What Small Business Owners Need to Know about Small Business Accounting?

July 11, 2018 | Roger and Susie Engelau

We often see small business owners getting by with a portion of the small business accounting service they really need. Usually, business owners have someone to prepare their taxes. But this doesn’t necessarily give you the small business accounting information you need to run your business profitably. Do you need a CPA? An accountant? A Controller or CFO? A bookkeeper? All of them?

The flow of cash is the lifeblood of any business. Yet small business owners, uncomfortable with their level of financial knowledge, tend to avoid investing some of that cash to leverage it effectively. The result can, literally, be the end of the firm or the acceptance of smaller returns on your hard work.

You need to know the return on the investment of every outlay of cash so, just hiring someone to track and prepare taxes isn’t enough.

Small business accounting tracking

How much money does your technician need to earn each day to break even? What amount of production does that assembler need to complete to pay for themselves? Is that service you’re performing making money, breaking even, or bleeding you dry? To answer these and other vital questions, you need a financial service professional to track and report to you the customized financial information necessary to run your business profitably. This may be your CPA firm or it may require another financial management professional but the point is, you need both.

Overall small business accounting vs tax accounting

A tax accountant’s work is to provide information necessary to pay taxes correctly but not necessarily to run your business profitably. For example, a tax preparer doesn’t necessarily have to categorize overhead costs versus the cost to deliver your product or service as long as expenses are accurately captured. It isn’t necessary for them to separate costs like materials and labor costs, truck costs, supplies, and fuel costs from expenses like utilities, rent, administrative costs, etc to accurately report your tax obligations. However, you want to segregate those costs and align them with the sales they produced to make sure you’re making money on those products/services. It’s not unheard of for a business owner to not know if s/he’s making enough money on the basic product or service. That calls into question whether you even have a viable business.

To match costs to revenue, it can be helpful to follow a specific product or service. Pick a product or service, say a service call, and list all the costs associated with getting the technician to the customer site, having them do the work, complete the administrative stuff, and add in any materials. Or choose a product, say a customer orders a wrought-iron gate… figure the cost of the iron, the time to fabricate the components, the welding, labor, painting, transporting the finished product to the jobsite, the installation crew to hang the gate, etc.

Once you’ve got the costs and sales price of one product or service identified, you’ll have an idea what categories you want to capture for the others.

Comprehensive small business accounting leads to greater profitability

Even if your business is making a profit, you may be losing money on a couple of products. Fixing those could greatly increase your profitability. Perhaps you’d want to increase the price of those products, discontinue them, or find ways to produce them less expensively. But without the proper information, you won’t even know you need to do this. Worse, you could be losing out on easy money and not even know it.

So what small business accounting services do you really need?

There are three different types of accounting professionals: bookkeeper/accountant, Controller/CFO and CPA. While the terms are sometimes used interchangeably, they aren’t the same. Here are the tasks they each perform and whether you need them:

1.  Bookkeeper – captures basic financial information correctly, especially the recording of receivables and payables. They may also track payroll and inventory and may provide regular reports. In a very small business, the owner sometimes performs this task. QuickBooks or other accounting software makes this fairly do-able though there’s a learning curve. While a Controller/CFO or your CPA can do this task, a bookkeeper typically has a lower hourly rate. Our advice is to hire a bookkeeping service if you can at all afford it, keeping you free to focus on your strengths – delivering your products/services. I can recommend a good bookkeeping company that I’ve used and have referred a few clients to.

2.  Controller/CFO – typically ensures the accuracy of the bookkeeper’s work, prepares financial statements and creates reports. Often this is what small business owners are missing. Any small business no matter the size needs to have a Controller/CFO or CPA who ensures that accurate monthly, quarterly, and annual financial reports are provided. Your tax preparer may prepare a P&L and a balance sheet report annually for tax purposes but you need these on at least a quarterly basis so you can react quickly to changes in profitability. Today, there are a number of affordable providers that can train your bookkeeper, ensure accurate, customized reports are being generated in a timely fashion and even help you with your bank or other financial transactions. This support can remove a huge burden and provide the information you need to maximize the profitability of your business.

3.  CPA – an accountant with a “Certified Public Accountant” designation. While an accountant can prepare tax forms, only CPAs are able to sign them and represent you with the IRS. (A tax attorney can also do this). Every business owner should have a CPA to prepare and file their taxes. Get tax advice from your CPA and also use him/her for analyzing your financial reports and helping you make financial decisions.

For our business, our CPA prepares and files our taxes and creates annual reports and we hire a bookkeeping service to record payables, receivables, and to process payroll. We can very easily pull our own monthly and quarterly P&L reports since we have the online version of QuickBooks.

In summary, you need all 3 functions—bookkeeping, financial reporting, and tax preparation—but you don’t necessarily need 3 different professionals. Meeting your small business accounting needs means you’ll meet your profit goals.


Interested to know more about how you can take more informed decision about small business accounting? Review our proven business coaching method – SERVANT Model for making better small business accounting decision for growth.