What Small Business Owners Need to Know About Accounting

The owner of a small business is also the chief financial officer and needs to have an understanding of accounting and financial statements. There are various sources of information, assistance, and guidance available.

One of the many roles of a small business owner is that of chief financial officer. While the bookkeeping and accounting activities of a small business can be delegated or outsourced, the owner needs to keep a finger on the pulse of business finances. No one is more interested in the business' financial success than the owner.

As Jay Goltz, who owns five small businesses in Chicago, points out in an article for The New York Times, poor accounting is one of the top reasons small businesses fail. Whether the bookkeeping is done internally using accounting software or contracted to an outside accountant, the owner must be sure the books are kept in an up-to-date, correct, and orderly manner.

Properly carrying out the role of chief financial officer requires the owner to have at least a basic understanding of accounting, particularly the ability to read and interpret financial statements. An analytical review of basic financial statements - the balance sheet, income statement, and cash flow statement - provides valuable tools for managing the business.

A small business owner, whose time and resources are generally limited, has several sources to gain an initial understanding of accounting and build up solid financial management abilities. Local colleges and universities may offer courses like accounting for entrepreneurs or online courses. Other options include mentoring, seminars, consultation with experts and associates, and self-study.

The U.S. Small Business Administration (SBA) offers free and paid classes in accounting, among various other business management topics, as well as one-on-one counseling. The SBA Direct tool can be used to find local resources. The SBA also offers a free, online Introduction to Accounting course.

The SBA also administers Small Business Development Centers, which are partnerships between the government and colleges and universities. These centers offer free services and additional low-cost training options. The Association of Small Business Development Centers website has a directory to find a local office.

SCORE is a non-profit organization affiliated with the SBA that helps and mentors entrepreneurs and small businesses. SCORE has 364 chapters nationwide, with over 13,000 volunteers who have extensive experience in business and industry. SCORE provides local workshops and events around the country and also online workshops, such as Analyzing Your Financial Ratios.

A Web search can turn up some useful online content for small business owners looking for guidance on accounting and financial management topics. For example, All About Financial Management in Business, by Carter McNamara, MBA, Ph.D., on the Free Management Library contains a series of sections that is very relevant for small business owners. And The Business Owner's Toolkit provides a comprehensive and practical series of content on Managing Your Business Finances.

Taxes are another area of financial management that a small business owner needs to oversee. Tax aspects include federal and state income tax, payroll tax, sales and excise tax returns, as well as any additional regulatory reporting, depending on the type of business. While the accountant or an outside tax service may actually prepare the tax returns and reports, the business owner is ultimately responsible for his or her content.

Before signing a tax return, the owner should review it, verify the content by comparing figures to other financial information and reports, such as the financial statements, and clear up any questions with the preparer. There are some differences between accounting for tax purposes and financial reporting purposes. Some small businesses that do not have significant reporting requirements may decide to keep their books on a tax basis. But when there are tax-to-book differences, the preparer should be able to explain them to the small business owner.

The IRS provides considerable information for small businesses in its Small Business and Self-Employed Tax Center, including links to online videos, tools, and educational products.

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