Finances and Taxes

How to Master Small Business Accounting in One Week

David Cheng Former Head of Content, Gusto 
How to Master Small Business Accounting in One Week

The National Small Business Association estimates that more than 50 percent of businesses in America spend at least four hours per month on payroll. Over the course of a year, that’s a full work week. 

With Gusto, you can run payroll in minutes, not hours. As an ongoing series, we want to help our entrepreneurs learn or do something new in the week they’ve saved.

What could you do if you had an extra week?


As a small business owner, accounting can be a drag.

You’re busy selling to customers and it’s tempting to worry about how to account for it later. Don’t fall into that trap. Without proper accounting practices, you may be exposing your company to working capital shortfalls or tax penalties.

In your extra week, learn to master the basics of small business accounting.

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The days of doing your accounting on Excel is over. There are numerous cloud-based accounting solutions that you should consider.

If you’re already on QuickBooks, consider moving onto QuickBooks Online. By moving to the cloud, you can connect your accounting provider to other cloud-based applications, from time-tracking, expense management, and of course, payroll. Consider the following cloud-based solutions:

Check out which accounting solutions Gusto integrates with here. Since many third-party accounting firms also use the latest software, it’s important to pick a software solution that scales as you grow.

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Cash Accounting:

There are two popular accounting methods. cash and accrual accounting. Which method you choose can have a meaningful impact on visibility into your business operations.

This type of accounting recognizes revenue when cash is received and expenses when cash is paid out. Under this method, there is no accounts receivable or payable.

Accrual Accounting:

This type of accounting recognizes revenue and expenses when they are earned, regardless of when cash is paid in or out.

accounting method guide

Which method should you adopt? While most small businesses start with cash accounting, as companies grow, they adopt accrual accounting because it better monitors a company’s long-term financial health. It also follows accounting’s matching principle.

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As your business grows, it’s important to make sure you’re on top of getting paid. The traditional way of invoicing is to send invoices to your customers by the end of your billing period, typically through snail mail. As you can imagine, a lot can go wrong in that scenario. Your invoice can get “lost in the mail” and it’s time-consuming  to follow-up if the customer is late to pay.

To stay on top of your invoices, start invoicing online with a cloud-based accounting provider and collect your payments online as well. An online service can help you:

  • Invoice as soon as the project is finished
  • Track the work throughout the engagement
  • Automate follow-ups, especially if payments are late
  • Create an online paper trail for clients and regulators
  • Accept payments online

In addition to the aforementioned cloud-based accounting providers, consider the following online invoicing vendors:

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Just as getting cash more quickly into your business is important, it’s also vital you track your expenses closely. One particular area where small businesses get tripped up is collecting, recording, and managing receipts.

Unfortunately, this is a common mistake made by novice and seasoned entrepreneurs alike. Receipts can become faded and unclear, or even worse, lost.

The impact on your business can be very meaningful, particularly around tax time. Without proper expense management, you may miss expenses on your tax return, which means fewer deductions. You may also mis-categorize an expense because the receipt is unclear, and end up triggering an audit.

Even if you’re confident you’re safe on taxes, poor expense management means you have poor insight into your company’s spending. Rather than wait until tax day to organize your expenses, you should consider tracking them as close to real-time as possible to better manage your company’s day-to-day operations.

Fall in love with modern payroll

Most cloud-based accounting providers have an import and export function for expenses that tie into your credit card and bank accounts. There are also providers like Bill.com or Expensify that help you manage expenses and track reimbursements.

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The #1 reason to invoice online and track expenses is to be more effective in managing your operations. Measure your financial performance with these simple ratios.

If you are delinquent in collecting on your receivables, you can get a lengthy Days Sales Outstanding (DSO).

DSO calc

This means you’re extending a lot of credit to your customers and not collecting cash quickly enough.

With a high DSO number, you expose your balance sheet to cash shortfalls because you’re taking longer to collect money from your customers. In addition, invoices can come at an unpredictable rate. If you’re not matching your revenue with your expenses as they come, you can hit working capital issues.

For your liabilities, consider tracking your current ratio, also sometimes known as cash asset ratio, cash ratio, and liquidity ratio. The current ratio helps you measure your company’s ability to pay your short-term obligations.

current ratio

You should also watch out for the quick ratio. Like the current ratio, the quick ratio measures your ability to pay back short-term debts, but with your most liquid assets.

quick ratio
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Now that you have a handle on your cash in and out flow, you can start reporting. Good reporting can also give you valuable visibility into your business finances. The metrics you want to track include:

  • Which invoices are outstanding, and how old?
  • How much have I spent, and on what?
  • What work will I be able to bill for soon and for how much?

Your cloud-based accounting provider can help auto-generate some important reports, so you can better understand your business. Here are some reports to watch out for:

  • Accounts Receivable Aging: This report helps categorize your accounts receivable based upon the length of time of the outstanding invoice.
  • Expense Report: It’s important to have an itemized and categorized report of your expenses for both budgeting and tax reporting purposes.
  • Profit and Loss (P&L): The P&L statement is a summary of your revenue, expenses, and profit over a period of time. It is sometimes called an income statement too.
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Now that you’ve mastered the basics of small business accounting for your day-to-day operations, you’ll want to watch out for the end of the year.

For great year-end tips, check out Zoho’s checklist. Taking care of these issues is important as you don’t want to underpay or overpay your taxes.

Because you were using a cloud-based accounting provider, many of the important end of year reports can be generated.  But if you aren’t, the end of the year is also the best time to switch.

We also recommend if you haven’t done so already to switch your payroll provider to Gusto at the end of the year. Like accounting, payroll is easier when using a modern software provider. Since Gusto also integrates with all the popular cloud-based accounting providers, it’s even easier to switch at the end of year.

Finished!

You saved a work week because you run Gusto and now you’ve learned the basic ins and outs of small business accounting!

As a next step, you may want to consider bringing in an external bookkeeper or accountant to help you manage your books as you grow. When you do, make sure they’re using the latest online accounting software so you can leverage the lessons you learned this week.

Updated: November 1, 2019

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