Starting a retail business? There are long lists of related formalities, documents, arranging, and planning to accomplish. One of the most important areas is the accounting practices you adopt and the ways in which they are utilized. As Warren Buffett, the chairman and CEO of Berkshire Hathaway, once famously said, “Accounting is the language of business.”
As business owners recognize, accounting is fundamental in the circle of profit and loss, revenue and return, tracking inventory and balancing the books. This can be challenging, but it doesn’t need to be confusing. Consider the following best practice accounting tips that will Support your accounting practices with accurate results.
Tip: Every Dollar Spent Impacts the Bottom Line.
Overspending is one of the most common practices of new business owners and it is generally driven by unexpected costs or a purchase that doesn’t benefit the company. For example, one may know the cost of retail inventory items; however, the freight forwarding costs for the shipment are an unhappy surprise.
A best practice tip to guard against overspending in any area is to ask yourself before making a purchase, “Does this (whatever) add or will add to profits of the company?” Depending on your answer, you’ll either choose to make the purchase or not. Documenting every item purchased creates an accounting record for tax filings and serves as a reminder of the best and worst of your purchases.
Tip: Choose the Right Accounting Practice
Depending on the legal structure of your company and the advice of your accountant, you may be able to choose from among two common forms of accounting practices:
Cash-based accounting: In this practice, revenue is documented when the cash is received. Expenses are recorded when the cash is paid. This method is easy and uncomplicated; however, it is typically used only for small businesses and professional services firms that do not hold inventory. There are some tax implications for cash-based accounting and the IRS will check to determine that the records are correct.
Accrual-based accounting: Income in the accrual accounting practice is reported when earned rather than when cash is received. Expenses are recorded when money is incurred, not actually paid. This method is aligned with larger or more complex business structures with inventory. Companies that have shareholders or investors typically use this accounting practice, as well.
Tip: Include Financial Projections in Your Business Plan
It is incredibly easy to get caught up in the present stage of your startup retail business. After all, everything is new! However, you’ll want to continually refer to your business plan while executing financial projections. If you don’t have a business plan, use this retail business plan template as a comprehensive guide. When setting your financial goals or creating financial projections, consider three distinct elements — the past, present, and future. Going full steam ahead without a financial forecast is a waste of time and money. Frequently refer to the financial history of your company, the present financial stage and the financial future of the company.
Tip: Automate Time-consuming Processes.
Accounting documentation can be one of the most time-consuming efforts of a retail business, choking out the potential for attention to be given to other crucial business concerns. Choose a software program that addresses the most time-consuming tasks on your plate. Your software should be able to perform these functions: sync data from bank charges, calculate car mileage, track receivables and payables and reconcile expenses.
Tip: Sort and Categorize Every Retail Expenditure.
Categorizing each expense into tax-deduction and tax-write off categories translates to saving money on yearly taxes and extracting the maximum amount of write-off benefits. This effort is especially helpful for startup retail business owners because every purchase and the record of expenditures will reveal the true value of purchases.
Tip: Avoid Credit Balances in Your Retail Business Startup
It’s incredibly easy to build up a credit balance; and, sometimes, incredibly difficult to pay it off. A retail business owner may need credit to purchase inventory items; however, it is crucial to pay off the balance on or before the payment is due. Business owners can easily become trapped by high interest rates and standing balances of thousands of dollars; this is one best practice to follow–pay the full credit balance each month it is due.
Adopting accounting practices that are beneficial for the health of your startup retail business are crucial for reporting purposes and for the long-term growth of your business. Following these best practice accounting tips will result in solid gains in both regards.
