Accounting for Small Businesses: Why it’s important and 5 tips for success
7 minute read
Small and Medium Enterprises (SMEs) make up 99% of all enterprises in Singapore – and these companies started by strong entrepreneurs form the backbone of the country. To ensure their success, their focus on running their business is critical.
One of the first steps towards their success is keeping their business finances organized.
If you’re a small business owner double-hatting as your own accountant, continue reading. This article will cover the role of accounting, its importance in small businesses, and a few key tips to get your company off on the right foot.
What is accounting?
Accounting, sometimes known as bookkeeping, is the organization of financial accounts. Put very simply, it is verifying and recording of all business transactions including expenses and earnings. Accounting for small businesses usually comprises three things: balance sheet, income statement, and cash flow statement.
These financial reports will also be used for external reporting and tax compliance. In Singapore, the corporate income tax rate is 17% of your company’s chargeable income. However, there is a tax exemption scheme for start-ups.
Corporate income tax exemptions for start-ups
|When||Tax exemption (Year of Assessment 2020 onwards)||Example for first S$200,000|
|First 3 Years of Assessment||75% exemption on the first S$100,000 of normal chargeable income, and further 50% exemption on the next S$100,000||S$75,000 for the first S$100,000, and S$50,000 for the next S$100,000|
|Fourth year onwards||75% exemption on the first $10,000 of normal chargeable income, and further 50% exemption on the next $190,000||S$7,500 for the first $10,000, and S$95,000 for the next S$190,000|
Why accounting for small businesses is important
Accounting is a crucial function in every business, but it is especially important for SMEs and start-ups. In fact, studies show that as many as 61% of small businesses around the world struggle with insufficient cash flow.
Keeping clean records of your finances helps you to manage your money more effectively, which is essential during the early stages of your business. Proper accounting helps you track what’s working (and what’s not) for your business, helping you to identify and discover new potential avenues of growth. Not to mention, it also makes your company’s payroll and tax filing processes easier.
But keeping up with administration work is one of the biggest challenges for SMEs. Accounting for small businesses is very time-consuming. Plus, most small businesses don’t have the budget or resources to hire a dedicated accounting department. This is why many small business owners choose to either do the bookkeeping themselves, hire just one accountant to do it, or use an accounting software — like Sleek!
5 Tips for small business accounting
1. Keep business records separate
The most basic part of accounting is to track all business expenses strictly and in an organized fashion. Needless to say, no matter how small your business is, you should always keep all business and personal finances separate.
To simplify the process, you should clearly define the types of business expenses, such as:
- Meals and entertainment
- Business travel
- Transport and vehicles
- Office supplies
If you are self-employed and use your home as an office, you can consider defining a percentage of your home expenses or what utilities (e.g., electricity) you would consider a business expense.
To make things easier, you can also consider setting up a separate business bank account. In fact, Sleek provides business accounts that come free for every client.
2. Plan for major expenses
As mentioned above, cash flow issues are often the downfall of small businesses. Hence, it is wise to keep a close eye on large expenses. Some of them might be recurring (e.g. labor costs, office rental), while others are ad hoc. Accurate financial forecasting will help your business save a lot of money.
So be sure to always plan for major expenses ahead of time. There are two main accounting systems and bookkeeping methods – cash and accrual-based. Cash accounting is better for cash flow projections, but accrual accounting gives you better insight into your business performance because it tells you more clearly when the expenses and profits occurred.
Psst.. interested to learn more about the differences between cash and accrual accounting? Our tax expert Laura dives deep into it in our video series below!
3. Don’t forget about taxes (and the law)
Taxes are a legal obligation, and all small business owners will do well to familiarize themselves with the tax rules. For example, in addition to income taxes, if you have an office, your company may also be liable for property taxes. Tax season is often very hectic too, and you don’t want to miss any deadlines!
That’s not all, you should also be aware of any business-related laws and regulations to avoid incurring any unwanted penalties. Not only is the financial cost potentially significant, but any run-in with the law could severely impact your brand’s reputation.
Here are some useful topics to read on:
- Filing annual return and taxes
- Employment Act
- Personal Data Protection Act (PDPA)
- General Data Protection Regulation (GDPR)
- Contract law
- Competition Act
4. Update your books regularly
A big tip for keeping your accounting books neat is to update your financial statements regularly.
Although it seems tedious, your future self will thank you for it – organized and accurate records of your businesses’ financial transactions make it much easier and faster for you to pull up specific records and do any strategic analysis when you need to. Updated financial reports also mean that you can access a snapshot of the company’s financial health at any time.
5. Leverage on digital solutions like accounting software
At this point, it is quite clear that accounting is a large task for any company, big or small. If you don’t have an entire team of accountants to perform these “chores”, don’t worry – there is a simple solution.
Small business owners can very easily automate the manual workflows of accounting. You can do this by investing in accounting software and/or services. These are typically very affordable – when compared to hiring additional staff – and are very easy to implement.
For instance, Sleek offers fuss-free accounting services in Singapore, including the management of your finances, taxes, and payrolls, from as little as S$75 per month. Not to mention, these come with a free business account to help make tracking your financials easier! To get started, simply book a consultation, meet your accountant, and let Sleek take care of the rest. Learn more about Sleek’s accounting services here.
Frequently asked questions
Q) What accounting is needed for a small business?
Accounting for small businesses requires three aspects: balance sheet, income statement, and cash flow statement.
Q) How do small businesses maintain accounts?
Consider the following aspects to maintain your accounts:
- Method of bookkeeping
- Mode of accounting
- Separation of personal and company finances
- Expenses tracker
- Timely record transactions
Q) Can I do my own bookkeeping?
Yes, you can. Just be careful to record your transactions accurately and timely.
Q) What is the difference between accounting and bookkeeping?
Bookkeeping is the recording and organising of financial data whereas accounting interprets and presents these data to business stakeholders.
Have any further questions about accounting? Reach out to Sleek’s team of experts who’ll help you with any concerns you may have.