Accounting for
Small Business Start Ups

Accounting for small business and home business owners, need not be complicated. The most important thing is to start your business record keeping straight away! Although you won't be earning money at the beginning it is important to get a system in place early to record your expenditure.

First things first, it would be sensible to open a dedicated business bank account. Then all business transactions should be routed through that account. This helps to keep home and business separated, and your accounting easier to manage.

Business Record Keeping

I am not an accountant so this page will only give you the basics regarding what records to keep. If you are just wanting to make a little extra income in your retirement you can keep things simple. A record of what you spend, and what you earn, will likely suffice to begin with.

This record can be kept in a notebook, or old fashioned ledger, or you may like to invest in some home business accounting software, for either your PC, or Mac. The simpler you keep it, the more likely you are to keep it up to date.

You may find that a spreadsheet, such as Excel will suffice. As long as you can keep a list of what you spend and what you earn you will be able to keep on top of things.

When I started my own small business, I was given some great advice. "You need to know who you owe, who owes you, and how much there is in the bank!"

Let's start with the first of those requisites...

Accounting for Small Business - Purchases

There are basically two types of purchases...direct costs and indirect costs.

Direct Costs

This group consists of purchases that are essential in order to make your product, or provide your service. Let's look at a few examples...

• Fabric and thread if you make curtains
• Lawn fertilizer if you offer a lawn care service
• Wood for a woodworking business
• Shampoo if you are a mobile hairdresser
• Postage stamps to send out orders

The more rabbit hutches you make, for example, the more wood you would need to buy.

Indirect costs

In comparison, indirect costs refer to things that you have to buy which have no bearing on how many products you make (or sell).

In order to keep the business running you may need to spend money on things like rent, electricity, Internet connection and Web site hosting fees. These expenses will not be less in a month where you do not sell anything!

In order to keep your business running, you need to ensure that you can afford these indirect costs during low earning months.

Purchasing on credit

Some things you will pay cash for, on the spot. They just need to be recorded, as and when you spend the money.

Others you will order, have delivered, and pay for later. The length of time you will given to pay for these items may vary, but normally it will be 30 days.

It is important to pay these bills on time, otherwise you could jeopardise future deliveries. So you need to keep a record of when those payments are due to be made. This takes care of the "Who you owe" part of your accounting. For small business owners this knowledge is essential.

Accounting for Small Business - Sales and invoicing

Most small business owners prefer this side of the accounting system. Keeping a record of what you have earned seems much easier than recording what you have spent!

Again, you may be paid in cash as soon as you sell your product or service. Add the amount, and details of what you sold, to your accounting software or ledger as soon as you can.

If you offer credit to your customers then you will need to bill or invoice them and wait for them to pay you. Ensure that your payment terms are clearly stated on your invoice and that you chase any late payers!

As well as being essential for the tax man, accounting for small business owners will provide valuable information. You will be able to look back on the previous season or year, and see which products were popular, whether they were profitable and which to drop.

Business bank accounts

Unless you have a lump sum to deposit in your business bank account when you start up, you may find that you need either an overdraft facility, or to investigate a small business bank loan. This is mainly for people that offer goods or services on credit. You need some cash flow while you are waiting to be paid.

Knowing what the bank balance is, at any time, is essential. You may like to take advantage of Internet banking so that you can check at any time, rather than waiting for a bank statement to arrive in the post.