your books now will help you avoid waiting until your financial records morph into an insurmountable mess.
Small business bookkeeping should be made a habit. For instance, if you’re just starting out or running a small operation, try sending out invoices every week. You’ll also want to make sure all your transactions are properly accounted for and categorized. As for monthly tasks, try to make payments to your suppliers and vendors at month’s end on a set schedule. Look for ways to automate and batch processes to save man-hours and money. Technology can also be your friend, look for software and equipment that can help you make things simpler and quicker while reducing errors. At least once a quarter, check to make sure the systems and processes you’ve had in place are effective. If not, what is the underlying issue, and how can it be resolved? You’ll also want to analyze data, such as sales and inventory information, to pinpoint patterns and trends.
If you’re swimming in a sea of late invoices and sloppy financial records, you might want to consult with professional bookkeeping and accounting services for small businesses. Whether you want to schedule a one-time consultation or hire them to tend to your financial records long-term, it might be a worthwhile investment to save yourself the struggle.
#3. Use Cash Accounting
Your accounting method matters both in terms of bookkeeping and tax filing. Accounting method affects the way that income and expenses are recorded on your financial statements and the tax year in which those transactions are reflected. Businesses often ask whether they should use cash or accrual accounting. Unless you’re a sophisticated corporation, you will want to use cash accounting so that you know, at any given time, how much money you have available to work with.
In cash basis accounting income is recorded when received and expenses are recorded when they’re paid. Cash accounting mimics what will appear on your cash flow statement. It gives a good indicator of a business’s cash position and how it changes over time. Cash basis accounting registers bank transfers, check transactions, and credit card payments. Additionally, this way of accounting makes record keeping really easy. If you’re recording income when you receive it, and expenses when you pay them, you can do most of the legwork on your own and may not even need to hire a professional accountant
#4. Have a separate savings account for taxes
Business owners are responsible for paying their own taxes throughout the year. No one is withholding money from the earnings coming to you — so you need to separate out what you owe the IRS and your state from the money you can use to pay expenses (and yourself). Exactly how much you owe in taxes depends on your state, your revenue, and your filing status. We recommend talking to a CPA firm to get an estimate and decide on a percentage of your earnings you’ll set aside in a bank account earmarked for taxes.
Putting 30% of your monthly earnings into an account designated for taxes is a good rule of thumb. You can pull from this fund when you need to pay estimated taxes throughout the year and when/if you need to pay annually every April. Ideally, you won’t actually need to pay 30%. But setting aside this amount means you’ll have the cash available when taxes are due and can pay your bill out of this designated account.
#5. Demonstrate a good financial history and cash flow
If you have a good financial history, you will not only be more likely to get a loan, but you will be eligible for loans with better terms. Cash flow can make or break your business. A steady and healthy stream of cash shows lenders that you’re capable of sustaining the loan payments. It’s essentially a representation of your business’s health. Lenders look at the debt-to-income ratio of a business when assessing its risk. Most lenders require a debt-to-income ratio of 50% or lower.
Most lenders take a number of factors into consideration, so if you’re lacking in one area, you may be able to secure a loan through the strength of other areas. With proper preparation and smart financial decisions, you can increase your chances of quick business loan approval.
Limitless Investment and Capital’s Bookkeeping and Accounting Services for Small Businesses
As a business owner, the books should be your friend. Limitless Investment and Capital was founded in the belief that small and mid-sized business deserve a better result from their bookkeeping and accounting function. That’s why we’re committed to giving every Limitless client the accountability, access, and know-how of a fully staffed in-house accounting department, at a price designed for the budgets of small and mid-sized businesses. If you would like to learn more about our bookkeeping and accounting services for small businesses, get in touch today!