When you started your business, you probably weren’t dreaming about managing cash flow statements or categorizing expenses. Yet understanding your company’s finances can mean the difference between thriving and just surviving.
This guide walks you through each step of setting up and managing your business finances, from choosing the right accounting method to finding a qualified accountant.
What is small business accounting?
Small business accounting involves tracking, organizing, and analyzing your company’s financial transactions to understand your financial position and meet your tax obligations.
This includes recording financial transactions, managing your invoices and bills, reconciling bank statements, and preparing financial statements—including an income statement and balance sheet—that show how your business is performing.
In other words, it’s more than just bookkeeping. Small business accounting provides insights that help you make strategic decisions about your company’s future.
By maintaining accurate financial records, you can spot trends in your cash flow, identify areas for cost reduction, and make informed choices about investments and growth opportunities.
Basic financial management tasks
Running a successful business requires staying on top of several key financial tasks. Some of these you’ll handle daily, while others need attention weekly or monthly.
Recording daily transactions
Every purchase, sale, and expense needs to be documented accurately. Record income as it arrives and expenses as they occur. Keep digital copies of receipts and invoices to support each transaction.
Your accounting software can automate much of this process by connecting to your business bank account and credit cards. This automation helps ensure nothing falls through the cracks.
Managing invoices and bills
Create and send your invoices promptly to keep cash flowing into your business. Then, manage your accounts receivable by tracking whether your invoices have or haven’t been paid, and follow up on overdue payments consistently.
For bills, set up a system to pay vendors on time while maintaining control over your cash flow. AP automation can help streamline this process, ensuring you never miss a payment while maintaining approval oversight.
Monthly reconciliation requirements
At least monthly, compare your business records to your bank statements to catch any discrepancies. Look for missing transactions, incorrect amounts, or unexpected fees.
Regular reconciliation helps identify potential issues early, whether they’re simple entry errors or signs of fraud. It also ensures your financial records are accurate for tax purposes.
Year-end tax considerations
Throughout the year, maintain organized records of tax-deductible expenses and required tax documents. Track employee payments, contractor payments, and any documents needed for filing taxes.
Consider setting aside money each month for estimated tax payments. This will help you avoid surprises and ensure you can meet your tax obligations when they come due.
How to set up a small business accounting system
Setting up a robust accounting system early in your business journey creates a strong foundation for financial success. The right system helps you track cash flow, manage tax obligations, and make data-driven decisions about your company’s future.
Following these steps will help you establish an organized, efficient accounting process that can scale with your business.
Step 1: Register your business and get your EIN
Before you can set up any accounting systems, you’ll need to establish your business legally. Register your business structure (such as an LLC or corporation) with your state.
Next, obtain your Employer Identification Number (EIN) from the IRS. This foundation ensures your business is properly separated from your personal finances for accounting purposes.
Step 2: Open a dedicated business bank account
With your legal structure and EIN in place, open a business checking account and obtain a business credit card. This critical separation between personal and business finances prevents the commingling of funds and simplifies tax preparation.
Choose a bank that offers features like online banking, mobile check deposit, and integration with accounting software. A dedicated business account also helps establish your business credit history.
Step 3: Set up your accounting software
With your foundation in place, choose small business accounting software that matches your needs and budget. Look for features like bank feed integration, invoice creation, expense tracking, and financial report generation.
Consider scalability and whether the software can grow with your business. Set aside time to properly learn the software or get training to ensure you’re using it effectively.
Step 4: Determine your accounting method
Next, you’ll need to choose between cash-basis or accrual accounting. Cash-basis accounting records transactions when money changes hands—simple but limited, it’s a common choice for start-ups.
Accrual accounting records income when it’s earned and expenses when they’re incurred, regardless of payment timing. This method is more complex but provides a clearer picture of your financial position.
Your choice will affect your bookkeeping, so consult with a financial professional if you’re unsure.
Step 5: Create your chart of accounts
Develop a clear organizational system for categorizing every financial transaction in your business. Your chart of accounts should include categories for assets (what you own), liabilities (what you owe), equity (your investment in the business), income (money earned), and expenses (money spent).
These essentials will come with your accounting software, but you may want to make minor changes depending on what you want to track and how detailed you want to be.
This framework becomes the backbone of your financial reporting.
Step 6: Automate your bill pay
Once your accounting software is in place, automate your bill pay (also known as accounts payable, or AP) processes to eliminate double data entry, reduce errors, and provide better visibility into cash flow.
Choose AP software that syncs with your accounting software, and look for ai-enabled features like automated approval workflows, mobile receipt capture, and digital document storage to reduce paper and save time.
This integration creates a foundation for scaling your business without adding administrative overhead.
Step 7: Establish a document management system
Your AP automation software should serve as your primary document management system for all vendor-related materials, from contracts and W-9s to receipts and invoices. Take advantage of this digital storage for vendor documents.
Create a separate organized system for storing and filing other essential financial paperwork like bank statements, tax returns, and business registration documents.
While most of your financial documentation will live in your AP and accounting software, maintaining organized files for these additional business records ensures you can access everything you need when you need it.
Step 8: Create your accounting routines
Develop specific procedures for daily, weekly, and monthly accounting tasks. This includes processes for reviewing automated payments, handling any exceptions in your AP workflow, reconciling accounts, and running financial reports.
Document these procedures in writing and set up a calendar of accounting tasks. Even with automation handling many routine tasks, regular review and oversight ensures your financial records stay accurate and up to date.
Do you need an accountant for a small business?
Modern financial automation makes it possible to handle many accounting tasks in-house, even as your business grows. With the right tools, you can manage daily bookkeeping, expense tracking, and bill payments efficiently without extensive accounting knowledge.
However, accountants bring strategic value that goes beyond transaction management. They offer expertise in tax planning, financial analysis, and business strategy that can help guide your company’s growth.
Tasks you can handle with automation
With AP automation software, you can confidently manage daily financial tasks yourself. This includes processing invoices, paying bills, tracking expenses, and reconciling accounts. Modern tools provide automated categorization, approval workflows, and audit trails that make these tasks straightforward and accurate.
Digital tools also make it easy to maintain organized records and documentation, giving you or your accountant easy access to any information needed for tax preparation or financial planning.
When to work with an accountant
While automation handles the day-to-day, there are two main reasons to consider working with an accounting professional.
First, accountants provide valuable strategic guidance for:
- Tax strategy and planning
- Major financial decisions like expansion or equipment purchases
- Complex compliance requirements
- Business structure decisions
- Long-term financial planning
Second, you might choose to delegate bookkeeping tasks simply to focus on running your business. With AP automation software like BILL, you can maintain control over spending decisions through custom approval rules while letting a bookkeeper handle the day-to-day details.
You can quickly review and approve transactions from your phone, keeping an eye on your finances without getting bogged down in data entry and paperwork.
How much should I pay an accountant for my small business?
Accountant fees vary based on the location, experience level, and services provided. Some accounting services charge hourly rates of $150 to $400 per hour.
Others offer monthly packages that include regular bookkeeping, tax planning, and advisory services. When evaluating costs, consider the value of expert financial guidance and the time you’ll save so you can focus on growing your business instead of managing your books.
Find accounting or bookkeeping experts through BILL
Connect with qualified accounting professionals through BILL’s network of experts. Our platform helps you:
- Find accountants and bookkeepers who understand your industry
- Access professionals with experience in your accounting software
- Compare services and expertise to find the right fit
- Get started quickly with verified professionals
Small business accounting FAQs
As you set up or improve your small business accounting systems, you’re likely to have questions about best practices and common challenges. Here are answers to some of the most frequently asked questions about small business accounting.
What is the best accounting method for a small business?
The best accounting method depends on your business size, industry, and needs. Cash-basis accounting works well for many small businesses because of its simplicity and straightforward cash flow tracking.
However, accrual accounting provides a more accurate picture of your business’s financial position. This method is required for companies with annual revenue exceeding $25 million.
Consider your growth plans and industry requirements when choosing your accounting method.
What are some common mistakes to avoid in small business accounting?
One of the most common mistakes is failing to keep your personal and business finances separate. This can create confusion during tax time and make it difficult to assess your business’s true financial health.
Other frequent errors include failing to track business expenses, falling behind on bill payments, waiting too long to reconcile accounts, and failing to maintain proper documentation for tax deductions.
Working with accounting software and professional advisors can help prevent these costly mistakes and ensure your books remain accurate and compliant.
