Even the best small business lives and dies by the accounting solutions the owner implements. Your accounting systems, if they are good, can help you spot a problem before it becomes fatal to your business. After sales, there is nothing more important than the accounting systems you use.
There are two major accounting solutions you need; one is cost accounting and the other is tax reporting. Cost accounting tells you if you are making money or not. It also tells you how you can make more money. Tax accounting is a bit different. Since the IRS uses different rules than the real world, tax accounting simply tracks your revenue and expenses (as recognized by the IRS) and makes it easy to do your year-end reporting.
You need to understand the differences between cost accounting and tax accounting so you can have excellent solutions for both.
In my experience, you must do your own internal cost accounting in order to really have your finger on the pulse of your business. I
have been using Quickbooks for years and I love it. It allows me to automatically download my data and it integrates easily with payroll. It also does most of the heavy lifting for tax prepraration but we’ll get to that shortly.
No matter what, if you have a small business, you should run this software yourself. If you don’t want to do it because you don’t know how, don’t worry. You can hire someone to set it up and show you how to run the software. The reason you need to run this is because you need to know where your income is coming from and where your expenses are. There is something magical about doing the weekly Quickbook updates that allows me to understand what is going on in my business that no other single activlity provides. I used to have a staff member do this and I would review the reports but it wasn’t nearly as effective as me seeing every transaction and following the costs. As a result of doing this myself I shaved about 15% fat off my operations and was able to make better investments in my business.
Tax Accounting is another story. I suggest you have a qualified CPA do this for you. You can use the Quickbooks data to make her job very easy. But because the rules are so complex, I am a huge fan of outsourcing the tax accounting for my small business.
Of course, when I receive the reports back, I match them with my cost reports. They should generally be in the same ballpark. But I don’t go through the headache of preparing tax reports even thoug my degree is in accounting.
If you run a small business, what accounting solutions do you use? Do you have a bookkeeper? Is that a good solution for you?
Neal, thank you for sharing this article. Tried doing my own return one year (pre-business). Bad experience… lots of mistakes. We have a wonderful tax preparer now that we have a small business. I totally agree with having a licensed tax preparer do the IRS part.
Have been using spreadsheets, but I’m now deeply into the process of evaluating accounting software. I’m wondering if anyone has any comments/insights about AccountEdge (formerly MYOB–Mind Your Own Business) for Mac users. Sure would appreciate any advice, pros/cons.
I work for a public accounting firm, but I do some independent consulting for small business – I usually do exactly what you said and recommend quick-books for cost accounting and a CPA for tax related issues.
There have even been times when its a small company without a lot of capital we have set up a series of Google docs to manage inventory and cost so everyone in the company can have easy and cheap access to the information in real time “in the cloud.” All for free.