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Now that we're well into spring and nearing summer, I thought a best accounting practices for Startup Businesses post might be appropriate...

How to establish an accounting method that will grow with your business:

Determine the accounting practices and procedures that you will use at the very start. Establish a bookkeeping method that is forward-thinking, so that you're business growth doesn't have to wait while you refigure your bookkeeping methods

Selecting an Accounting Software Package

Sooner or later if your startup business expands, you will need a small business accounting software package. If you maintain your financial records with Excel Spreadsheets, you might find eventually the bookkeeping method can no longer support the growth of your business.

Anticipate your bookkeeping needs. There are software packages that work great with project accounting, and there is software that best accommodates real property/real estate (like fixed income accounting). Specialized accounting software is as a rule more costly than the generic software packages which are very appropriate for sales of goods, but if you have an idea of where your business is headed, you could choose the most appropriate accounting software at the very beginning can save time and money down the line.

How to Select the Accounting Method that Works Best for You

Large corporations will have to follow GAAP, or the Generally Accepted Accounting Principles. Small Businesses, though, are allowed more autonomy in how they record their records. If you are a small business owner, you might prefer the cash method of bookkeeping,

As your business grows, then, you might elect to adopt a more sophisticated financial recordkeeping method. Now, you might wish to adopt the accrual method of accounting. With this model, you record income when you have the invoice, rather than waiting to get paid for that service. You recognize a business expense when you receive a bill from a supplier, rather than waiting until you pay the supplies. This method of accounting is preferable because it allows you to more closely match the income your business generates to the expenses you incurred to earn it. For example, you may have received an advanced cash payment before you provided services to a customer. You may want to wait and record that amount as revenue during the year you actually provided the services, rather than the year in which you received the cash.

As far as taxes are concerned, if you produce, purchase, or sell merchandise, rules apply as to when you will have to use the accrual method of accounting.

How to Establish a Budget

Effective start-up owners, while staying focused on servicing customers, keep good financial records as well. However, your financial situation can quickly change despite your diligence if you are not carefully monitoring your cash.

A lot of small business bookkeeping software packages will allow you to design a budget, based either on the past year’s records or completely from scratch. Establishing a budget is necessary simply because it will set the bar for your standards of performance for your business. Then after some time, you can then compare your businesses' actual performance to the budgeted amounts and then explain the differences. And this will inform you if you are on track to meet your goals. This helps keep businesses profitable.

Rating Your Performance

Finally, most accounting software packages also make it possible for you to make comparisons between your business’s current-year financial statements to those of previous years. This process will permit you to see trends in your business. It also provides insight on how you can add to the success.

It is worthwhile to get to the bottom of trends in order to form a useful picture of your business’s performance and to make smart financial decisions. For example, if your revenue increased by 30-percent for 2011 over that from 2010, but your expenses only increased by 10 percent, this suggests that your business model could be hyper-efficient. Did you truly manage to increase your return on investment? Or, if your revenue increased by 10-percent in 2011 over that from 2010, but, to do so, your expenses increased by 30-percent, this suggests some inefficiency in your business model. Are you investing in assets with the greatest return on investment? Or, did you forget to provide invoices for any number of the services provided during the year?

Additional resources are available at self employment tax guide.

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