Posted by Federal Way CPA on April 20, 2012 ? Leave a Comment?
Best Accounting Practices for Startup Business
When developing a startup business it is necessary to consider the accounting groundwork you will put in place from the onset of things.
Which Bookkeeping Software Package to Prefer
Sooner or later if your startup business grows, you will need small business accounting software. If you maintain your books with Excel Spreadsheets, you?ll find eventually this accounting method can no longer sustain the growth of your business.
Certain bookkeeping packages work exceptionally well for real property/real estate, and there is software that works well for project accounting. While generalized accounting software is frequently less expensive, whereas the niche-specific accounting software is in most cases more costly, but keep in mind that industry-specific accounting software may end up saving you time and money in the end.
How to Select the Accounting Method that Works Best for You
As a small business owner, you?ve got a bit of freedom in how you document your financial comings and goings. As you?re no huge corporation, it is not necessary for you to provide financial books in line with Generally Accepted Accounting Principles, or GAAP. For instance, you may prefer to record your income at the time you deposit payment for a job into your bank account and record an expense whenever you write out a check. This is referred to as the cash method of accounting. While this doesn?t fall in line with GAAP, it is more than adequate for a smaller start-up.
Some more advanced methods of accounting, such as the accrual method of accounting, may better serve you as your business grows. The accrual method of accounting records expenses and income upon invoice, rather than waiting for cash to change hands. This bookkeeping method provides you a more expansive insight into you finances.
As for income taxes, the IRS is very flexible in allowing you to choose an accounting method. According to its rules, you may use any method as long as it clearly reflects income and expenses and you treat all items of income and expenses in the same manner from one year to the next. Although, if you produce, purchase, or sell goods, special rules apply on when to use the accrual method. If you handle inventory at all, you should consult our accountants to find out when to use the accrual method.
Create a Budget
Many of the small business bookkeeping software packages allow you to construct a budget, either based on the previous year?s records or from scratch. Establishing a budget is critical considering that it will determine your standards of performance. Then after a period of time, you can then compare your performance against the budgeted amount. This analysis will convey to you if you might satisfy your goals. It can also keep your business profitable.
Judging Your Performance
Most accounting software packages also make it possible for you to draw comparisons between your business?s current-year financial statements to those from preceding years. This anaylsis will permit you to see trends in your business. It also provides insight on how you can add to its success.
For example, if your small business? revenue increased by 30-percent for 2011 over that from 2010, whereas your expenses only increased by 10 percent, this indicates that your business model could be hyper-efficient. Were all expenses recorded? Is there a chance some revenue was duplicated? And did you definitely manage to increase your return on investment? It is very important to get to the bottom of these trends so as to have a detailed picture of your small business? performance and to make essential financial decisions. On the flip side, if your revenue increased by 10-percent in 2011 over that from 2010, but, to do so, your expenses increased by 30-percent, this might indicate a lack of efficiency in your business model. You might ask yourself, are you investing in assets with the greatest returns on investment? Or, did you forget to provide invoices during the year?
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