For virtually every new business owner, managing business finances properly is a top concern. Poor accounting and bookkeeping can lead to problems ranging from financial loss to legal violations.
Although professional guidance is essential for important decisions and unexpected snags, the owners of most Illinois small businesses can benefit from understanding the basic guidelines for setting up the financial portion of a business.
Starting steps
Opening a business bank account is a smart first step for new business owners. Establishing a separate bank account is mandatory for corporations and limited liability companies, since these organizations are distinct legal entities. The owners of sole proprietorships and partnerships can also benefit from opening business bank accounts. Doing so ensures that personal and business expenses stay separate, which makes accounting and recordkeeping simpler.
New business owners should also decide how they want to handle accounting. Accounting can be done by hand or with computer software, and the IRS does not stipulate which method small business owners must use. Many business owners prefer using computer programs, which catch errors and make analyzing profits and expenses easy. However, for businesses with limited transactions, doing accounting by hand may be more affordable.
Business owners must also decide which accounting method they will use. Under the cash basis method, expenses and income are only counted when payments are made or received. Under the accrual basis, expenses and income are counted when an order is placed, even if payment is pending. Outstanding transactions are then tracked through accounts receivable and accounts payable records. Using the accrual basis takes more effort, but it can also provide more accurate information on the financial state of a business.
Organizational tips
Once a business bank account and method of accounting are set up, business owners must be careful to keep up with accounting and save physical records of all transactions. These records are needed to support the information provided on tax returns, such as losses or deductible expenses. Business owners who keep their records organized will also be able to prepare financial statements more easily. Depending on the volume of transactions, business owners may want to set up an invoicing system and keep copies of all invoices as proof of incoming payments.
Many small business owners can initially handle all of these responsibilities without professional help. However, owners who run into legal questions or accounting issues at any point should strongly consider speaking with a business attorney to make sure they are staying legally compliant and following best practices.
