A sound accounting system is the foundation of every small business’s success. It shows where your moneyis coming and going. Yet, many businessowners push this aside because it seems challenging and takes time.

The good news is that you can make accounting easy when you create a solid system. With a strong accounting system, you can make better decisions. Build your accounting system with these steps:

1. Hire a Professional

Hiring a professional is a foundational step in establishing a solid accounting system for your business. Doing so will ensure the company’s financial records are accurate, up-to-date and compliant with all standards and regulations.

Mistakes in accounting can lead to significant financial losses, penalties and legal complications. Having a skilled professional by your side can help prevent these issues.

Professional accountants are adept at setting up systems that track your business’s income, expenses and other accounts. You will also have a clearer understanding of your financial health as they can easily explain where your company is heading.

When hiring, choosing a certified public accountant(CPA) familiar with your industry is essential. They should have a proven track record and know the latest best practices and accounting software.

2. Get to Know Your Financial Statements

Understanding your financial statements is essential for any business owner. Otherwise, they may deplete their business of enough cash to keep reinvesting — and running out of moneyis why 38% of new businessesfail.

By understanding your finances, you gain insights into the business's health so you can make informed decisions. When looking at your financial statements, there are three key types to review:

• Income statement: This statement shows your business’s profitability over a specified period. It lists revenues and subtracts expenses to show the net profit or loss. Regularly reviewing it helps to identify trends, control costs and ensure the business remains profitable.
• Balance sheet: This snapshot shows what the business owns (assets) and owes (liabilities) at a specific point in time. It reflects the company’s financial position to assess its overall value and financial strength.
• Cash flow statement: This statement reveals how cash moves in and out of your business. It helps you ensure enough liquidity to cover short-term expenses and invest in growth.

Once these statements have served their purpose — and are no longer needed — ensure you dispose of them properly by shredding them. These documents contain highly sensitive information, and getting rid of them safely protects your business from misuse or unauthorized access.

3. Choose the Right Accounting Software

Investing in accounting software helps create a solid foundation for your accounting system, as it streamlines financial processes and enhances accuracy. Accounting software makes the process easier by automating data entry and calculations.

Software reduces manual work by taking care of repetitiveness in the process. It also saves time by minimizing human errors. Automation can help ensure your financial records are correct, giving you a perfect overview of your business's finances.

To choose the right accounting software, understand your needs first. What do you need specifically that allows you to keep your accounting system in place? Once you know your needs, list the features and the budget for the type of software you desire.

Then, research the best types of accounting software. Narrow down your choices to see which best suits your small business, and take advantage of free trials to learn which you like the most.

4. Use the Right Accounting Method

The next step you must take is to choose an accounting method. Following a specific method is essential for accurate financial reporting and tax purposes. There are two primary accounting methods:

• Cash-based accounting: Businesses use this to record transactions when they receive cash. It is a much simpler and straightforward method, but it may not always represent the company’s financial health accurately.
• Accrual-based accounting: This method records revenue and expenses earned or incurred. Because it includes amounts you’re expecting but haven’t yet received, it gives a more accurate view of the company’s financial performance but is a more complex accounting method.

Since you have a small business, the best accounting method may be cash-based if you have a smaller volume of transactions. Service-based companies also prefer this method since they have no inventory. Whichever way you choose, ensure you stick with it. Doing so helps keep your financial reporting on track when tax season comes.

5. Implement a Bookkeeping System

Bookkeeping may be dull, but it is vital for accurately recording your transactions. Keeping your financial records free from error ensures you have captured them correctly for your reports and making decisions.

When choosing a bookkeeping system, you have three options. You can take the hands-on approach, in which you would manage your books using spreadsheets or accounting software.

Another option is to outsource. Bookkeeping can be time-consuming and complex if you need help keeping up with it. A professional bookkeeper ensures your financial records are maintained.

The third option is to hire an in-house bookkeeper. As your business grows, it may be large enough to warrant your company's own bookkeeping department. However, your chosen method will depend on your business’s size, accounting needs and structure.

6. Establish a Payroll System

Many companies need to hire staff at some point. If you have employees, you need a sound payroll system to pay your team on time accurately. However, maintaining a payroll system takes time and energy.

Automating or outsourcing this part of your business is often helpful. Consider using payroll software or hiring a service to simplify processes and maintain compliance. Think of it as an investment in your company. Outsourcing or using software ensures your business’s operation stays smooth and legal.

7. Plan for Taxes

Preparing for tax season is another crucial step in establishing a solid accounting system. When it comes time to file your taxes, you will have a much easier payment process.

One significant aspect of planning your taxes is estimating your annual tax obligation and making quarterly payments based on projected income. Taking this approach prevents penalties associated with underpayment.

Another crucial element is understanding tax deductions. Expenses such as home office costs, business travel and interest on business loans reduce your taxable incomeand lessen your tax burden.

As tax laws evolve, staying informed is essential. It is often beneficial to consult tax professionals, who can help you take advantage of available opportunities and maintain compliance.

Set up a Robust Accounting System

In business, knowledge is truly powerful. Establishing a reliable accounting system gives small business owners clarity and control over their finances. While it may initially seem challenging, the benefits far outweigh the efforts. With the right approach and tools, you can turn accounting from a daunting task into a valuable asset for your business’s future.