What Is Business Accounting for Small Businesses—Managing Finances

Business accounting is integral to the operation of small and medium-sized businesses. This type of accounting manages a company’s daily financial activity while setting long-term financial goals. From forecasting to invoicing, business accounting works with bigger decision-making and granular levels of operations through financial tracking, analysis, recordkeeping, budgeting, and more. 

To better manage finances, business owners can use business accounting principles to keep track of inventory, profit and loss, and cash flow so they catch problems early and maintain profitability or improve when needed. Some business owners manage their finances, hire a bookkeeper, outsource accounting duties, or use a mix of these options. In this article, learn more about business accounting, how to manage business accounting, and whether you need an accountant. 

What is business accounting?

Business accounting refers to bookkeeping and managerial accounting done by accounting professionals, typically for smaller businesses rather than large corporations. Small businesses may conduct their business accounting in-house or with an accounting firm, depending on their size and needs. Through business accounting, a company can track, organize, and analyze finances to make financial decisions easier. The core of business accounting is management, so most of the core elements involve steps to monitor things like cash flow, expenses, and inventory. 

Financial advisors can use the financial data from business accounting to help small business owners make important financial decisions about the future and day-to-day operations. 

Business accounting vs. accounting

Business accounting differs from other types of accounting in a few ways. One significant way this type of accounting differs from other accounting methods, like financial accounting, is that there are no compliance regulations. Business accounting also does not focus on long-term financial decisions but on internal tasks within the company. 

Steps to managing your business accounting

Small businesses must adhere to effective and accurate business accounting practices. Some common steps to manage your business’s accounting include a few processes involving a company’s overall record-keeping methods, taxes, forecasting, budgeting, and more. 

1. Record your transactions.

Government regulations and requirements govern how a company must record transactions. Some requirements include supporting documentation such as receipts, invoices, or other proof of purchase. A good record-keeping system for business transactions should include items such as: 

• Check disbursement journal 

• Business chequebook 

• Employee compensation records 

• Summary of cash receipts (daily and monthly) 

• Depreciation worksheet 

It’s essential to have a methodology for recording business transactions that works well for the company’s needs and structure. Expense tracking software is an efficient, paperless method to ensure the accuracy of transaction recording. Popular software options include QuickBooks Canada, Expensify, and Emburse Certify. If you use an electronic tracking system, it must be accessible or able to be shared with the Canada Revenue Agency (CRA) electronically. 

2. Document your receipts and invoices.

Proper documentation of financial transactions like purchases is important for preparing financial statements like balance sheets, preparing tax returns, and monitoring a company's financial health. When documenting receipts and invoices, have an organization system that tracks taxable and non-taxable transactions, the source of the purchase, and whether you can take that purchase as a company deduction. If you’re already using expense tracking software, you can document receipts and invoices within the same platform for easier accessibility and organization. 

3. Manage cash flow.

Cash flow refers to the total amount of cash that comes in (revenue) and out (expenses) of a company. The company can use this financial data for budgeting, forecasting, and making financial decisions. You'll record cash flow using a cash flow statement. Cash flow statements include internal and external cash inflows and outflows over a certain period, including investments, financing, and operational costs. 

Maintaining a positive cash flow and having a system to manage it are vital. This means a company should always organize and track when and where cash goes. A company can get into negative cash flow by carrying too much debt or having too much income in overdue accounts receivables. Some systems to manage cash flow include the following: 

• Have a strategic plan for paying all bills. Stagger bill payments and have a system or methodology behind when and how you pay certain bills. 

• Establish systems to encourage customers to pay on time and make overdue accounts receivable (AR) a priority. 

• Allow electronic payment systems. Online payment is more convenient and faster in many cases. 

• Structure payroll in billing cycles that flow well with the company's income stream. This means timing the frequency and amount of payouts in congruence with other business expenses and payouts. 

4. Oversee payroll.

Payroll means all payouts to a business's employees, including benefits, salaries, taxes, garnishments, and other deductions. Companies will use payroll processing software to streamline or outsource the task entirely. In many small businesses, a payroll manager is in charge of overseeing the payroll. Some tasks involved in payroll management are ensuring compliance with provincial and federal regulations, preparing financial reports for audits, and having an accurate and timely payroll salary and benefits payout. 

5. Make projections.

Financial projections should closely align with a company's goals and objectives. Small businesses should position themselves in a way that helps them achieve long-term financial goals. To do this, companies make projections or hypothetical scenarios that may involve predicting future financing needs, allocating funds and organizing spending around cash flow, or creating budgets. Small businesses make projections to prepare for the future, and business accounting provides companies with the financial insight and records to make strategic and smart projections and budgets. 

6. Understand taxes.

The taxes a company pays depend on its type of business, and the Canadian Revenue Agency sets out guidelines for different business taxes. Factors could include whether the business operates as a corporation or a small business, for example. 

In addition to income tax, a business accountant may need to track employee payroll taxes, including Canada Pension Plan contributions, employment insurance, and any employment taxes set up by a particular province.

7. Manage profits and losses.

Managing profit and loss in business accounting involves calculating revenue and finding ways to cut costs. Profits are earnings or cash in, and loss refers to anything the company has to pay for or money out—record profits and losses on a profit-and-loss statement or income statement. 

Many small businesses use software like QuickBooks to log and track income and expenses. The purpose of managing revenue, costs, and expenses is so that it’s easy to see how much the business earns and how to adjust if needed. For example, if losses outweigh revenue, a company may look at the cost of goods or pricing on the products or services offered to see about cutting costs or raising prices. Some businesses keep profit-and-loss statements monthly, quarterly, or yearly. 

8. Review inventory.

Companies hold a certain amount of inventory, or finished products/goods, that have not yet been sold. Inventory is considered an asset to a company. A company mustn’t hold too much or too little of an unsold product or service. To ensure that doesn’t happen, a component of business accounting is managing and reviewing inventory. 

Many small businesses use a cloud-based inventory management system that provides real-time data when needed. Beyond the tools a company may use, it’s also critical to have a consistent system to track all inventory. Common methods include batch tracking, demand forecasting, and bulk shipments.

9. Submit tax returns and financial reports.

A company needs an accountant to ensure compliance with tax laws by the Government of Canada through the Canada Revenue Agency. 

Most corporations have to file a corporate income tax return, or T2, every tax year regardless of whether a tax has to be paid or not. This includes non-profit organizations, tax-exempt corporations, and inactive corporations. There are additional issues to consider if you’re an accountant for a business with more than $1 million in annual gross revenue, including filing a T2 corporate income tax return electronically.

Do I need an accountant?

Small businesses may benefit from an accountant as the company grows, and the need for more financial tracking, recording, forecasting, and budgeting accrues. Bookkeeping involves the day-to-day administrative tasks of recording sales and financial transactions. It aims to collect and track financial data involving the company's daily operations. Compared to accounting, bookkeeping does not include any analysis, budgeting, or forecasting. 

Accountants are certified to file taxes, while bookkeepers are not. Taxes and government compliance with certain rules and regulations may be best managed by a chartered professional accountant (CPA). CPA certification is important when hiring an accountant who offers business accounting services. 

Some companies may use an accountant or the services of an accounting firm only to do taxes. Others only analyze data gathered during bookkeeping a few times yearly to assist in financial budgeting and projections. 

Accounting software 

Accounting software can help a business manage finances more efficiently, prepare for tax filing, and provide a clearer sense of the company’s financial health and needs. 

You can choose from many accounting software systems with varying features and prices. The type of business or industry and its number of employees are two major factors to consider when choosing the best accounting software system for the needs of a small business. This list includes some of the top accounting software systems for 2023: 

• QuickBooks Online: This accounting tool is popular with small business owners and freelancers. Its features include invoicing, payment tracking, payroll, receipt capture, report generation, project management tools, and assistance in finding tax deductions. The features will vary by plan. 

• FreshBooks: FreshBooks is known for its mobile app and online-friendly system, which allows a company to link online payments to the app. The system can be fully customizable and customer-centric. Other features include time tracking, project management tools, report generation, payment tracking, and turning an estimate into an invoice. 

• Xero: With three plans, this cloud-based accounting software offers features for small and medium-sized companies that include expense manager tools, bank connection, and online payment options. Xero also allows companies to track projects, manage payroll, and track inventory. 

• Zoho Books: Zoho Books has a free version and five other paid ones. This software platform can help you file and prepare your taxes as a small business and calculate how much you may owe. Like similar systems, Zoho Books can help companies track spending, manage inventory, pay employees, accept online payments, organize receipts and other supporting documents, and track projects. 

• Wave: Designed for smaller businesses, Wave can generate invoices, track payments automatically, run payroll, and calculate payroll tax (depending on your province). This software system does not offer as many features as similar accounting software, but you can use Wave’s accounting services for free. Wave has an "a la carte" setup where you can choose what features you need, and some of these features or services are free, and others are not. Payroll, for example, requires a monthly fee. 

Get started.

Get your small business on track and move forward toward the goals and financial objectives you have for your company with business accounting principles. Once you understand some of the steps to take for effective, accurate business accounting, take the initiative and learn key skills in business accounting. 

One way to learn business accounting skills is through online business accounting classes. Create a Financial Statement in Microsoft Excel on Coursera is an excellent course for beginners who want to learn more about financial statements vital to a small business, like profit-and-loss statements and balance sheets. This course teaches the core basics of business accounting.