Starting a new business is a thrilling journey - but with all the excitement comes even more stress and uncertainty. Even if you’re a serial entrepreneur who has started companies in the past, every new opportunity presents unique challenges.
One thing that any new endeavor requires, though, is proper accounting system setup. Learning how to set up a small business accounting system is not quite as fun and glamorous as scoring clients and growing your business, but it’s essential nonetheless.
As much as you might be dreading it, we’re here to help simplify things for you with this guide on how to create an accounting system for a small business. The actual process is fairly straightforward:
From there, it’s just a matter of managing AR reconciliation, laying out your company’s expense policy, and determining when it makes sense (if ever) to hire help to oversee the accounting department.
Learn more below, including how InvoiceSherpa can save you time and stress while helping you get paid faster. Our accounts receivable automation software integrates with a variety of accounting systems and can speed up your cash flow cycle dramatically. See it yourself today!
We know you’re eager to get to the fun part of business, but setting the foundation for your company is not something you can afford to take lightly. The accounting system you use is a huge part of this.
This is where you’ll track all your financial transactions so you can see where your money is going and what’s coming in. Without a solid system in place you could fall behind on payments, lose track of expenses, and ultimately, make poor financial decisions that can harm your business in the long run.
You’ll use your accounting system to generate essential reports like profit and loss statements, balance sheets, and cash flow statements. In other words, your accounting system gives you insight into the financial health of your company.
This empowers you to make sound strategic decisions and chase opportunities, in turn growing your business. But growth aside, proper accounting system setup can be the difference between staying afloat and going under.
Trust us, a few years down the road you’ll be glad you began this journey by learning how to set up a small business accounting system. You won’t have to deal with untangling a mess down the line. So, let’s get into how to create an accounting system for a small business below!
As daunting as it might sound, there’s not too much work that goes into setting up a small business accounting system. Once it’s over with managing accounting for your company will be so much easier. Here’s how to set up a small business accounting system.
First, you need to figure out which accounting method aligns with your business: cash basis or accrual basis. Each has its pros and cons:
We recommend the accrual accounting method for businesses that need detailed financial statements or anticipate rapid growth. It’s also required for companies bringing in anything north of $25 million annually by the IRS.
Regardless of the accounting method you choose you’ll need to open a business bank account. Solopreneurs make the mistake of just using their own personal bank account early on, but the sooner you get this out of the way, the better.
Not only will it simplify income and expense tracking, but it’s actually necessary for legal and tax purposes down the road. Trust us, you don’t want to deal with the hassle of untangling personal and business finances - especially if you end up getting audited. It can get pretty chaotic.
If you love the bank you use for your personal accounts, see what options they have available for businesses and consider opening a new account.
Take your time to compare fees across banks and think about which will make your life easier when it comes to mobile deposits, online banking, ease of integration with accounting software, and more.
You should also look into business credit cards offered by the bank and see which has the most incentives. This will come in handy as you start paying for inventory and travel costs so you can rack up points.
Similarly, you need to pick an accounting software that meets your company’s needs. This is where things start to get a bit more complex in setting up a small business accounting system.
Cloud-based accounting software is typically going to be your best bet. QuickBooks, Xero, or FreshBooks all allow for easy access anywhere with an internet connection. You can even harness the benefits of AR automation through many of these options.
Desktop versions may offer more control for larger businesses but lack flexibility. Since you came here looking to learn how to set up a small business accounting system, we’ll assume you’re not at the point where this makes sense yet.
That being said, here are a few things to consider when choosing an accounting software:
When in doubt, take advantage of free trials and see which ends up offering the best bang for your buck. You can’t go wrong with Quickbooks, but Xero and Clio are great options as well.
Whether you're accepting payments online or in person, linking your accounting system with payment gateways like Stripe, PayPal, or Square makes it easier to track payments and reconcile accounts.
Manual invoice and payment reconciliation is time-consuming and prone to errors. We highly suggest learning how to automate accounts receivable for this reason - and the truth is, this is just one of many accounts receivable automation use cases you should look into.
The goal is to provide as frictionless an experience for your customers as possible, as this will help you get invoices paid faster. So, accept credit cards, ACH transfers, or direct bank transfers to make it effortless for your clients to pay you.
You might even consider learning how to set up recurring payments if you provide ongoing services or sell a subscription-based product. This goes back to eliminating friction that slows down your cash flow cycle.
We’ll talk more about how you can leverage a billing automation system to streamline a lot of these things in just a few moments. First, let’s get into the payroll side of things.
This may not be necessary for every small business, particularly those being run by a solopreneuer. However, any company that has employees needs a solid payroll system in place.
Not only does it ensure timely payments to your staff, but it also keeps you compliant with tax regulations. This should be an extension of your accounting system setup process.
If your accounting software comes with built-in payroll functionality, great - you can work through that setup process to streamline things. Otherwise, you'll need to integrate a third-party service like Gusto or ADP.
You want to automate as much of the payroll process as possible, including direct deposits, payroll tax filings, and generating year-end tax forms. However, you should still set reminders for important payroll dates like tax filings to avoid missing deadlines that could cause penalties.
One of the biggest accounts receivable challenges (and how automation can help) is reconciling payments and expenses over into your accounting software.
It’s a process that’s time-consuming and prone to human error, which is why we suggest removing yourself from it altogether through automation.
So, what is AR automation software and how does it work? Platforms like InvoiceSherpa automatically reconcile inbound payments with the corresponding invoices, reducing errors and saving time.
This reduces the likelihood of errors - but should they pop up anyway, you’ll be alerted to discrepancies so you can pinpoint the problem and get it rectified.
Not only does this reduce errors, though. It will also save your team time to focus on more relevant tasks, be it customer service, business development, or service delivery.
An essential part of the accounting system setup process is determining which reports you want to generate and track on a regular basis. The most important reports are:
The best AR automation software should generate these reports on your behalf, ideally on a recurring basis (be it monthly, quarterly, annually, etc.).
Expense management can easily spiral out of control if you don’t establish clear policies and procedures from the get-go. So, make it crystal clear what qualifies as a business expense and what does not.
Employees should understand the process for reimbursement, which includes submitting receipts to the proper personnel. You might want to set up and approval process before employees actually make purchases to avoid misunderstandings.
Categorize your expenses within your accounting software to make your life easier come tax season. Make sure someone you trust is auditing expenses on a regular basis to avoid unauthorized spending.
That is most of what you need to know for how to set up a small business accounting system. But as you get started with accounting system setup, you might be wondering if this is really something you should be doing or if it makes more sense to hire help.
Unfortunately, most small businesses can’t justify hiring a bookkeeper or an accountant. This might be an option as your company grows, but in the interim, you might need to rely on automation instead.
This is a far more cost-effective approach that more or less does the same thing - and, you still maintain control of your financial management.
Just make sure you’re choosing the right platform and following the accounts receivable automation best practices. If you’re interested in exploring this route further, your search ends at InvoiceSherpa.
InvoiceSherpa is the best automated invoice processing software for any small or mid-sized business looking to get paid faster while reducing the time spent on invoice management.
It provides you with a variety of tools to accelerate your cash flow cycle, like custom invoices, automated reminders via email or SMS, a variety of payment options, and personalized portals for all your customers to manage their payments.
The solution can help reduce past due deliverables by 25%, days sales outstanding by 20%, and bad debt reserves by 15%. The best part? Our accounts receivable automation solution costs as little as $49 a month! That’s a fraction of what you’d pay AR management services.
You can easily get up and running today in just a few clicks. Set up your free trial and connect with your chosen accounting software. This will pull in all your invoices and customer data.
Then, you can automate many of the frustrating AR processes that are sucking up valuable time. When an invoice is paid it will automatically reconcile in your accounting software. You’ll also have access to an intuitive dashboard so you can see your company’s financial health at a glance.
As you get started setting up a small business accounting system, don’t overlook the power of automation. Why work harder when you could work smarter? Try InvoiceSherpa today and see how it can benefit you.
Setting up a small business accounting system can be a huge source of stress for new business owners, but the truth is, it’s not nearly as complicated as you might have initially assumed. We hope this guide on how to set up a small business accounting system has left you feeling confident in your next steps.
Find more accounting tips in our blog like how to calculate accounts receivable, accounts receivable forecasting, maximum late fees by state, invoice late fee wording, non-payment of invoice law, and more.
Or, set yourself up for success in any business endeavor by automating financial management with InvoiceSherpa. You’ll get paid faster and spend less time overseeing the accounting process.
Whether you’re starting from square one or simply want to streamline an existing process, your free trial is just a click away. Eliminate manual invoicing and take control of your business finances today!
Posted on October 3, 2024
