what is business planning in accounting

Accounting Business Plan Template

Written by Dave Lavinsky

Accounting Business Plan

Over the past 20+ years, we have helped over 500 entrepreneurs and business owners create business plans to start and grow their accounting firms. 

In this article, you will learn some background information on why business planning is important. Then, you will learn how to write an accounting business plan step-by-step so you can create your plan today.

Download our Ultimate Business Plan Template here >

What Is an Accounting Business Plan?

A business plan provides a snapshot of your accounting business as it stands today, and lays out your growth plan for the next five years. It explains your business goals and your strategies for reaching them. It also includes market research to support your plans.

Why You Need a Business Plan for Your Accounting Firm

If you’re looking to start an accounting firm or grow your existing accounting business, you need a business plan. A business plan will help you raise funding, if needed, and plan out the growth of your accounting business to improve your chances of success. Your accounting business plan is a living document that should be updated annually as your company grows and changes.

Sources of Funding for Accounting Firms

With regards to funding, the main sources of funding for an accounting firm are personal savings, credit cards, bank loans, and angel investors. When it comes to bank loans, banks will want to review your business plan and gain confidence that you will be able to repay your loan and interest. To acquire this confidence, the loan officer will not only want to ensure that your financials are reasonable, but they will also want to see a professional plan. Such a plan will give them the confidence that you can successfully and professionally operate a business. Personal savings and bank loans are the most common funding paths for accounting firms.

Finish Your Business Plan Today!

How to write a business plan for an accounting firm.

If you want to start an accounting business or expand your current one, you need a business plan. The guide below details the necessary information for how to write each essential component of your accounting business plan.

Executive Summary

Your executive summary provides an introduction to your business plan, but it is normally the last section you write because it provides a summary of each key section of your plan.

The goal of your executive summary is to quickly engage the reader. Explain to them the kind of accounting business you are running and the status. For example, are you a startup, do you have an accounting business that you would like to grow, or are you operating an established accounting business you would like to sell? 

Next, provide an overview of each of the subsequent sections of your plan. 

• Give a brief overv iew of the accounting industry. 
• Discuss the type of accounting business you are operating. 
• Detail your direct competitors. Give an overview of your target customers. 
• Provide a snapshot of your marketing strategy. Identify the key members of your team. 
• Offer an overview of your financial plan.

Company Overview

In your company overview, you will detail the type of accounting business you are operating.

For example, you might specialize in one of the following types of accounting firms:

• Full Service Accounting Firm: Offers a wide range of accounting services. 
• Bookkeeping Firm: Typically serves small business clients by maintaining their company finances. 
• Tax Firm: Offers tax accounting services for businesses and individuals. 
• Audit Firm: Offers auditing services for companies, organizations, and individuals. 

In addition to explaining the type of accounting business you will operate, the company overview needs to provide background on the business.

Include answers to questions such as:

• When and why did you start the business?
• What milestones have you achieved to date? Milestones could include the number of clients served, or the amount of revenue earned. 
• Your legal business structure. Are you incorporated as an S-Corp? An LLC? A sole proprietorship? Explain your legal structure here.

Industry Analysis

In your industry or market analysis, you need to provide an overview of the accounting industry.

While this may seem unnecessary, it serves multiple purposes.

First, researching the accounting industry educates you. It helps you understand the market in which you are operating. 

Secondly, market research can improve your marketing strategy, particularly if your analysis identifies market trends.

The third reason is to prove to readers that you are an expert in your industry. By conducting the research and presenting it in your plan, you achieve just that.

The following questions should be answered in the industry analysis section of your accounting business plan:

• How big is the accounting industry (in dollars)?
• Is the market declining or increasing?
• Who are the key competitors in the market?
• Who are the key suppliers in the market?
• What trends are affecting the industry?
• What is the industry’s growth forecast over the next 5 – 10 years?
• What is the relevant market size? That is, how big is the potential target market for your accounting business? You can extrapolate such a figure by assessing the size of the market in the entire country and then applying that figure to your local population.

Customer Analysis

The customer analysis section of your accounting business plan must detail the customers you serve and/or expect to serve.

The following are examples of customer segments: individuals, organizations, government entities, and corporations.

As you can imagine, the customer segment(s) you choose will have a great impact on the type of accounting business you operate. Clearly, individuals would respond to different marketing promotions than corporations, for example.

Try to break out your target customers in terms of their demographic and psychographic profiles. With regards to demographics, including a discussion of the ages, genders, locations, and income levels of the potential customers you seek to serve.

Psychographic profiles explain the wants and needs of your target customers. The more you can recognize and define these needs, the better you will do in attracting and retaining your customers.

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Competitive Analysis

Your competitive analysis should identify the indirect and direct competitors your business faces and then focus on the latter.

Direct competitors are othe r accounting firms. 

Indirect competitors are other options that customers have to purchase from that aren’t directly competing with your product or service. This includes CPAs, other accounting service providers, or bookkeeping firms. You need to mention such competition as well.

For each such competitor, provide an overview of their business and document their strengths and weaknesses. Unless you once worked at your competitors’ businesses, it will be impossible to know everything about them. But you should be able to find out key things about them such as

• What types of customers do they serve?
• What type of accounting business are they?
• What is their pricing (premium, low, etc.)?
• What are they good at?
• What are their weaknesses?

With regards to the last two questions, think about your answers from the customers’ perspective. And don’t be afraid to ask your competitors’ customers what they like most and least about them.

The final part of your competitive analysis section is to document your areas of competitive advantage. For example:

• Will you provide options for multiple customer segments?
• Will you offer products or services that your competition doesn’t?
• Will you provide better customer service?
• Will you offer better pricing?

Think about ways you will outperform your competition and document them in this section of your plan.  

Marketing Plan

Traditionally, a marketing plan includes the four P’s: Product, Price, Place, and Promotion. For a accounting business plan, your marketing strategy should include the following:

Product : In the product section, you should reiterate the type o f accounting company that you documented in your company overview. Then, detail the specific products or services you will be offering. For example, will you provide auditing services, tax accounting, bookkeeping, or risk accounting services?

Price : Document the prices you will offer and how they compare to your competitors. Essentially in the product and price sub-sections of yo ur plan, yo u are presenting the products and/or services you offer and their prices.

Place : Place refers to the site of your accounting company. Document where your company is situated and mention how the site will impact your success. For example, is your accounting business located in a busy retail district, a business district, a standalone office, or purely online? Discuss how your site might be the ideal location for your customers.

Promotions : The final part of your accounting marketing plan is where you will document how you will drive potential customers to your location(s). The following are some promotional methods you might consider:

• Advertise in local papers, radio stations and/or magazines
• Reach out to websites 
• Distribute flyers
• Engage in email marketing
• Advertise on social media platforms
• Improve the SEO (search engine optimization) on your website for targeted keywords

Operations Plan

While the earlier sections of your business plan explained your goals, your operations plan describes how you will meet them. Your operations plan should have two distinct sections as follows.

Everyday short-term processes include all of the tasks involved in running your accounting business, including answering calls, scheduling meetings with clients, billing and collecting payments, etc. 

Long-term goals are the milestones you hope to achieve. These could include the dates when you expect to book your Xth client, or when you hope to reach $X in revenue. It could also be when you expect to expand your accounting business to a new city.  

Management Team

To demonstrate your accounting business’ potential to succeed, a strong management team is essential. Highlight your key players’ backgrounds, emphasizing those skills and experiences that prove their ability to grow a company. 

Ideally, you and/or your team members have direct experience in managing accounting businesses. If so, highlight this experience and expertise. But also highlight any experience that you think will help your business succeed.

If your team is lacking, consider assembling an advisory board. An advisory board would include 2 to 8 individuals who would act as mentors to your business. They would help answer questions and provide strategic guidance. If needed, look for advisory board members with experience in managing an accounting business or bookkeeping firm.   

Financial Plan

Your financial plan should include your 5-year financial statement broken out both monthly or quarterly for the first year and then annually. Your financial statements include your income statement, balance s heet, and cash flow statements.

Income Statement

An income statement is more commonly called a Profit and Loss statement or P&L. It shows your revenue and then subtracts your costs to show whether you turned a profit or not.

In developing your income statement, you need to devise assumptions. For example, will you see 5 clients per day, and/or offer discounts for referrals ? And will sales grow by 2% or 10% per year? As you can imagine, your choice of assumptions will greatly impact the financial forecasts for your business. As much as possible, conduct research to try to root your assumptions in reality.

Balance Sheets

Balance sheets show your assets and liabilities. While balance sheets can include much information, try to simplify them to the key items you need to know about. For instance, if you spend $50,000 on building out your accounting business, this will not give you immediate profits. Rather it is an asset that will hopefully help you generate profits for years to come. Likewise, if a lender writes you a check for $50,000, you don’t need to pay it back immediately. Rather, that is a liability you will pay back over time.

Cash Flow Statement

Your cash flow statement will help determine how much money you need to start or grow your business, and ensure you never run out of money. What most entrepreneurs and business owners don’t realize is that you can turn a profit but run out of money and go bankrupt. 

When creating your Income Statement and Balance Sheets be sure to include several of the key costs needed in starting or growing a accounting business:

• Cost of equipment and office supplies
• Payroll or salaries paid to staff
• Business insurance
• Other start-up expenses (if you’re a new business) like legal expenses, permits, computer software, and equipment

Attach your full financial projections in the appendix of your plan along with any supporting documents that make your plan more compelling. For example, you might include your office location lease or a list of your most prominent clients.    Summary Writing a business plan for your accounting business is a worthwhile endeavor. If you follow the accounting business plan example above, by the time you are done, you will truly be an expert. You will understand the accounting industry, your competition, and your customers. You will develop a marketing strategy and will understand what it takes to launch and grow a successful accounting business.  

Accounting Business Plan Template FAQs

What is the easiest way to complete my accounting business plan.

Growthink's Ultimate Business Plan Template allows you to quickly and easily write your accounting business plan.

How Do You Start an Accounting Business?

Starting an accounting business is easy with these 14 steps:

• Choose the Name for Your Accounting Business
• Create Your Accounting Business Plan
• Choose the Legal Structure for Your Accounting Business
• Secure Startup Funding for Your Accounting Business (If Needed)
• Secure a Location for Your Business
• Register Your Accounting Business with the IRS
• Open a Business Bank Account
• Get a Business Credit Card
• Get the Required Business Licenses and Permits
• Get Business Insurance for Your Accounting Business
• Buy or Lease the Right Accounting Business Equipment
• Develop Your Accounting Business Marketing Materials
• Purchase and Setup the Software Needed to Run Your Accounting Business
• Open for Business

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principlesofaccounting.com

Planning, Directing, And Controlling

• Goals Achievement
• Fill in the Blanks
• Multiple Choice

What does it mean to manage? Managing requires numerous skill sets. Among those skills are vision, leadership, and the ability to procure and mobilize financial and human resources. All of these tasks must be executed with an understanding of how actions influence human behavior within, and external to, the organization. Furthermore, good managers must have endurance to tolerate challenges and setbacks while trying to forge ahead. To successfully manage an operation also requires follow through and execution. Because each management action is predicated upon some specific decision, good decision making is crucial to being a successful manager.

Decision Making

Good decision making is rarely done by intuition. Consistently good decisions result from diligent accumulation and evaluation of information. Managerial accounting provides the information needed to fuel the decision-making process. Managerial decisions can be categorized according to three interrelated business processes: planning, directing, and controlling. Correct execution of each of these activities culminates in the creation of business value. Conversely, failure to plan, direct, or control is a road map to failure. The central theme is this: (1) business value results from good decisions, (2) decisions must occur across a spectrum of planning, directing, and controlling activities, and (3) quality decision making can only consistently occur by reliance on information.

A business must plan for success. What does it mean to plan? It is about deciding on a course of action to reach a desired outcome. Planning must occur at all levels. First, it occurs at the high level of setting strategy. It then moves to broad-based thought about how to establish an optimum “position” to maximize the potential for realization of goals. Finally, planning must give thoughtful consideration to financial realities/constraints and anticipated monetary outcomes (budgets).

A business organization may be made up of many individuals. These individuals must be orchestrated to work together in harmony. It is important that they share and understand the organizational plans. In short, “everyone needs to be on the same page.” As such, clear communication is imperative.

A business should invest considerable time and effort in developing strategy. Employees, harried with day-to-day tasks, sometimes fail to see the need to take on strategic planning. It is difficult to see the linkage between strategic endeavors and the day-to-day corporate activities associated with delivering goods and services to customers. But, strategic planning ultimately defines the organization. Specific strategy setting can take many forms, but generally includes elements pertaining to the definition of core values, mission, objectives, and sustainability.

Core Values — An entity should clearly consider and define the rules by which it will play. Core values can cover a broad spectrum involving concepts of fair play, human dignity, ethics, employment/promotion/compensation, quality, customer service, environmental awareness, and so forth. If an organization does not cause its members to understand and focus on these important elements, it will soon find participants becoming solely “profit-centric.” This behavior leads to a short-term focus and potentially dangerous practices that may provide the seeds of self-destruction. Remember that management is to build business value by making the right decisions, and decisions about core values are essential.

The globally-based Chartered Institute of Management Accountants (CIMA) joined with the American Institute of Certified Public Accountants (AICPA) to establish the Chartered Global Management Accountant (CGMA) designation in 2012. The CGMA designation distinguishes professionals who have advanced proficiency in finance, operations, strategy and management. The Institute of Management Accountants (IMA) is another representative group for the managerial accounting profession. IMA‘s overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility. Many IMA members have earned the Certified Management Accountant (CMA) and Certified Financial Manager (CFM) designations. These certificates represent significant competencies in managerial accounting and financial management skills, as well as a pledge to follow the ethical precepts of the IMA.

Mission — Many companies attempt to prepare a pithy statement about their mission. For example:

Overall, the strategic structure of an organization is established by how well it defines its values and purpose. But, how does the managerial accountant help in this process? At first glance, these strategic issues seem to be broad and without accounting context. But, information is needed about the “returns” that are being generated for investors; this accounting information is necessary to determine whether the profit objective is being achieved. Actually, though, managerial accounting goes much deeper.

For example, how are core values policed? Consider that someone must monitor and provide information on environmental compliance. What is the most effective method for handling and properly disposing of hazardous waste? Are there alternative products that may cost more to acquire but cost less to dispose? What system must be established to record and track such material? All of these issues require “accountability.” As another example, ethical codes likely deal with bidding procedures to obtain the best prices from capable suppliers. What controls are needed to monitor the purchasing process, provide for the best prices, and audit the quality of procured goods? All of these issues quickly evolve into internal accounting tasks.

Most would agree that management has a fiduciary responsibility to shareholders to strategically deploy and manage the assets of the business to generate profit, but not at the expense of the well-being of its people or the environment. Beginning in the early 1980’s the United Nations (UN) engaged in multi-national debates resulting in the creation of the Brundtland Commission whose mission was to unite countries to pursue sustainable development together. The report of the commission identified the interrelated nature of  the environment, society, and the economy. Currently most companies consider these three components of sustainable development as a strategic part of the core values and mission of the corporate structure.

Today companies convey progress toward their goals of economic profit along with care for the environment and responsibility to society in a report often called the Environmental, Social, and Governance (ESG) Report or Corporate Social Responsibility (CSR) Report . Guidelines for reporting have been developed by an international independent standards organization known as the Global Reporting Initiative . These reports can be far ranging, including discussions of reductions in greenhouse gas emissions, water consumption, and the like. Some companies additionally comment on volunteerism efforts, donations, worker safety, and other such matters. While the sustainability reporting guidelines are not mandatory, many large corporate reports are produced after having been audited by independent CPA firms.

Positioning

An important part of the planning process is positioning the organization to achieve its goals. Positioning is a broad concept and depends on gathering and evaluating accounting information.

Cost/Volume/Profit Analysis and Scalability — A subsequent chapter will cover cost/volume/profit (CVP) analysis. It is imperative for managers to understand the nature of cost behavior and how changes in volume impact profitability. Methods include calculating break-even points and determining how to manage to achieve target income levels. Managerial accountants study business models and the ability (or inability) to bring them to profitability via increases in scale.

Branding / Pricing / Sensitivity / Competition — In positioning a company’s products and services, considerable thought must be given to branding and its impact on the business. To build a brand requires considerable investment with an uncertain payback. Frequently, the same product can be “positioned” as an elite brand via a large investment in up-front advertising, or as a basic consumer product that will depend upon low price to drive sales. What is the correct approach? Information is needed to make the decision, and management will likely enlist the internal accounting staff to prepare prospective information based upon alternative scenarios. Likewise, product pricing decisions must be balanced against costs and competitive market conditions. And, sensitivity analysis is needed to determine how sales and costs will respond to changes in market conditions.

Decisions about positioning a company’s products and services are quite complex. The prudent manager will need considerable data to make good decisions. Management accountants will be directly involved in providing such data. They will usually work side-by-side with management in helping correctly interpret and utilize the information. It is worthwhile for a good manager to study the basic principles of managerial accounting in order to better understand how information can be effectively utilized in the decision process.

A necessary planning component is budgeting. Budgets outline the financial plans for an organization. There are various types of budgets. A company’s budgeting process must take into account ongoing operations, capital expenditure plans, and corporate financing.

Operating Budgets — A plan must provide definition of the anticipated revenues and expenses of an organization, and more. Operating budgets can become fairly detailed. The process usually begins with an assessment of anticipated sales and proceeds to a detailed mapping of specific inventory purchases, staffing plans, and so forth. These budgets oftentimes delineate allowable levels of expenditures for various departments.

Capital Budgets — The budgeting process must also contemplate the need for capital expenditures relating to new facilities and equipment. These longer-term expenditure decisions must be evaluated logically to determine whether an investment can be justified and what rate and duration of payback is likely to occur.

Financing Budgets — A company must assess financing needs, including an evaluation of potential cash shortages. These estimates enable companies to meet with lenders and demonstrate why and when additional financial support may be needed.

The budget process is quite important (no matter how tedious the process may seem) to the viability of an organization. Several of the subsequent chapters are devoted to the nature and elements of sound budgeting.

There are many good plans that are never realized. To realize a plan requires the initiation and direction of numerous actions. Often, these actions must be well coordinated and timed. Resources must be ready, and authorizations need to be in place to enable persons to act according to the plan. By analogy, imagine that a composer has written a beautiful score of music. For it to come to life requires all members of the orchestra, and a conductor who can bring the orchestra into synchronization and harmony. Likewise, the managerial accountant has a major role in moving business plans into action. Information systems must be developed to allow management to maneuver the organization. Management must know that inventory is available when needed, productive resources (people and machinery) are scheduled appropriately, transportation systems will be available to deliver output, and so on. In addition, management must be ready to demonstrate compliance with contracts and regulations. These are complex tasks which cannot occur without strong information resources provided by management accountants.

Managerial accounting supports the “directing” function in many ways. Areas of support include costing, production management, and special analysis.

A strong manager must understand how costs are captured and assigned to goods and services. This is more complex than most people realize. Costing is such an extensive part of the management accounting function that many people refer to management accountants as “cost accountants.” But, cost accounting is only a subset of managerial accounting applications.

Cost accounting can be defined as the collection, assignment, and interpretation of cost. Subsequent chapters introduce alternative costing methods. It is important to know the cost of products and services. The ideal approach to capturing costs is dependent on what is being produced.

Costing Methods — In some settings, costs may be captured by the job costing method . For example, a custom home builder would likely capture costs for each house constructed. The actual labor and material would be tracked and assigned to that specific home (along with some amount of overhead), and the cost of each specific home can be expected to vary.

Some companies produce homogenous products in continuous processes. For example, consider production of paint or bricks used in building a home. How much does each brick or gallon of paint cost? These types of items are produced in continuous processes where costs are pooled together and output is measured in aggregate quantities. It is difficult to identify specific costs for each unit. Yet, it is important to make a cost assignment. For these situations, accountants might utilize process costing methods .

The firm might consider tracing costs and assigning them to activities (e.g., training, client development, etc.). Then, an allocation model can be used to attribute selected activities to a job. Such activity-based costing (ABC) systems are particularly well suited to situations where overhead is high, and/or a variety of products and services are produced.

Costing Concepts — In addition to alternative methods of costing, a good manager will need to understand different theories or concepts about costing. In a general sense, these approaches can be described as “absorption” and “direct” costing concepts. Under the absorption concept, a product or service would be assigned its full cost, including amounts that are not easily identified with a particular item, such as overhead items (sometimes called “burden”). Overhead can include facilities depreciation, utilities, maintenance, and many other similar shared costs.

With absorption costing, this overhead is schematically allocated among all units of output. In other words, output absorbs the full cost of the productive process. Absorption costing is required for external reporting purposes under generally accepted accounting principles. Some managers are aware that sole reliance on absorption costing numbers can lead to bad decisions.

As a result, internal cost accounting processes in some organizations focus on a direct costing approach. With direct costing, a unit of output will be assigned only its direct cost of production (e.g., direct materials, direct labor, and overhead that occurs with each unit produced). Future chapters examine differences between absorption and direct costing.

Successfully directing an organization requires prudent management of production. Because this is a hands-on process, and frequently involves dealing with the tangible portions of the business (inventory, fabrication, assembly, etc.), some managers are especially focused on this area of oversight. Managerial accounting provides numerous tools for managers to use in support of production and logistics (moving goods through production to a customer).

To generalize, production management is about running a “lean” business model. This means that costs must be minimized and efficiency maximized, while seeking to achieve enhanced output and quality standards. In the past few decades, advances in technology have greatly contributed to the ability to run a lean business. Product fabrication and assembly have been improved through virtually error-free robotics. Accountability is handled via comprehensive software that tracks an array of data on a real-time basis. These enterprise resource packages (ERP) are extensive in their power to deliver specific query-based information for even the largest organizations.

Machine to machine (M2M) enables connected devices to communicate information without requiring human engagement. These developments ultimately enhance organizational efficiency and the living standards of customers who benefit from better and cheaper products. But, despite their robust power, they do not replace human decision making. Managers must pay attention to the information being produced, and be ready to adjust business processes in response. M2M is also becoming known as IOT (internet of things).

Inventory — For a manufacturing company inventory may consist of raw materials, work in process, and finished goods. The raw materials are the components and parts that are to be eventually processed into a final product. Work in process consists of goods that are actually under production. Finished goods are the completed units awaiting sale to customers. Each category will require special consideration and control.

Failure to properly manage any category of inventory can be disastrous. Overstocking raw materials or overproduction of finished goods will increase costs and obsolescence. Conversely, out-of-stock situations for raw materials will silence the production line. Failure to have goods on hand might result in lost sales. Subsequent chapters cover inventory management. Popular techniques include JIT (just-in-time inventory management) and EOQ (economic order quantity).

Responsibility Considerations — Enabling and motivating employees to work at peak performance is an important managerial role. For this to occur, employees must perceive that their productive efficiency and quality of output are fairly measured. A good manager will understand and be able to explain to others how such measures are determined.

Direct productive processes must be supported by many “service departments” (maintenance, engineering, accounting, cafeterias, etc.). These service departments have nothing to sell to outsiders, but are essential components of operation. The costs of service departments must be recovered for a business to survive. It is easy for a production manager to focus solely on the area under direct control and ignore the costs of support tasks. Yet, good management decisions require full consideration of the costs of support services.

In addition, techniques must be utilized to capture the cost of quality, or perhaps better said, the cost of a lack of quality. Finished goods that do not function as promised cause substantial warranty costs, including rework, shipping, and scrap. There is also an extreme long-run cost associated with a lack of customer satisfaction.

Understanding concepts of responsibility accounting will also require one to think about attaching inputs and outcomes to those responsible for their ultimate disposition. In other words, a manager must be held accountable, but to do this requires the ability to monitor costs incurred and deliverables produced by defined areas of accountability (centers of responsibility). This does not happen by accident and requires extensive systems development work, as well as training and explanation, on the part of management accountants.

Certain business decisions have recurrent themes: whether to outsource production and/or support functions, what level of production and pricing to establish, whether to accept special orders with private label branding or special pricing, and so forth.

Managerial accounting provides theoretical models of calculations that are needed to support these types of decisions. Although such models are not perfect in every case, they certainly are effective in stimulating correct thought. The seemingly obvious answer may not always yield the truly correct or best decision. Therefore, subsequent chapters will provide insight into the logic and methods that need to be employed to manage these types of business decisions.

In addition, a recent trend is for enhanced internal controls and mandatory certifications by CEOs and CFOs as to the accuracy of financial reports. These certifications carry penalties of perjury, and have gotten the attention of corporate executives. This has led to greatly expanded emphasis on controls of the various internal and external reporting mechanisms.

Most large organizations have a person designated as controller (sometimes termed “comptroller”). The controller is an important and respected position within most larger organizations. The corporate control function is of sufficient complexity that a controller may have hundreds of support personnel to assist with all phases of the management accounting process. As this person’s title suggests, the controller is primarily responsible for the control task; providing leadership for the entire cost and managerial accounting functions.

In contrast, the chief financial officer (CFO) is usually responsible for external reporting, the treasury function, and general cash flow and financing management. In some organizations, one person may serve a dual role as both the CFO and controller. Larger organizations may also have a separate internal audit group that reviews the work of the accounting and treasury units. Because internal auditors are reporting on the effectiveness and integrity of other units within a business organization, they usually report directly to the highest levels of corporate leadership.

Begin by thinking about controlling a car (aka “driving”)! Steering, acceleration, and braking are not random; they are careful corrective responses to constant monitoring of many variables like traffic, road conditions, and so forth. Clearly, each action is in response to having monitored conditions and adopted an adjusting response. Likewise, business managers must rely on systematic monitoring tools to maintain awareness of where the business is headed. Managerial accounting provides these monitoring tools and establishes a logical basis for making adjustments to business operations.

Standard Costs — To assist in monitoring productive efficiency and cost control, managerial accountants may develop standards . These standards represent benchmarks against which actual productive activity is compared. Importantly, standards can be developed for labor costs and efficiency, materials cost and utilization, and more general assessments of the overall deployment of facilities and equipment (the overhead).

Flexible tools — Great care must be taken in monitoring variances. For instance, a business may have a large increase in customer demand. To meet demand, a manager may prudently authorize significant overtime. This overtime may result in higher than expected wage rates and hours. As a result, a variance analysis could result in certain unfavorable variances. However, this added cost was incurred because of higher customer demand and was perhaps a good business decision. Therefore, it would be unfortunate to interpret the variances in a negative light. To compensate for this type of potential misinterpretation of data, management accountants have developed various flexible budgeting and analysis tools. These evaluative tools “flex” or compensate for the operating environment in an attempt to sort out confusing signals. Business managers should become familiar with these more robust flexible tools, and they are covered in depth in subsequent chapters.

The traditional approach to monitoring organizational performance has focused on financial measures and outcomes. Increasingly, companies are realizing that such measures alone are not sufficient. For one thing, such measures report on what has occurred and may not provide timely data to respond aggressively to changing conditions.

In addition, lower-level personnel may be too far removed from an organization’s financial outcomes to care. As a result, many companies have developed more involved scoring systems. These scorecards are custom tailored to each position, and draw focus on evaluating elements that are important to the organization and under the control of an employee holding that position.

For instance, a fast food restaurant would want to evaluate response time, cleanliness, waste, and similar elements for the front-line employees. These are the elements for which the employee would be responsible; presumably, success on these points translates to eventual profitability.

Processes relate to items like delivery time, machinery utilization rates, percent of defect free products, and so forth. Customer issues include frequency of repeat customers, results of customer satisfaction surveys, customer referrals, and the like. Betterment pertains to items like employee turnover, hours of advanced training, mentoring, and other similar items.

If these balanced scorecards are carefully developed and implemented, they can be useful in furthering the goals of an organization. Conversely, if the elements being evaluated do not lead to enhanced performance, employees will spend time and energy pursuing tasks that have no linkage to creating value for the business. Care must be taken to design controls and systems that strike an appropriate balance between their costs and resulting benefits. This means that the managerial accountant must also be skilled in helping an organization avoid creating bureaucratic processes that do not lead to enhanced results and profits.

Normally, TQM-based improvements represent incremental steps in shaping organizational improvement. More sweeping change can be implemented by a complete process reengineering. Under this approach, an entire process is mapped and studied with the goal of identifying any steps that are unnecessary or that do not add value. In addition, such comprehensive reevaluations will help to identify bottlenecks that constrain the whole organization.

So far, this chapter has provided snippets of how managerial accounting supports organizational planning, directing, and controlling. As one can tell, managerial accounting is surprisingly broad in its scope of involvement. The remaining chapters of this book will examine all of these subjects in detail. First, however, this chapter concludes by introducing key managerial accounting concepts and terminology.

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What Is a Business Plan? Definition and Planning Essentials Explained

Posted february 21, 2022 by kody wirth.

What is a business plan? It’s the roadmap for your business. The outline of your goals, objectives, and the steps you’ll take to get there. It describes the structure of your organization, how it operates, as well as the financial expectations and actual performance. 

A business plan can help you explore ideas, successfully start a business, manage operations, and pursue growth. In short, a business plan is a lot of different things. It’s more than just a stack of paper and can be one of your most effective tools as a business owner. 

Let’s explore the basics of business planning, the structure of a traditional plan, your planning options, and how you can use your plan to succeed. 

What is a business plan?

A business plan is a document that explains how your business operates. It summarizes your business structure, objectives, milestones, and financial performance. Again, it’s a guide that helps you, and anyone else, better understand how your business will succeed.  

Why do you need a business plan?

The primary purpose of a business plan is to help you understand the direction of your business and the steps it will take to get there. Having a solid business plan can help you grow up to 30% faster and according to our own 2021 Small Business research working on a business plan increases confidence regarding business health—even in the midst of a crisis. 

These benefits are directly connected to how writing a business plan makes you more informed and better prepares you for entrepreneurship. It helps you reduce risk and avoid pursuing potentially poor ideas. You’ll also be able to more easily uncover your business’s potential. By regularly returning to your plan you can understand what parts of your strategy are working and those that are not.

That just scratches the surface for why having a plan is valuable. Check out our full write-up for fifteen more reasons why you need a business plan .  

What can you do with your plan?

So what can you do with a business plan once you’ve created it? It can be all too easy to write a plan and just let it be. Here are just a few ways you can leverage your plan to benefit your business.

Test an idea

Writing a plan isn’t just for those that are ready to start a business. It’s just as valuable for those that have an idea and want to determine if it’s actually possible or not. By writing a plan to explore the validity of an idea, you are working through the process of understanding what it would take to be successful. 

The market and competitive research alone can tell you a lot about your idea. Is the marketplace too crowded? Is the solution you have in mind not really needed? Add in the exploration of milestones, potential expenses, and the sales needed to attain profitability and you can paint a pretty clear picture of the potential of your business.

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Document your strategy and goals

For those starting or managing a business understanding where you’re going and how you’re going to get there are vital. Writing your plan helps you do that. It ensures that you are considering all aspects of your business, know what milestones you need to hit, and can effectively make adjustments if that doesn’t happen. 

With a plan in place, you’ll have an idea of where you want your business to go as well as how you’ve performed in the past. This alone better prepares you to take on challenges, review what you’ve done before, and make the right adjustments.

Pursue funding

Even if you do not intend to pursue funding right away, having a business plan will prepare you for it. It will ensure that you have all of the information necessary to submit a loan application and pitch to investors. So, rather than scrambling to gather documentation and write a cohesive plan once it’s relevant, you can instead keep your plan up-to-date and attempt to attain funding. Just add a use of funds report to your financial plan and you’ll be ready to go.

The benefits of having a plan don’t stop there. You can then use your business plan to help you manage the funding you receive. You’ll not only be able to easily track and forecast how you’ll use your funds but easily report on how it’s been used. 

Better manage your business

A solid business plan isn’t meant to be something you do once and forget about. Instead, it should be a useful tool that you can regularly use to analyze performance, make strategic decisions, and anticipate future scenarios. It’s a document that you should regularly update and adjust as you go to better fit the actual state of your business.

Doing so makes it easier to understand what’s working and what’s not. It helps you understand if you’re truly reaching your goals or if you need to make further adjustments. Having your plan in place makes that process quicker, more informative, and leaves you with far more time to actually spend running your business.

What should your business plan include?

The content and structure of your business plan should include anything that will help you use it effectively. That being said, there are some key elements that you should cover and that investors will expect to see. 

Executive summary

The executive summary is a simple overview of your business and your overall plan. It should serve as a standalone document that provides enough detail for anyone—including yourself, team members, or investors—to fully understand your business strategy. Make sure to cover the problem you’re solving, a description of your product or service, your target market, organizational structure, a financial summary, and any necessary funding requirements.

This will be the first part of your plan but it’s easiest to write it after you’ve created your full plan.

Products & Services

When describing your products or services, you need to start by outlining the problem you’re solving and why what you offer is valuable. This is where you’ll also address current competition in the market and any competitive advantages your products or services bring to the table. Lastly, be sure to outline the steps or milestones that you’ll need to hit to successfully launch your business. If you’ve already hit some initial milestones, like taking pre-orders or early funding, be sure to include it here to further prove the validity of your business. 

Market analysis

A market analysis is a qualitative and quantitative assessment of the current market you’re entering or competing in. It helps you understand the overall state and potential of the industry, who your ideal customers are, the positioning of your competition, and how you intend to position your own business. This helps you better explore the long-term trends of the market, what challenges to expect, and how you will need to initially introduce and even price your products or services.

Check out our full guide for how to conduct a market analysis in just four easy steps .  

Marketing & sales

Here you detail how you intend to reach your target market. This includes your sales activities, general pricing plan, and the beginnings of your marketing strategy. If you have any branding elements, sample marketing campaigns, or messaging available—this is the place to add it. 

Additionally, it may be wise to include a SWOT analysis that demonstrates your business or specific product/service position. This will showcase how you intend to leverage sales and marketing channels to deal with competitive threats and take advantage of any opportunities.

Check out our full write-up to learn how to create a cohesive marketing strategy for your business. 

Organization & management

This section addresses the legal structure of your business, your current team, and any gaps that need to be filled. Depending on your business type and longevity, you’ll also need to include your location, ownership information, and business history. Basically, add any information that helps explain your organizational structure and how you operate. This section is particularly important for pitching to investors but should be included even if attempted funding is not in your immediate future.

Financial projections

Possibly the most important piece of your plan, your financials section is vital for showcasing the viability of your business. It also helps you establish a baseline to measure against and makes it easier to make ongoing strategic decisions as your business grows. This may seem complex on the surface, but it can be far easier than you think. 

Focus on building solid forecasts, keep your categories simple, and lean on assumptions. You can always return to this section to add more details and refine your financial statements as you operate. 

Here are the statements you should include in your financial plan:

• Sales and revenue projections
• Profit and loss statement
• Cash flow statement
• Balance sheet

The appendix is where you add additional detail, documentation, or extended notes that support the other sections of your plan. Don’t worry about adding this section at first and only add documentation that you think will be beneficial for anyone reading your plan.

Types of business plans explained

While all business plans cover similar categories, the style and function fully depend on how you intend to use your plan. So, to get the most out of your plan, it’s best to find a format that suits your needs. Here are a few common business plan types worth considering. 

Traditional business plan

The tried-and-true traditional business plan is a formal document meant to be used for external purposes. Typically this is the type of plan you’ll need when applying for funding or pitching to investors. It can also be used when training or hiring employees, working with vendors, or any other situation where the full details of your business must be understood by another individual. 

This type of business plan follows the outline above and can be anywhere from 10-50 pages depending on the amount of detail included, the complexity of your business, and what you include in your appendix. We recommend only starting with this business plan format if you plan to immediately pursue funding and already have a solid handle on your business information. 

Business model canvas

The business model canvas is a one-page template designed to demystify the business planning process. It removes the need for a traditional, copy-heavy business plan, in favor of a single-page outline that can help you and outside parties better explore your business idea. 

The structure ditches a linear structure in favor of a cell-based template. It encourages you to build connections between every element of your business. It’s faster to write out and update, and much easier for you, your team, and anyone else to visualize your business operations. This is really best for those exploring their business idea for the first time, but keep in mind that it can be difficult to actually validate your idea this way as well as adapt it into a full plan.

One-page business plan

The true middle ground between the business model canvas and a traditional business plan is the one-page business plan. This format is a simplified version of the traditional plan that focuses on the core aspects of your business. It basically serves as a beefed-up pitch document and can be finished as quickly as the business model canvas.

By starting with a one-page plan, you give yourself a minimal document to build from. You’ll typically stick with bullet points and single sentences making it much easier to elaborate or expand sections into a longer-form business plan. This plan type is useful for those exploring ideas, needing to validate their business model, or who need an internal plan to help them run and manage their business.

Now, the option that we here at LivePlan recommend is the Lean Plan . This is less of a specific document type and more of a methodology. It takes the simplicity and styling of the one-page business plan and turns it into a process for you to continuously plan, test, review, refine, and take action based on performance.

It holds all of the benefits of the single-page plan, including the potential to complete it in as little as 27-minutes . However, it’s even easier to convert into a full plan thanks to how heavily it’s tied to your financials. The overall goal of Lean Planning isn’t to just produce documents that you use once and shelve. Instead, the Lean Planning process helps you build a healthier company that thrives in times of growth and stable through times of crisis.

It’s faster, keeps your plan concise, and ensures that your plan is always up-to-date.

Try the LivePlan Method for Lean Business Planning

Now that you know the basics of business planning, it’s time to get started. Again we recommend leveraging a Lean Plan for a faster, easier, and far more useful planning process. 

To get familiar with the Lean Plan format, you can download our free Lean Plan template . However, if you want to elevate your ability to create and use your lean plan even further, you may want to explore LivePlan. 

It features step-by-step guidance that ensures you cover everything necessary while reducing the time spent on formatting and presenting. You’ll also gain access to financial forecasting tools that propel you through the process. Finally, it will transform your plan into a management tool that will help you easily compare your forecasts to your actual results. 

Check out how LivePlan streamlines Lean Planning by downloading our Kickstart Your Business ebook .

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Free Accounting and Bookkeeping Sample Business Plan PDF

1 min. read

Updated February 26, 2024

Looking for a free, downloadable accounting and bookkeeping sample business plan PDF to help you create a business plan of your own? Bplans has you covered. 

Keep in mind that you don’t need to find a sample business plan that exactly matches your business. Whether you’re launching a larger accounting business in a bustling city or a smaller neighborhood office, the details will be different, but the bones of the plan will be the same. 

Are you writing a business plan for your accounting firm because you’re seeking a loan? Is your primary concern building a clear roadmap for growth? Either way, you’re going to want to edit and customize it so it fits your particular company. 

No two accounting businesses are alike. Your strategy will be different if you’re partnering with other CPAs, rather than working independently, for example. So take the time to create your own financial forecasts and do enough market research so you have a solid plan for success. 

• What should you include in an accounting and bookkeeping business plan?

Your accounting business plan doesn’t need to be hundreds of pages—keep it as short and concise as you can. You’ll probably want to include each of these sections: executive summary, company summary and funding needs, products and services, marketing plan, management team, financial plan, and appendix. 

One of the things that makes an accounting business plan different than some other service-based business plans is that you might decide to only work with businesses and not with individuals.  

You may offer different tiers of service to different types of clients. If that’s the case, make sure you include ideas like up-selling small businesses from hourly consultation to quarter contracts.

Download this accounting and bookkeeping sample business plan PDF for free right now, or visit Bplans’ gallery of more than 550 sample business plans if you want more options.

There are plenty of reasons accounting business owners can benefit from writing a business plan —you’ll need one if you’re seeking a loan or investment.

Even if you’re not seeking funding, the process of thinking through every aspect of your business will help you make sure you’re not overlooking anything critical as you grow.

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Kody Wirth is a content writer and SEO specialist for Palo Alto Software—the creator's of Bplans and LivePlan. He has 3+ years experience covering small business topics and runs a part-time content writing service in his spare time.

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1.3: Planning and Control Functions Performed by Managers

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Learning Objectives

• Describe the planning and control functions performed by managers.

Question: Managers of most organizations continually plan for the future, and after the plan is implemented, managers assess whether they achieved their goals. What are the two functions that enable management to go through the process of continually planning and evaluating?

The two important functions that enable management to continually plan for the future and assess implementation are called planning and control. Planning 4 is the process of establishing goals and communicating these goals to employees of the organization. The control 5 function is the process of evaluating whether the organization’s plans were implemented effectively.

Question: Continually planning for the future is an important quality of many successful organizations, such as Southwest Airlines (discussed in Note 1.11 "Business in Action 1.1"). How do organizations formalize their strategic plans?

Organizations formalize their plans by creating a budget 6 which is a series of reports used to quantify an organization’s plans for the future. For example, Ernst & Young , an international accounting firm, plans for the future by establishing a budget indicating the labor hours required to perform specific services for each client. The process of creating a budget for each client enables the firm to plan for future staffing needs and communicate these needs to employees of the company. Rather than simply hoping it all works out in the end, Ernst & Young projects the labor hours required in the future, hires accounting staff based on these projections, and schedules the staff required for each client.

A budget can take a variety of forms. A budgeted income statement indicates a profit plan for the future. A capital budget shows the long-term investments planned for the future. A cash flow budget outlines cash inflows and outflows for the future. We provide more information about how budgets can be used for planning purposes in later chapters.

business in action 1.1

Plans for the future.

Review the annual report or 10K for just about any company, and you are likely to find information regarding plans for the future. Here are some examples:

• Southwest Airlines . A low-fare, short-haul carrier that targets business commuters as well as leisure travelers states in its annual report, “We are focused on four big initiatives: the AirTran integration, the All-New Rapid Rewards program, the addition of the Boeing 737–800 in 2012, and the replacement of our reservations system.”
• Sears Holdings Corporation . A multiline retailer that offers a wide array of merchandise and related services states in its 10K report, “We will continue to invest in our online properties. By integrating our vast store network with our online properties, we believe that Sears Holdings will succeed in the rapidly evolving retail environment.”
• Nordstrom, Inc. A fashion specialty retailer indicates in its 10K report that its “strategic growth plan includes opening new Nordstrom full-line and Nordstrom Rack stores, with 6 announced Nordstrom full-line and 18 announced Nordstrom Rack store openings, the majority of which will occur by 2012.”

As these companies go through the process of making decisions about the future, developing plans based on their decisions, and controlling the implementation of their plans, managerial accounting information will play a key role in all phases of the process.

Sources: Southwest Airlines , “Annual Report, 2010,” http://www.southwest.com ; Sears Holdings Corporation , “10K Report, 2010,” www.searsholdings.com; Nordstrom, Inc. , “10K Report, 2010,” http://www.nordstrom.com .

Question: Although planning for the future is important, plans are only effective if implemented properly. How do organizations assess the implementation of their plans?

The control function evaluates whether an organization’s plans were implemented effectively and often leads to recommendations for the future. Many organizations compare actual results with the initial plan (or budget) to evaluate performance of employees, departments, or the entire organization.

For example, assume Ernst & Young creates a budget indicating the labor hours needed to perform tax services for a particular client (this is the planning function). After the work is performed, actual labor hours used to complete the work are compared to budgeted labor hours. This analysis is then used to evaluate whether employees were able to complete the work within the budgeted time and often results in recommendations for the future. Recommendations might include the need for adding more labor hours to the budget or obtaining better support documents from the client.

Planning and controlling operations are critical functions within most organizations. In today’s business environment, effective planning and control by managers can be the key to survival.

Key Takeaway

Managers continually plan and control operations within organizations. Planning involves establishing goals and communicating these goals to employees of the organization. The control function assesses whether goals were achieved and is often used to evaluate the performance of employees, departments, and the organization as a whole.

review problem 1.2

Assume you are preparing a personal budget of all income and expenses for next month.

• Describe the planning and control functions of this process.
• What benefits might be derived from performing the planning and control functions for a personal budget?
• The planning function would involve establishing income and expense goals for next month. Possible sources of income include wages, scholarships, or student loans. Expenses might include rent, textbooks, tuition, food, entertainment, and transportation. The control function occurs after the end of the month and involves comparing actual income and expenses with budgeted income and expenses. This allows for the evaluation of whether income and expense goals were achieved.
• There are several benefits to using a planning and control process. The planning function establishes income and expense goals and helps to identify any deviations from these goals. For example, planned expenditures are clearly outlined in the budget and provide guidelines for making expenditure decisions throughout the month. Without clear guidelines, money might be spent on items that are not needed. The control function allows for an evaluation of how well you met the goals established in the planning process. Perhaps some goals were achieved (e.g., food expenditures were close to what was budgeted) while other goals were not (e.g., transportation expenditures were higher than what was budgeted). The control function identifies these areas and leads to refined goals in the future. For example, the decision might be made to carpool next month to save on transportation costs or to earn more income to pay for transportation by working additional hours.

Definitions

• The process of establishing goals and communicating these goals to employees of the organization.
• The process of evaluating whether the organization’s plans were effectively implemented.
• A series of reports used to quantify an organization’s plan for the future.

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How to start an accounting firm: Your checklist for successfully starting a firm

So, you're thinking of starting an accounting firm.

That's great. No doubt you have plenty of questions about how to set up a new firm and get off to a great start.

Thomson Reuters spoke with some of our industry experts to get answers to the big questions you may have.

Here's what they told us.    

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Starting your own accounting business sounds like a lot of work. Why would I want to start an accounting firm?   

Starting an accounting firm is like starting any small business – it requires a lot of work. However, industry and consulting firms list accounting firms as one of the single most profitable small businesses a person can start right now.

Here are a few questions to consider when starting a firm:

• Do you want to be a cog in the machine or own a firm? Frankly, there isn’t a wrong answer to this question, but rather a preference. However, going out on your own comes with one significant benefit: you’re getting the profit from the firm, not just your wages. You go from employee to owner.
• What’s my business purpose? While perhaps a bit esoteric, defining your business’s purpose is crucial. Why am I doing this? What’s my goal behind this? It’s not just a philosophical exercise. Knowing why you’re starting a firm can help you define your target market, whether it’s helping small businesses, real estate, or another service area.
• Do you want to be nimble and cutting edge? Small firms tend to be much more agile and have a greater ability to do new things. From adopting new technology to discovering and implementing new software or other efficiency creating tools, running your own firm lets you make the decisions about what makes your business unique—and profitable.
• Should you start a legal entity? For some, a sole proprietorship won’t require incorporation – especially if the work is centered around less complex tasks such as basic tax preparation. However, there are certain liability protections by becoming an LLC, including limiting risk for your business. Assets become owned by your business and are distinguished from personal assets. When a business is not incorporated, it becomes harder to draw that line and the entire enterprise becomes at risk.

What are the requirements to open an accounting firm? What do I need?

Starting an accounting firm is no different from starting any other small business. And while there are accounting-specific requirements, it’s important to remember that you’re starting a business first.

Start by figuring out your purpose, goal, and market. This will influence many other decisions, including the function of the services you provide, whether you want a physical or virtual location, your target demographic, and the location of your business.

Once you’ve selected a location and determined your goals, it’s time to consider the nuts and bolts of owning a business.

You’ll need to:

• Obtain Employer Identification Number (EIN) and Tax ID number
• Investigate employment laws
• Determine startup costs
• Develop a pricing structure for services
• Decide on the legal structure of your business (S-Corp, L-Corp, LLC, Partnership, LLP )
• Look at business insurance
• Create a business bank account
• Develop internal policies and rules
• Hire employees

Additionally, you’ll have to think about the day-to-day needs of running a business, including managing risk, basic administrative tasks, and general questions of how and where you will meet clients. 

Will I need to get a new EIN from the federal government ?

In most cases, owning and running an accounting firm necessitates an Employer Identification Number (EIN). However, the IRS website provides an in-depth explanation of who is required to have an EIN and when. A good rule of thumb is: if you plan on hiring employees – or plan to in the future – you’ll probably need an EIN.

That said, even if you don’t think you need one – or the website says it isn’t a requirement– most businesses are probably better off acquiring an EIN.

Luckily, the online process is fast, easy, and free. 

If I’m not a Certified Public Accountant, do I need a CPA to open an accounting firm ?

It depends.

While all CPAs are accountants, not all accountants are CPAs. There are differences between the two, including education, experience, and certain opportunities. However, the answer goes back to the question, “What services do you want to offer?”

An accounting firm can do almost everything a CPA firm can do with one exception – audits and assurance services. So, if that is a part of your goals or your target market, then it’s probably wise to think about the steps needed to become a CPA.

However, if you are looking to focus on the multitude of other services accounting firms provide, it’s likely not a necessary credential to start. And while there are certain state-by-state exceptions about what can and cannot be undertaken by a CPA, they are not a requirement for starting an accounting firm.

However, if you want to call yourself a “CPA firm” – you will need a CPA.

Can accountants work from home ?

One of the benefits of starting an accounting firm is flexibility. So, the simple answer to the question is, yes—many accountants can and do work from a home office.

All the regulations that apply to a physical location also apply to virtual or home offices. So not having a physical office does not put an accounting firm at a disadvantage.

In fact, working from home is even easier with modern technology and software solutions that help bring vital aspects of your daily workflow into one dedicated (and usually online) space. For instance, Thomson Reuters makes its CS Professional Suite of tax and accounting software available as hosted online solutions and designed its Onvio products to run entirely in the cloud.

It’s important to note: an accounting firm must have a dedicated EFIN (Electronic Filing Identification Number) for every separate location where they perform work. So, if you have a physical location and do work in a home office, you’ll need to investigate whether you’ll need a separate EFIN for home office.

The answer largely depends on how much – and the extent of the work – you do from home. Check with the IRS for further guidance. 

If I’d prefer a home-based accounting business, what should I know about starting an accounting firm from home ?

Luckily, accounting firms don’t need a physical space to operate successfully. And like the traditional brick and mortar approach, having a home-based or virtual business brings both opportunities and challenges that are unique to that approach. When considering a home-based business, it’s important to think about the unique challenges and opportunities involved.

These include:

• Shared work locations. There are many co-working locations across the country, many of which include both space for professionals to perform their tasks, as well as providing a professional, on-demand space to meet with clients. While there is usually a monthly fee to use these spaces, the benefits they provide are often worth the cost (and are significantly cheaper than leasing or purchasing office space).
• Low costs. New businesses often struggle with overhead. As you build your client list, keeping costs low is a priority. Not only does it allow you to see a profit early, but it also allows you to adjust your service menu to attract clients with lower-than-normal prices.
• Liability issues. If you choose to meet clients in your home, liability and zoning can be an issue. If a client gets hurt inside your home office, or falls outside of it, it’s important to know the laws surrounding liability.
• Zoning laws. Most cities and counties have zoning regulations. Make sure you investigate and comply with any laws to ensure your home-based business isn’t operating illegally.
• Turn limitations into unique opportunities. While not having a physical space can be challenging at times, it can also be an advantage. Consider visiting clients onsite. Not only does it solve space concerns, it communicates a message to the client—you offer a higher level of service.    

What are the key services offered by accounting firm s? 

In many ways, this question can be answered by once again looking at your goals and target market. What are the key services needed by that population? How can you serve them better? Still, while many services will be dictated by the specifics of your clients and their business, there are a few standards most accounting firms offer, including:

• Assurance services
• Bookkeeping

While these are typically the core offerings – and the ones that will provide consistent business in most accounting firms – it’s also important to investigate emerging and buzz-worthy services that are attracting bigger and more progressive accounting businesses.

From consulting and advising to outsourced CFO services (serving as the embedded strategic financial decision-maker for a client), taking a cue from the bigger firms – and anticipating what trends might trickle down to smaller and independent businesses – can increase the clients you serve and put you steps ahead of your competition. 

What should I know about running an accounting firm ?

Starting a business is filled with new and challenging decisions. However, once the business is up and running, it’s common to be unprepared for typical day-to-day operations. Anticipating (and planning for) these concerns helps make sure you’re working as efficiently as possible.

Common questions and concerns include:

• Talent acquisition and development. Frankly, finding and keeping staff is a significant challenge, which is why hiring always leads industry surveys about common needs and concerns. Even if you aren’t ready to hire a team, it’s wise to start developing a strategy early.
• Going beyond the seasonal business . Every year it gets harder and harder to operate a seasonal accounting business, especially if you’re looking to offer a variety of services. Unless you’re doing just cookie-cutter tax prep – and you avoid complex returns – you won’t be able to operate on a seasonal basis. That said, prioritizing the season and maximizing your efficiency (and your profits) during the heavy times is critical to finding success.
• Keep on top of regulatory changes. Keeping up with major regulatory changes can be a challenge – especially if you add staff. Finding a solution that helps minimize the burden and risk that otherwise exists will help stave off the constant onslaught of new information.
• Rethink the traditional role of the accounting firm. Traditional accounting firms used to meet with clients just once a year to do their tax return. More progressive firms are moving to a year-round schedule, which not only allows them to expand services for current and future clients but implies a partnership relationship that goes beyond the “one touchpoint” per year model. 

How much should an accountant charge per hour? Or should accountants charge a fixed fee ?

This, in many ways, is an unanswerable question because the only reliable advice that can be given is, “It depends.” Every context is different and is swayed by factors such as competition, location, service offerings, and level of expertise.

However, even though there isn’t a standard fee, most accounting firms are moving away from an hourly fee structure and choosing to institute to a fixed fee model that allows for better value for clients, a more manageable business plan, and eventually an increase in earnings.

Again, every context is unique, and there are certain situations when an hourly fee structure is best. These include:

• When you’re gathering information to develop a fee structure
• Gauging profitability in a newer firm and trying to determine the hours you need to work and remain profitable
• Early in your career when you need more time to complete basic tasks

Outside of those circumstances, a fixed fee is recommended and preferred. As your skill and expertise grow, so will your abilities to complete tasks quickly. With an hourly fee, this means having to take on more clients to maintain (and hopefully increase) your profits.

A fixed fee structure is about value. The expertise and skill you bring to service are of more importance than just an hour of work for clients. Pricing your abilities based on knowledge is not only good for your business but is ultimately valuable for your clients as well.

How should I price accounting and bookkeeping services ?

While there is still a debate surrounding hourly versus fixed fees in some aspects of the business, accounting and bookkeeping is not one of them.

Accounting and bookkeeping services (as well as other service lines, such as simple tax preparations) are almost universally charged as a fixed fee, and there is a market expectation for that pricing structure.

When determining a fee structure, many accountants call other firms and ask for quotes. They use the average of those quotes to determine a fair and competitive price for their services.

Another resource is local and national affiliations and associations. Many of the larger ones (such as the National Association of Tax Preparers) will distribute recommended price structures and other useful information. 

How much should a CPA charge for taxes?

While you do not have to be a CPA to prepare or file taxes, the training and expertise it requires to gain that credential matters. Simply put, you’re a CPA, and you deserve a premium for your services.

When trying to structure fees, it’s important to set a minimum job value. By setting a minimum job value at, say, $500, you won’t get mired in lower-level work that you likely don’t want to take on. Plus, that work can take up time and pull you away from more valuable work that you’d rather be doing.

Knowing what you want to charge and identifying the value you bring to your clients is critical. You are providing a service to your clients, but you’re also giving them a value based on your credentials and experience. So, it’s up to you to set the standards and have them choose between lower costs (them doing it their self) versus the value of having a CPA prepare your taxes.

That said, there’s a balance.

Many CPAs make a practice of “writing down” certain services because they know their hourly rate for larger projects can quickly become untenable for a client. Not only is this seen as a discount by the client, but it also allows you to create a fixed-fee structure for your services and show the clients the savings and value they receive.

If they need more staff, what do accounting firms look for when hiring?

When hiring, accounting firms are like many businesses and are looking for a combination of credentials, experience, and the ability to perform the necessary tasks. However, in an increasingly competitive hiring market, many firms are beginning to look at soft skills as valuable for new hires.

For decades, accounting firms have focused primarily on credentials. However, more and more, it’s less and less about certification and more about aptitude. For the most part, it’s easier to train accounting knowledge than it is to build customer service skills. When hiring, it’s important to look at the qualities a candidate can bring into a firm – not necessarily just credentials.

Of course, experience and credentials do matter. Especially when the experience sets for an accountant is specific and narrow. What types of tax returns have you prepared? What specializations do you carry? And credentials such as CPA, EA, attorneys, and state certifications (when required) are all still attractive to firms looking to hire.

How much does it cost to start an accounting firm?

Start-up costs can range from $2,500 to $25,000. Your location and your goals will determine cost in several ways, including whether you want to start a traditional brick and mortar firm or are looking to create a virtual office environment.

It’s important to remember that, besides physical (or virtual) space, accounting firms need to find and install the necessary equipment and technology to help their practice run more efficiently. That, in many ways, is the first step for a new entrepreneur. Once they’ve found a tax solution that can help them achieve their goals, they’ll be able to begin tackling the other day-to-day tasks and questions of running a business.

What’s the best business structure for accounting firms?

Finding the best business structure for your accounting firm is a critical part of not only ensuring success but helping to minimize both your tax burden and your risk.

While the circumstances of what your incorporation looks like will depend on your approach, it is considered a best practice to become incorporated right off the bat due to the legal protections it provides.

Popular options include:

• Partnership

If you’re running a solo firm, you’re likely going to be looking at an S-Corp, which allows you to pay yourself as an employee. However, if you are working with other partners, a partnership might be more preferential, as it provides a little more flexibility with payment. You are permitted to take draws or distributions, and it doesn’t necessarily require a payroll department because it’s not considered “wages” per se.

Whichever structure you choose at the beginning, know that it will likely evolve throughout the maturity of your firm. For instance, a firm might accept the risk and start as unincorporated to avoid the incorporation fees. Then they might transition to S-Corp. Over time, as additional owners move into the entity structure, the firm can add additional shareholders or can reorganize as a partnership.

It’s better to have a separate legal entity than to not and better to have separate federal filing than to not.

How do I get accounting clients?

The consensus is word of mouth. However, while a strong work ethic, exceptional service, and competitive pricing will undoubtedly attract clients, a successful business always requires more than just good luck.

Here are a few tips on how to increase your client base:

• Be a business owner, not just an accountant. This means focusing on solid business practices and looking for ways to ensure both stability and growth.
• Market yourself . This goes beyond starting a business and hoping people show up. Look for ways to partner with other companies and firms, as well as networking opportunities in the community. The local chamber of commerce is an excellent resource.
• Don’t forget about friends and family. While they won’t be able to maintain your business over the long haul, friends and family are a great starting place not only for initial clients but also for referrals.
• Take advantage of easy and cheap technology . Google Ads can be capped at $20 and make for productive investments to help drive local searches for accounting firm.
• Be in the community. Look for professional speaking engagements that you can offer to local groups for free. Create thought leadership presentations, teach community education classes and provide a venue to show your skills and knowledge.

You’ll find other ideas in our blog post on finding new clients .

How about social media and online presence for accountants – is it worth the effort?

Websites, social media, and various other online presences are a great way to establish credibility in the market.

For the most part, a simple online presence is relatively easy to start with minimal start-up costs. And while an online presence won’t guarantee an increase in exposure, not having one can have a negative impact and can discredit you to a potential client. In many cases, website and social media become an augmentation to your word of mouth referrals. Most people won’t simply call a number without the opportunity to do some basic online research.

However, there is a difference between a website presence and social media. In most cases, a website is static and allows businesses to transmit basic, evergreen information such as phone number, services provided, and credentials. Social media, on the other hand, can drive business in a longer and more indirect fashion.

Auto-posting any relevant story or information can help create a brand on social media – one where you’re seen as an authority on tax and accounting subjects. Posting constant content can help with visibility and, ultimately, increasing your customer base.  

If you think you may need help with this, take a look at our social media and other digital marketing solutions for accounting firms .

Some firms focus on a specific accounting specialization. Should I consider a niche accounting service?

Put simply, the more specialized you are, the more profitable you are. However, it’s not as much a question of “should you” but “can you.”

Many – if not most – firms will start as generalists and then slowly make their way a more niche practice. Sometimes a firm will intentionally build clients in one area. Others realize they have, say, many construction clients and then move to the particular niche.

If moving toward a niche practice, consider:

• What’s your timeline? When should you plan to transition to a specialized practice? When is the right time to stop chasing general clients?
• Partnering with more generalist firms can help take on other needs from clients while you take only the niche side of their business.
• Gaining professional affiliations is important. They can help distinguish you in a competitive market and further signal your niche work.

What’s the most popular accounting niche?

Niches, like many things, are often dependent on location, interest, and understanding where there is a need across different businesses. However, some of the most successful niches are the ones serving fellow professionals such as doctors, dentists, attorneys.

Services based niches as opposed to manufacturing-based are also on the rise. For example, real estate professionals, landscapers, and farming clients are becoming a more prosperous and unique way to do business.

However, it’s important to remember that you have to target businesses where you have the right location and the right skills. Again, farming has particular needs and goals. If you can fill them, then you have a specialization that is highly valuable to that market.

What do prospective clients consider when deciding how to choose an accountant? What do they look for in a CPA?

What are the things that are most likely to influence a client’s perception of you in the little amount of information they’re able to get from a flyer, website, or social media? While the idea that “first impressions matter” may seem a little cliché, they still matter to your clients. As a result, making sure your communication is direct, pleasing, and engaging is critical to your success.

Some important deciding factors include:

• Aesthetics. What’s the aesthetic of your website? Is it mobile compliant? Does it seem modern? Do your documents use color and seem to be professionally designed? Take care to control the new prospective client’s perception of you and what they think they see in you.
• Have a professional place to meet. Whether you operate a brick-and-mortar business or a virtual one, having a professional place to meet with clients is essential.
• Clients want comfort and assurance . Clients want the assurance that, if the IRS or another regulatory authority comes after them, that you be my defender and stand between them and the organization? Extending that sense of comfort is going to help influence them.
• Know your target market . Know what your market is looking for and make it very clear that’s what you can provide them.    

Thanks to our subject matter experts Jordan Kleinsmith and Mo Arbas for their input into this article.

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Table of Contents

What is a business plan, the advantages of having a business plan, the types of business plans, the key elements of a business plan, best business plan software, common challenges of writing a business plan, become an expert business planner, business planning: it’s importance, types and key elements.

Every year, thousands of new businesses see the light of the day. One look at the  World Bank's Entrepreneurship Survey and database  shows the mind-boggling rate of new business registrations. However, sadly, only a tiny percentage of them have a chance of survival.   

According to the Bureau of Labor Statistics, about 20% of small businesses fail in their first year, about 50% in their fifth year.

Research from the University of Tennessee found that 44% of businesses fail within the first three years. Among those that operate within specific sectors, like information (which includes most tech firms), 63% shut shop within three years.

Several  other statistics  expose the abysmal rates of business failure. But why are so many businesses bound to fail? Most studies mention "lack of business planning" as one of the reasons.

This isn’t surprising at all. 

Running a business without a plan is like riding a motorcycle up a craggy cliff blindfolded. Yet, way too many firms ( a whopping 67%)  don't have a formal business plan in place. 

It doesn't matter if you're a startup with a great idea or a business with an excellent product. You can only go so far without a roadmap — a business plan. Only, a business plan is so much more than just a roadmap. A solid plan allows a business to weather market challenges and pivot quickly in the face of crisis, like the one global businesses are struggling with right now, in the post-pandemic world.  

But before you can go ahead and develop a great business plan, you need to know the basics. In this article, we'll discuss the fundamentals of business planning to help you plan effectively for 2021.  

Now before we begin with the details of business planning, let us understand what it is.

No two businesses have an identical business plan, even if they operate within the same industry. So one business plan can look entirely different from another one. Still, for the sake of simplicity, a business plan can be defined as a guide for a company to operate and achieve its goals.  

More specifically, it's a document in writing that outlines the goals, objectives, and purpose of a business while laying out the blueprint for its day-to-day operations and key functions such as marketing, finance, and expansion.

A good business plan can be a game-changer for startups that are looking to raise funds to grow and scale. It convinces prospective investors that the venture will be profitable and provides a realistic outlook on how much profit is on the cards and by when it will be attained. 

However, it's not only new businesses that greatly benefit from a business plan. Well-established companies and large conglomerates also need to tweak their business plans to adapt to new business environments and unpredictable market changes. 

Before getting into learning more about business planning, let us learn the advantages of having one.

Since a detailed business plan offers a birds-eye view of the entire framework of an establishment, it has several benefits that make it an important part of any organization. Here are few ways a business plan can offer significant competitive edge.

• Sets objectives and benchmarks: Proper planning helps a business set realistic objectives and assign stipulated time for those goals to be met. This results in long-term profitability. It also lets a company set benchmarks and Key Performance Indicators (KPIs) necessary to reach its goals. 
• Maximizes resource allocation: A good business plan helps to effectively organize and allocate the company’s resources. It provides an understanding of the result of actions, such as, opening new offices, recruiting fresh staff, change in production, and so on. It also helps the business estimate the financial impact of such actions.
• Enhances viability: A plan greatly contributes towards turning concepts into reality. Though business plans vary from company to company, the blueprints of successful companies often serve as an excellent guide for nascent-stage start-ups and new entrepreneurs. It also helps existing firms to market, advertise, and promote new products and services into the market.
• Aids in decision making: Running a business involves a lot of decision making: where to pitch, where to locate, what to sell, what to charge — the list goes on. A well thought-out business plan provides an organization the ability to anticipate the curveballs that the future could throw at them. It allows them to come up with answers and solutions to these issues well in advance.
• Fix past mistakes: When businesses create plans keeping in mind the flaws and failures of the past and what worked for them and what didn’t, it can help them save time, money, and resources. Such plans that reflects the lessons learnt from the past offers businesses an opportunity to avoid future pitfalls.
• Attracts investors: A business plan gives investors an in-depth idea about the objectives, structure, and validity of a firm. It helps to secure their confidence and encourages them to invest. 

Now let's look at the various types involved in business planning.

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Business plans are formulated according to the needs of a business. It can be a simple one-page document or an elaborate 40-page affair, or anything in between. While there’s no rule set in stone as to what exactly a business plan can or can’t contain, there are a few common types of business plan that nearly all businesses in existence use.  

Here’s an overview of a few fundamental types of business plans. 

• Start-up plan: As the name suggests, this is a documentation of the plans, structure, and objections of a new business establishments. It describes the products and services that are to be produced by the firm, the staff management, and market analysis of their production. Often, a detailed finance spreadsheet is also attached to this document for investors to determine the viability of the new business set-up.
• Feasibility plan: A feasibility plan evaluates the prospective customers of the products or services that are to be produced by a company. It also estimates the possibility of a profit or a loss of a venture. It helps to forecast how well a product will sell at the market, the duration it will require to yield results, and the profit margin that it will secure on investments. 
• Expansion Plan: This kind of plan is primarily framed when a company decided to expand in terms of production or structure. It lays down the fundamental steps and guidelines with regards to internal or external growth. It helps the firm to analyze the activities like resource allocation for increased production, financial investments, employment of extra staff, and much more.
• Operations Plan: An operational plan is also called an annual plan. This details the day-to-day activities and strategies that a business needs to follow in order to materialize its targets. It outlines the roles and responsibilities of the managing body, the various departments, and the company’s employees for the holistic success of the firm.
• Strategic Plan: This document caters to the internal strategies of the company and is a part of the foundational grounds of the establishments. It can be accurately drafted with the help of a SWOT analysis through which the strengths, weaknesses, opportunities, and threats can be categorized and evaluated so that to develop means for optimizing profits.

There is some preliminary work that’s required before you actually sit down to write a plan for your business. Knowing what goes into a business plan is one of them. 

Here are the key elements of a good business plan:

• Executive Summary: An executive summary gives a clear picture of the strategies and goals of your business right at the outset. Though its value is often understated, it can be extremely helpful in creating the readers’ first impression of your business. As such, it could define the opinions of customers and investors from the get-go.  
• Business Description: A thorough business description removes room for any ambiguity from your processes. An excellent business description will explain the size and structure of the firm as well as its position in the market. It also describes the kind of products and services that the company offers. It even states as to whether the company is old and established or new and aspiring. Most importantly, it highlights the USP of the products or services as compared to your competitors in the market.
• Market Analysis: A systematic market analysis helps to determine the current position of a business and analyzes its scope for future expansions. This can help in evaluating investments, promotions, marketing, and distribution of products. In-depth market understanding also helps a business combat competition and make plans for long-term success.
• Operations and Management: Much like a statement of purpose, this allows an enterprise to explain its uniqueness to its readers and customers. It showcases the ways in which the firm can deliver greater and superior products at cheaper rates and in relatively less time. 
• Financial Plan: This is the most important element of a business plan and is primarily addressed to investors and sponsors. It requires a firm to reveal its financial policies and market analysis. At times, a 5-year financial report is also required to be included to show past performances and profits. The financial plan draws out the current business strategies, future projections, and the total estimated worth of the firm.

The importance of business planning is it simplifies the planning of your company's finances to present this information to a bank or investors. Here are the best business plan software providers available right now:

• Business Sorter

The importance of business planning cannot be emphasized enough, but it can be challenging to write a business plan. Here are a few issues to consider before you start your business planning:

• Create a business plan to determine your company's direction, obtain financing, and attract investors.
• Identifying financial, demographic, and achievable goals is a common challenge when writing a business plan.
• Some entrepreneurs struggle to write a business plan that is concise, interesting, and informative enough to demonstrate the viability of their business idea.
• You can streamline your business planning process by conducting research, speaking with experts and peers, and working with a business consultant.

Whether you’re running your own business or in-charge of ensuring strategic performance and growth for your employer or clients, knowing the ins and outs of business planning can set you up for success. 

Be it the launch of a new and exciting product or an expansion of operations, business planning is the necessity of all large and small companies. Which is why the need for professionals with superior business planning skills will never die out. In fact, their demand is on the rise with global firms putting emphasis on business analysis and planning to cope with cut-throat competition and market uncertainties.

While some are natural-born planners, most people have to work to develop this important skill. Plus, business planning requires you to understand the fundamentals of business management and be familiar with business analysis techniques . It also requires you to have a working knowledge of data visualization, project management, and monitoring tools commonly used by businesses today.   

Simpliearn’s Executive Certificate Program in General Management will help you develop and hone the required skills to become an extraordinary business planner. This comprehensive general management program by IIM Indore can serve as a career catalyst, equipping professionals with a competitive edge in the ever-evolving business environment.

What Is Meant by Business Planning?

Business planning is developing a company's mission or goals and defining the strategies you will use to achieve those goals or tasks. The process can be extensive, encompassing all aspects of the operation, or it can be concrete, focusing on specific functions within the overall corporate structure.

What Are the 4 Types of Business Plans?

The following are the four types of business plans:

Operational Planning

This type of planning typically describes the company's day-to-day operations. Single-use plans are developed for events and activities that occur only once (such as a single marketing campaign). Ongoing plans include problem-solving policies, rules for specific regulations, and procedures for a step-by-step process for achieving particular goals.

Strategic Planning

Strategic plans are all about why things must occur. A high-level overview of the entire business is included in strategic planning. It is the organization's foundation and will dictate long-term decisions.

Tactical Planning

Tactical plans are about what will happen. Strategic planning is aided by tactical planning. It outlines the tactics the organization intends to employ to achieve the goals outlined in the strategic plan.

Contingency Planning

When something unexpected occurs or something needs to be changed, contingency plans are created. In situations where a change is required, contingency planning can be beneficial.

What Are the 7 Steps of a Business Plan?

The following are the seven steps required for a business plan:

Conduct Research

If your company is to run a viable business plan and attract investors, your information must be of the highest quality.

Have a Goal

The goal must be unambiguous. You will waste your time if you don't know why you're writing a business plan. Knowing also implies having a target audience for when the plan is expected to get completed.

Create a Company Profile

Some refer to it as a company profile, while others refer to it as a snapshot. It's designed to be mentally quick and digestible because it needs to stick in the reader's mind quickly since more information is provided later in the plan.

Describe the Company in Detail

Explain the company's current situation, both good and bad. Details should also include patents, licenses, copyrights, and unique strengths that no one else has.

Create a marketing plan ahead of time.

A strategic marketing plan is required because it outlines how your product or service will be communicated, delivered, and sold to customers.

Be Willing to Change Your Plan for the Sake of Your Audience

Another standard error is that people only write one business plan. Startups have several versions, just as candidates have numerous resumes for various potential employers.

Incorporate Your Motivation

Your motivation must be a compelling reason for people to believe your company will succeed in all circumstances. A mission should drive a business, not just selling, to make money. That mission is defined by your motivation as specified in your business plan.

What Are the Basic Steps in Business Planning?

These are the basic steps in business planning:

Summary and Objectives

Briefly describe your company, its objectives, and your plan to keep it running.

Services and Products

Add specifics to your detailed description of the product or service you intend to offer. Where, why, and how much you plan to sell your product or service and any special offers.

Conduct research on your industry and the ideal customers to whom you want to sell. Identify the issues you want to solve for your customers.

Operations are the process of running your business, including the people, skills, and experience required to make it successful.

How are you going to reach your target audience? How you intend to sell to them may include positioning, pricing, promotion, and distribution.

Consider funding costs, operating expenses, and projected income. Include your financial objectives and a breakdown of what it takes to make your company profitable. With proper business planning through the help of support, system, and mentorship, it is easy to start a business.

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What is Accounting and Why it Matters For Your Business

Reviewed by

March 4, 2022

This article is Tax Professional approved

When you start a business, you’ve suddenly got all kinds of new responsibilities. One of the most important? Business accounting.

But what exactly is accounting? What value does it provide your business? And how much time is it going to require?

The good news is that with the right people, tools, and resources, accounting doesn’t have to be a black hole for your time.

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In this post, we’ll cover the basics of accounting, from budgets to other accounting functions. But if you want to jump straight to the how-to, you can download our free guide to small business accounting .

A simple definition of accounting

Accounting is how your business records, organizes, and understands its financial information.

You can think of accounting as a big machine that you put raw financial information into—records of all your business transactions, taxes, projections, etc.—that then tells you a story about the financial state of your business.

Accounting is how you get a clear picture of your financial position. It tells you whether or not you’re making a profit, what your cash flow is, what the current value of your company’s assets and liabilities is, and which parts of your business are actually making money.

Accounting vs. bookkeeping

Accounting and bookkeeping are both part of the same process: keeping your financial records in order. However, bookkeeping is more concerned with recording everyday financial transactions and operations, while accounting puts that financial data to good use through analysis, strategy, and tax planning.

The accounting cycle

Accounting begins with recording transactions. Business transactions—any activity or event that involves your business’s money—need to be put into your company’s general ledger . Recording business transactions this way is part of bookkeeping.

Bookkeeping is the first step of what accountants call the “ accounting cycle ”: a process designed to take in transaction data and spit out accurate and consistent financial reports.

The accounting cycle has six major steps:

• Analyze and record transactions. Collect any invoices, bank or credit statements, and receipts from business transactions.
• Post journal entries to the ledger. It’s time to take those documents and start making journal entries for your transactions. Journal entries include three components of a transaction: when it happened, what it was for, and how much it was. Some businesses use single-entry accounting where only the expense or revenue is entered. But more common is double-entry accounting, which records each transaction in two accounts: where money is coming from and where it’s going.
• Prepare an unadjusted trial balance. At the end of a reporting period, list all of your business’s accounts and figure out their balances.
• Prepare adjusting entries at the end of the period. When you need to update entries you’ve already made, you prepare adjusting entries. For example, if a client is late on paying an invoice and you offer a 5% discount to help them pay, you would enter the discount as an adjusting entry, as opposed to changing the entry you’ve already made.
• Prepare an adjusted trial balance . After entering in adjusting entries, you’re left with an adjusted trial balance. This information is now ready to be turned into financial statements.
• Prepare financial statements. Finally, all the information you’ve collected is converted into your financial statements. This final step includes summarizing all your financial information into succinct reports for easy review.

Accounting software takes your accounting information and automates most of these rules and processes, so we’re going to skip over the gritty details of the accounting cycle and talk about the end product: financial statements.

Suggested reading: A Beginner’s Guide to The Accounting Cycle

Financial statements

Financial statements are reports that summarize how your business is doing financially.

There are three main types of financial statements: the balance sheet , income statement , and cash flow statement . Together, they tell you where your business’s money is and how it got there.

Let’s say you’re a self-employed surfing instructor who bills clients for surfing lessons. Financial statements can tell you what your most profitable months are, how much money you’ve spent on supplies, and what the total value of your business is.

Accounting software can help you generate financial statements easily, or you can have a bookkeeper do it for you.

Suggested reading: The ROI of Hiring a Bookkeeper

Generally accepted accounting principles (GAAP)

Every company is different, but in order to make accurate financial comparisons between companies, we need a common language to describe each of them. That’s what generally accepted accounting principles (GAAP) are: a series of standards and procedures that accountants at all companies must adhere to when preparing financial statements.

A non-governmental body called the Financial Accounting Standards Board sets the GAAP. While there are no laws enforcing these standards, most lenders and business partners in the United States will require that you adhere to GAAP. If you’re in Canada, you’ll use a different system called International Financial Reporting Standards, or IFRS .

Cash vs. Accrual

You can do your business accounting on a cash or accrual basis. The difference between the two comes down to timing.

Cash basis is the most basic accounting. On a cash basis, you only record transactions when money changes hands. If you receive an invoice on the 10th but don’t pay it until the 15th, the transaction is recorded on the 15th.

With accrual basis, you record transactions twice: when they occur and when they’re paid. For the invoice above, you record the expense on the 10th and the payment on the 15th as two separate transactions.

The method you use depends on what you need from your business finances. Cash basis is simpler and easier to stay on top of, while accrual offers greater insights for more detail-oriented business owners.

Most small businesses have more basic accounting needs, which means cash basis is often the right fit.

Suggested reading: Cash Basis Accounting vs. Accrual Accounting

The different types of accounting

Financial accounting.

Every year, your company will generate financial statements that people outside of your company—people like investors, lenders, government agencies, auditors, potential buyers, etc.—can use to learn more about your business’s financial health and profitability.

Preparing the company’s annual financial statements this way is called financial accounting. If you’re looking to hire a financial accountant, start with looking into how much an accountant costs .

Managerial accounting

Managerial accounting (or management accounting) is similar to financial accounting, with two important exceptions:

• The statements produced by managerial accounting are for internal use only.
• They’re generated much more frequently—often on a quarterly or monthly basis.

If your business ever grows to the point where you need to hire an accountant full-time, most of their time will be taken up by managerial accounting. You’ll be paying them to produce reports that provide regular updates on the company’s financial health and help you interpret those reports.

This is somewhat similar to the work a financial analyst might do, although a financial analyst will also look at past and current trends in the larger economy, not just your business, to inform their recommendations.

Tax accounting

Tax accounting is designed to make sure that you don’t pay more income tax than you are legally required to by the IRS. An example of this is when your accountant provides you with recommendations for how to get the most out of your tax return.

Tax accounting is regulated by the Internal Revenue Service (IRS), and the IRS legally requires that your tax accounting adhere to the Internal Revenue Code (IRC).

Cost accounting

Whenever you’re trying to figure out how to increase your margin or deciding if raising prices is a good idea, you’re doing cost accounting.

Cost accounting involves analyzing all of the costs associated with producing an output (whether it be a physical product or service) in order to make better decisions about pricing, spending, and inventory.

Cost accounting is often a prerequisite of managerial accounting because managers use cost accounting reports to make better business decisions. It also feeds into financial accounting since costing data is often required when compiling a balance sheet.

Credit accounting

Credit accounting involves analyzing all of a company’s unpaid bills and liabilities to make sure that a company’s cash isn’t constantly tied up in paying for them.

Credit accounting can be one of the most difficult kinds of accounting to do well, in part because it’s a difficult subject to be critical about. Talking about debts can be a sensitive, but necessary, conversation.

Why accounting matters for your small business

Accounting helps you plan for growth.

Every great journey begins with a roadmap. When you’re planning your company’s growth, it’s essential to set goals. What should your profits look like one year from now? How about in five years?

Keeping up with your accounting helps you stay on top of your business finances. That information is essential to assess how quickly your business is developing and guide future decision making. Without accurate reporting, you won’t have the full financial picture.

Has your cost of goods sold increased? Are margins thinner? Are your growth goals reasonable? Without financial statements, you won’t have an objective answer.

Accounting is essential for securing a loan

Up-to-date financial statements are essential if you want to fund your small business with a loan.

For instance, suppose you want to apply for a Small Business Association (SBA) loan through one of the big banks. You’ll need to provide, on average, three years of financial statements, plus a one-year cash flow projection . It’s virtually impossible to deliver any of these if you don’t have an accounting system in place.

Suggested reading: What to Prepare When Applying for a Business Loan

You need accounting to attract investors or sell your business

You may not be planning to court investors or sell your business right now, but it’s a good idea to leave your options open. And the best way to do that is to put a proper accounting system in place now.

Potential investors, stakeholders, or buyers will expect accounting records vetted by a CPA (Certified Public Accountant) that prove your business is profitable and on track for growth.

Accounting helps you get paid

When a customer owes you money, it appears as Accounts Receivable (AR) on your balance sheet , which is generated automatically by your accounting software or manually by you or your accountant.

The balance sheet tells you how much of your AR you’ve already pocketed during the month and how much is still outstanding.

By referring to your balance sheet, you can track how effectively you’re collecting payment. Then you can put in place processes—like harder payment deadlines or better follow-up with clients—to make sure you get your hands on the money you’ve earned when you need it.

Accounting helps you stay on top of your debts

If your business owes debts to a variety of sources, like credit cards, loans, and accounts payable, you’ll have to jump into multiple accounts to check what you’re left owing.

The balance sheet shows everything you owe in one place. It also shows all your bank account balances so you can reference both at the same time. It’s the perfect report to review to make sure you have the cash available to tend to your debts and plan future payments.

Accounting keeps you out of jail (or at least saves you from fines)

As your business grows, it can be difficult to keep track of all your tax information reporting obligations. What’s more, if there are mistakes in your financial reports, you run the risk of misreporting your income. Either mistake could land you in hot water with the IRS and other regulators.

Solid accounting gives you complete, accurate financial records , which reduces your risk of breaking tax laws and the chance of an audit . And, when you have an accountant filing your taxes for you, you can be sure they’ll be done accurately and on time.

Accounting helps you pay the right amount of taxes (and not a dollar more)

If you don’t pay your tax bill in full, the IRS will fine you . But they won’t give you a gold star for paying too much.

You can tell you’re paying too much in taxes if your business consistently receives large tax refunds.

Remember: a tax refund isn’t free cash from the IRS. It’s money you’ve overpaid the government that you could’ve used to invest in your business instead.

Refunds are often the result of miscalculated quarterly estimated tax payments . To calculate quarterly estimated tax payments accurately, you need to predict your income. It’s almost impossible to do so without reliable financial records produced through accurate accounting.

Suggested reading: The Top 19 Self-Employment Tax Deductions

What an accountant does

An accountant does more than just year-end tax preparation. A skilled CPA will save you time by communicating your company’s financial state to you in clear language, while anticipating your financial needs.

Accounting professionals like CPAs or tax advisors can also provide you with knowledge and insight that are simply inaccessible to non-accountants. These experts can offer guidance on tax deductions you didn’t know you qualified for, tax rules you didn’t know you were breaking, and best practices picked up while working for other companies in your industry.

If those are tips your business can benefit from right now, it might be time to hire an accountant .

Suggested reading: How to Find an Accountant

Accounting solutions

Small business accounting software has made big advancements as more people take the entrepreneurial path.

The self-service software you use is now almost equal to the accounting software used in firms all over the world. There are now a wide array of options available—which one is best for you depends on your business’s accounting needs.

Freshbooks offers integrated invoicing that makes it simple to manage your accounts receivable and your accounting in one place. Automated bank reconciliation will import all transactions from your business bank accounts, but you will have to review and categorize each one. Their time-tracking functionality also makes it easy for freelancers who bill by the hour. Freshbooks is a good fit for someone generating a lot of invoices with a low number of transactions.

Intuit makes both Quickbooks and a payroll processor, and allows you to bundle both for one monthly cost. The payroll service automates payroll taxes, checks, and all year-end forms, but the accounting platform is mostly manual. While the tool is powerful and can help a skilled user navigate multiple aspects of running a business, it takes a good amount of know-how to get the most out of it.

If you prefer a completely hands-off approach to bookkeeping and accounting, Bench might be right for you. Connect your business bank accounts to have transactions automatically imported, categorized, and reviewed by your personal bookkeeper.

Communication is quick and reliable—the Bench platform allows you to send messages straight to your bookkeeper or set up a call to go over any financial questions that might come up. Our premium package even includes tax filing, which makes all accounting tasks completely automated. Learn more about how Bench can help .

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What Is Accounting? Definition and Basics, Explained

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Accounting is the practice of tracking your business's financial data and interpreting it into valuable insights. This allows you to generate crucial financial statements, such as a balance sheet, cash flow statement, and profit and loss report. It sounds simple, but in reality, a lot of behind-the-scenes work goes into accurately reporting on a business's financial state.

Accounting requires meticulous record-keeping and financial transaction tracking year-round. Moreover, keeping accurate records helps ensure your business is prepared to file taxes, present information to investors or even apply for a loan.

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Accounting basics

Recording financial transactions.

For a small business, accounting involves tracking money flow in various forms, including operating expenses (e.g., marketing, utilities, rent), cost of goods sold, accounts receivable and sales. It also takes into account liabilities, such as accounts payable, business loans and taxes, and the value of your assets, such as cash and inventory.

Let's say a client just paid their invoice online, or money was withdrawn from your checking account to pay a utility bill. Each transaction — money in or money out — gets recorded. Most business owners opt for small-business accounting software to help automate the process and reduce the likelihood of error.

Organizing financial transactions

A chart of accounts helps organize and make sense of all of a business's recorded transactions. It's essentially a list of financial accounts, and each time you record a transaction, you classify it under a particular account. Most accounts fall into five overarching account types: assets, liabilities, equity, expenses or revenue. Categorizing transactions accurately is critical for producing financial statements, which each pull information from specific accounts.

After you enter a transaction and categorize it under an account, your accounting software will create a journal entry behind the scenes. Most modern accounting software uses the double-entry accounting system , which requires two book entries — one debit and one credit — for every business transaction. These entries are summarized in the general ledger.

Running accounting reports

After recording and categorizing transactions, you can analyze the results by running reports. There are a few main financial statements that businesses rely on:

Income statement . Also called a profit and loss statement, the income statement consolidates data on revenue and expenses to show how profitable your business was over a specific period. It also shows how much it's paid in expenses and taxes. 

Balance sheet . The balance sheet takes your business's assets (e.g., inventory, equipment and accounts receivable ), liabilities (e.g., accounts payable or taxes owed) and equity into account. 

Cash flow statement . As the name implies, this accounting report gives you an overview of your business's cash flow . It breaks down how your business earns cash and what that cash is going toward. Ideally, your cash flow will be positive and indicate that you have enough cash to cover future liabilities. 

The figures in your reports will look different depending on whether you use cash or accrual basis accounting .

Following accounting standards

Gaap accounting.

The Financial Accounting Standards Board, an independent organization recognized by the federal government, established a set of standards called generally accepted accounting principles , or GAAP, that publicly traded companies must comply with. For example, a company has to reference specific time periods in reports and follow the same accounting method across time periods to ensure accurate comparisons. Though small businesses aren't required to follow the same rules, doing so can help ensure a higher level of consistency.

How do small businesses use accounting?

You can use accounting to track cash flow and quantify your company's financial health. In addition, accounting makes it possible to create financial projections to plan for the future and anticipate sales and expenses. Without accounting, it would be incredibly difficult to gauge your business's performance and whether it's on track to meet its goals and obligations.

What do accountants do?

Small businesses hire accountants to advise them on their financial situation and help file taxes. Aside from handling taxes and compliance issues, they can help you optimize budgets, spot opportunities to save, and even apply for business loans.

Whereas you might only periodically consult your accountant, a bookkeeper touches base more frequently and handles daily accounting tasks. Regardless of who you hire, knowing basic accounting principles can help you understand your business better and have more productive conversations with your financial team.

» MORE: Best accounting and bookkeeping apps for small businesses

Accounting consists of tracking financial transactions and analyzing what they mean for your business.

Accounting helps you gauge where your small business stands financially, what it can afford at any given time, and where its money is coming from and going. In addition to this financial overview, proper accounting practices prepare your business to file taxes and produce financial statements needed for potential investors or business loan applications.

When running a small business, you should choose an accounting software product and consider hiring an accountant. Accounting software does a lot of the heavy lifting (such as keeping track of debits and credits) for you. However, it's still important to understand basic accounting principles to know what's happening behind the scenes. Business owners should be able to enter transactions, reconcile accounts and interpret financial statements accurately.

Accountants can help take some of the pressure off tax season by handling the preparation and filing for you. If your business can afford to hire an accountant, doing so could save you time and potentially even tax dollars.

On a similar note...

The Role of Accounting in Business and Why It’s Important

• February 19, 2019

The term accounting is very common, especially during tax season.

But before we dive into the importance of accounting in business, let’s cover the basics – what is accounting?

Accounting refers to the systematic and detailed recording of financial transactions of a business. There are many types, from accounting for small businesses, government, forensic, and management accounting, to accounting for corporations.

Why Is Accounting Important?

Accounting plays a vital role in running a business because it helps you track income and expenditures, ensure statutory compliance, and provide investors, management, and government with quantitative financial information which can be used in making business decisions.

There are three key financial statements generated by your records.

• The income statement provides you with information about the profit and loss
• The balance sheet gives you a clear picture on the financial position of your business on a particular date.
• The cash flow statement is a bridge between the income statement and balance sheet and reports the cash generated and spent during a specific period of time.

It is critical you keep your financial records clean and up to date if you want to keep your business afloat. Here are just a few of the reasons why it is important for your business, big or small!

It Helps in Evaluating the Performance of Business

Your financial records reflect the results of operations as well as the financial position of your small business or corporation. In other words, they help you understand what’s going on with your business financially. Not only will clean and up to date records help you keep track of expenses, gross margin, and possible debt, but it will help you compare your current data with the previous accounting records and allocate your budget appropriately.

It Ensures Statutory Compliance

Laws and regulations vary from state to state, but proper accounting systems and processes will help you ensure statutory compliance when it comes to your business.

The accounting function will ensure that liabilities such as sales tax, VAT, income tax, and pension funds, to name a few, are appropriately addressed.

It Helps to Create Budget and Future Projections

Budgeting and future projections can make or break a business, and your financial records will play a crucial role when it comes to it.

Business trends and projections are based on historical financial data to keep your operations profitable. This financial data is most appropriate when provided by well-structured accounting processes.

It Helps in Filing Financial Statements

Businesses are required to file their financial statements with the Registrar of Companies. Listed entities are required to file them with stock exchanges, as well as for direct and indirect tax filing purposes. Needless to say, accounting plays a critical role in all these scenarios.

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What Is Accounting? The Basics Of Accounting

Updated: Jan 20, 2023, 2:00am

Table of Contents

What is accounting, types of accounting, ways to manage your business accounting, effective accounting practices to adopt immediately, frequently asked questions (faqs).

Accounting is the process of keeping track of all financial transactions within a business, such as any money coming in and money going out. It’s not only important for businesses in terms of record keeping and general business management, but also for legal reasons and tax purposes. Though many businesses leave their accounting to the pros, it’s wise to understand the basics of accounting if you’re running a business. To help, we’ll detail everything you need to know about the basics of accounting.

Accounting is the process of recording, classifying and summarizing financial transactions. It provides a clear picture of the financial health of your organization and its performance, which can serve as a catalyst for resource management and strategic growth.

Accounting is like a powerful machine where you input raw data (figures) and get processed information (financial statements). The whole point is to give you an idea of what’s working and what’s not working so that you can fix it.

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Why Accounting Is Important

Accounting information exposes your company’s financial performance; it tells whether you’re making a profit or just running into losses at the end of the day.

This information is not just available to you, but also to external users such as investors, stakeholders and creditors who would want to be enlightened about your business, to figure out whether it’ll be a good choice to invest in and what they can expect in returns.

Besides playing a key role in providing transparency for stakeholders, accounting also ensures you make informed decisions backed by data.

Accountant vs. CPA vs. Tax Pro

In accounting, you’ll come across certain titles which appear to bear similar duties but actually have unique job descriptions. In this section, we’ll briefly review the roles of accountants vs. CPAs and tax professionals.

An accountant is a professional with a bachelor’s degree who provides financial advice, tax planning and bookkeeping services. They perform various business functions such as the preparation of financial reports, payroll and cash management.

A certified public accountant (CPA) is a type of professional accountant with more training and experience than a typical accountant. Aspiring CPAs are expected to have a bachelor’s degree, more than two years of public accounting work experience, pass all four parts of the CPA exam and meet additional state-specific qualifications if required. In the U.S., licensed CPAs must have earned their designation from the American Institute of Certified Public Accountants (AICPA).

Tax professionals include CPAs, attorneys, accountants, brokers, financial planners and more. Their primary job is to help clients with their taxes so they can avoid paying too much or too little in federal income or state income taxes.

As a general note, CPAs are considered to be more qualified than tax professionals when it comes to preparing taxes on an individual basis as they are trained to analyze business and personal finances to maximize savings and minimize taxes. It’s also worth noting that while all CPAs are accountants, not all accountants are CPAs.

Accounting can be broken down into several categories ; each category deals with a specific set of information, or documents particular transactions. In this section, we discuss four of the most common branches of accounting:

Financial Accounting

This is the practice of recording and reporting financial transactions and cash flows. This type of accounting is particularly needed to generate financial reports for the sake of external individuals and government agencies. These financial statements report the performance and financial health of a business. For example, the balance sheet reports assets and liabilities while the income statement reports revenues and expenses. Financial accounting is governed by accounting rules and regulations such as U.S. GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards).

Managerial Accounting

This focuses on the use and interpretation of financial information to make sound business decisions. It’s similar to financial accounting, but this time, it’s reserved for internal use, and financial statements are made more frequently to evaluate and interpret financial performance.

Cost Accounting

This is the process of tracking, analyzing and understanding the costs involved in a specific business activity. This includes all direct and indirect expenses associated with your business’s day-to-day operations. Cost accounting is particularly important because it helps you ensure that you are spending money on things that benefit your business’s bottom line.

Tax Accounting

This is the act of tracking and reporting income and expenses related to your company’s taxes. You don’t want to be in a situation where you have to pay more income tax than is normally required by the Internal Revenue Service (IRS).

So far, we’ve seen the types and benefits of accounting. This leads us to the next question of knowing how to carry out accounting efficiently. There are many ways to manage your business accounting. They include:

Outsource to Professionals

You can outsource your accounting work to outside professionals who specialize in bookkeeping and tax preparation. Outsourcing can offer many advantages because it allows you to take advantage of specialized skill sets that may not be available when hiring someone in-house. It’s also flexible and generally costs less.

Using Accounting Software

Accounting software allows you to do basic tasks such as tracking inventory, invoicing and payments, and generating reports on sales and expenses. It’s useful for small businesses and freelancers who don’t have the resources to hire an accountant or bookkeeper. Besides, this frees up time so you can focus on running your business smoothly. Check out our recent piece on the best accounting software for small businesses .

Hiring an In-House Accountant

You can choose to manage your business accounting by hiring an in-house accountant or CPA . This can be a great option if you want to ensure your books are in order, and that your company’s financial information is accurate, but it does come with some drawbacks. For one thing, the cost of hiring someone like this can be a substantial burden on your business’s finances.

There are many ways to do accounting, but there are also certain practices that make it easier to keep track of your finances. Some best practices include:

• Keep your personal finances separate from that of your business to get an accurate view of your company’s financial health. This applies a lot to small businesses just getting started with accounting.
• Pay attention to details. Make sure that all transactions are accounted for and properly totaled to facilitate accurate reporting at year-end.
• Hire an accounting professional if you don’t have the time to learn accounting software. This will save you stress and give you the needed time to focus on other important parts of your business.
• Keep adequate records of all assets, liabilities and cash flows for tax purposes. Pay attention to tax laws and regulations. Stay up to date on current news so you can know what’s happening in the financial world.

Bottom Line

Accounting is popularly regarded as “the language of business” because it doesn’t just help you keep track of your money, but also helps you make informed decisions about your business. To speed up action, you may hire accounting professionals or purchase accounting software to ensure accurate financial audits and reporting.

What is accounting in simple terms?

Accounting is the process of keeping track of your business’s financial transactions. It helps you to understand how money comes in and how it goes out.

Why is accounting important?

Accounting helps a business understand its financial position to be able to make informed decisions and manage risks.

What is the simplest accounting software?

Freshbook is one of the easiest accounting software systems to use. Its interface is very intuitive, making it very easy to learn. Another easy to use option that’s perfect for self-employed entrepreneurs who need an affordable accounting solution is Neat. Learn more about the best accounting software .

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Accounting for Small Businesses: A Comprehensive Guide to Financial Management

Accounting is an instrumental part of running a small business . Implementing systems and best practices for keeping track of expenditures and revenues is key to managing cash flow . Without these systems in place, it’s all too easy to lose track of funds or create the financial records necessary to file taxes and apply for small business financing, if necessary.

Proper accounting for small businesses encompasses a number of important tasks.

Key Takeaways

• Accounting is crucial for small businesses to effectively manage their finances.
• Setting up accounting systems involves opening a business bank account, choosing an accounting method, setting up a chart of accounts, and determining the fiscal year.
• Basic bookkeeping includes tracking expenses, recording transactions accurately, documenting receipts, and reconciling bank statements.
• Financial statements such as the income statement, balance sheet, and cash flow statement provide insights into a small business’s financial health.
• Small businesses need to understand their tax obligations, track deductible expenses, and file taxes on time.

Setting Up Accounting for Small Businesses

Accounting as a small business owner begins with laying a proper foundation. That includes four key activities:

• Opening a small business bank account
• Choosing an accounting method (cash or accrual)
• Setting up a chart of accounts
• Determining the fiscal year for the business

Here’s a closer look at each step.

Opening a Small Business Bank Account

Opening a business bank account allows you to separate business and personal spending, which can be helpful when it’s time to file taxes if you plan to deduct eligible expenses. To open a bank account for a small business, you’ll generally need to have the following:

• Employer Identification Number (EIN) or a Social Security number if you operate as a sole proprietor
• Business formation documents
• Ownership agreements
• Business license, if your state requires one to do business

You’ll also need a minimum opening deposit if the bank requires one. Minimum deposit requirements can depend on the type of business account and whether you’re opening the account at a traditional bank, credit union, or online bank.

Remember to compare the fees, features, and benefits associated with different business bank accounts to find the one that best aligns with your needs.

Choosing an Accounting Method

Your accounting method determines how you report income and deduct expenses for the year. The Internal Revenue Service (IRS) allows you to choose between two options: cash and accrual . Here’s how they compare.

• Cash method . With the cash method, you report income in the year that you receive it and deduct expenses in the year that you pay them.
• Accrual method . With the accrual method, you would report income in the year that you earn it, regardless of when it’s received.

If you select one accounting method and then decide that you’d like to change it after filing your taxes, you’d need to complete IRS Form 3115 to formally do so.

Setting Up a Chart of Accounts

A chart of accounts is a list of all accounts available for recording transactions in your accounting software program if you use one or a general ledger if you don’t. To create this chart, you’d first organize your accounts into specific categories, then further break your organization down into relevant subaccounts.

Each category is assigned a range of numbers that are used to track individual accounts. For instance, if you have a category for business asset accounts, your organization might look like this:

• Asset: Checking account, 1005
• Asset: Savings account, 1015
• Asset: Money market account, 1020

You’d follow this system for all of the account categories that you have. Common categories include asset, liability, equity, revenue, and expense accounts.

Determining the Fiscal Year

A fiscal year is 12 consecutive months for which accounting activity is recorded. Small business owners can decide when their fiscal year begins and ends; the only rule is that it must be 12 consecutive months.

For instance, you might choose to start your fiscal year on July 1 and have it end on June 30 of the following calendar year. Or you may choose a more traditional approach and have your fiscal year follow the standard calendar year, depending on what works best for your business. If you operate a seasonal business, for instance, then you may choose to begin your fiscal year at the beginning or end of your peak sales season.

Basic Bookkeeping for Small Businesses

Basic bookkeeping for small business owners revolves around a core set of tasks, all of which are designed to help you keep track of where funds are going. The most important bookkeeping practices include:

• Tracking small business expenses
• Recording transactions accurately
• Documenting and filing receipts
• Reconciling bank statements

In terms of which expenses to track for a small business, the short answer is all of them. Anything that you spend money on—whether it’s your monthly lease payment, utilities, office supplies, or postage fees—should be recorded in your accounting system. And those transactions should be recorded accurately to ensure that you have the correct amounts when you’re ready to deduct business expenses on your taxes.

The IRS encourages small business owners to maintain proper documentation for expenses, such as receipts showing the amount spent, the date, the payment method, and what was purchased.

Taken separately, those tasks can be time-consuming. When utilizing a comprehensive bookkeeping software program, they become easier. The best bookkeeping software syncs with your business bank account and payroll systems so that you’re easily able to import and export transaction history. We’ll cover some of the best business bookkeeping software options a little later.

Financial Statements for Small Businesses

Financial statements can yield valuable insights into how well your small business is managing income and expenses. You’ll also need to present up-to-date financial statements to lenders if you plan to apply for small business financing at some point.

There are three financial statements that all small businesses should consider creating.

• Income statement (profit and loss statement) . An income statement shows a business’s expenses, income, losses, and gains over a set period. These figures are used to determine your net profit or net loss accordingly.
• Balance sheet . A balance sheet records a business’s assets, liabilities, and shareholder equity. In simple terms, this financial statement will tell you what your business owns and what it owes.
• Cash flow statement . A cash flow statement provides a snapshot of how cash moves in and out of the business. It can also tell you how well your business is equipped to pay its bills.

If you’re already using an accounting software program for small businesses, you may be able to generate these statements automatically using the expense and income information you’ve already entered.

Tax Considerations for Small Businesses

Running a small business means you have to file a tax return and pay what you owe, if anything, to the IRS. Businesses will need to pay federal and state taxes, as well as any local taxes that may apply. There are five types of small business taxes at the federal level:

• Self-employment tax
• Estimated tax
• Employer tax

Your business structure determines which types of tax you must pay . Remember that if you have employees, you’ll also need to account for payroll tax . If you’re unsure about your tax obligations, you may want to talk to a professional accountant or tax expert for advice.

Small businesses that are required to pay estimated quarterly taxes but fail to do so may be assessed a penalty by the IRS.

Deducting Business Expenses

The IRS allows business owners to deduct a number of expenses. Deductions reduce your taxable income for the year. Some of the expenses you may deduct include:

• Business meals
• Business travel
• Business insurance
• Home office expenses
• Utilities and rent for business premises
• Inventory purchases
• Vehicle purchases or eligible vehicle expenses
• Employee benefits
• Retirement plan contributions

Again, you’ll need to keep track of all of these expenses and maintain the proper records for each one. Keeping accurate records serves two purposes:

• It ensures that you’re deducting the right amounts when you file your taxes.
• It allows you to prove your deductions should your business be selected for a tax audit.

If you’re using tax filing software , you may have the option to organize and store receipts electronically.

Software and Tools for Small Business Accounting

Software programs, apps, and tools can save your business time and potentially money if you’re able to ensure more accurate accounting. Using a software program can also eliminate the need to retain a full-time accountant, which can add to your business expenses.

Additionally, accounting software can help you to:

• Create cost predictions
• Run forecasts to determine the potential return on business investments
• Manage inventory
• Manage payroll
• Send and receive invoices
• Track accounts payable and receivables

There are numerous software options for small businesses, with QuickBooks and FreshBooks being two of the most popular. When deciding which software program to use for accounting, it helps to first consider what your business needs. You can then compare different programs to evaluate the range of features and benefits that are included, and the overall cost of using it.

Outsourcing Accounting Services for Small Businesses

While you could handle accounting for your small business on your own, you may consider outsourcing it to an accounting pro .

In terms of the advantages of doing so, letting someone else handle your accounting means you have one less thing to worry about. Instead of crunching numbers, you’ll be free to focus on other tasks that are necessary to run or scale your business. An accountant can also ensure greater accuracy and may be more knowledgeable about the tax code and reporting requirements.

The disadvantage is that outsourcing means your business’s financial information is being viewed by someone else, which you may or may not be comfortable with. Aside from that, you also have to consider what you might pay to hire an accountant on a full-time or part-time basis.

In terms of how to choose an accountant, you may ask other business owners you know for a referral. If you’re able to get a few names, you can schedule meetings with those that look promising. During your meeting with them, consider asking the following questions to get a better idea of how well they align with your business:

• How long have you worked in the accounting field?
• Are you a certified public accountant (CPA), or do you hold any other professional credentials?
• What type of small business owners do you typically work with?
• What’s the full range of services you provide?
• How much do you charge, and how are the fees structured?
• How often will we communicate, and what is your preferred communication method?

You might choose to work with a virtual bookkeeper if you’re comfortable connecting via Zoom call or email. The fees may be lower, but be sure to ask about their background and experience before entering into an agreement to contract their services.

Best Practices for Small Business Accounting

Following best practices can minimize room for errors in your small business accounting and help you to keep better records. What those practices look like may vary from business to business, but at a minimum, it’s a good idea to include the following:

• Maintain separate bank accounts and credit cards for business and personal spending.
• Ensure accuracy in business record-keeping.
• Regularly review financial statements.
• Seek professional advice when needed.
• Back up and secure records.

Setting up a document management system can help with organizing your records so that they’re easier to review. There are different ways to organize files, depending on what you need to store.

You might choose to use document management software to keep track of key financial information and statements. You’ll want to periodically back up your files and ensure that you’re adhering to security protocols so your information isn’t compromised. For example, if you need to save a copy of a document separately from other files, you may put it in its own password-protected folder inside your document management software.

What Are the Benefits of Using Accounting Software for Small Businesses?

Using accounting software can allow you to save time when managing the books for your business. You can sync financial accounts to easily import transaction history, track expenses, double-check transactions for accuracy, and generate important financial statements.

What Are the Best Practices for Maintaining Accurate Financial Records?

Some of the best ways to ensure accuracy in financial records include keeping business and personal accounts separate, using an accounting software program to track cash flow, regularly updating financial statements, and conducting an annual audit to review your business’s financial history.

What Types of Records Do Small Businesses Need to Keep?

Small businesses need to keep accurate records relating to any expenses they incur, particularly for expenses they plan to deduct. It’s also important to keep records of any agreements with vendors and suppliers, bank statements, documents showing payment of estimated quarterly taxes, and annual tax returns.

The Bottom Line

The importance of accounting for small businesses can’t be underestimated. Whether you’re starting a brand-new business or you have some experience under your belt, creating a solid accounting plan can help you monitor and maintain your financial health.

U.S. Small Business Administration. “ Open a Business Bank Account .”

Internal Revenue Service Video. “ Lesson 1—Federal Taxes and Your New Business: Accounting Methods .”

Internal Revenue Service. “ About Form 3115, Application for Change in Accounting Method .”

Internal Revenue Service. “ Publication 538: Accounting Periods and Methods ,” Pages 2–3.

Internal Revenue Service. “ What Kind of Records Should I Keep ?”

U.S. Securities and Exchange Commission. “ Beginners’ Guide to Financial Statement .”

U.S. Small Business Administration. “ Pay Taxes .”

Internal Revenue Service. “ Estimated Taxes .”

Internal Revenue Service. “ Publication 535: Business Expenses .”

• Understanding Small Business Taxes: A Comprehensive Guide 1 of 21
• Tax Implications of Different Business Structures 2 of 21
• Accounting for Small Businesses: A Comprehensive Guide to Financial Management 3 of 21
• How Becoming an LLC Could Save Taxes Under the Tax Cuts and Jobs Act of 2017 4 of 21
• Self-Employment Tax: Definition, How It Works, and How to File 5 of 21
• Self-Employed Contributions Act (SECA) Tax: Overview and FAQs 6 of 21
• Is Now the Time to Restructure Your Business? 7 of 21
• Writing off the Expenses of Starting Your Own Business 8 of 21
• 5 Tax Breaks Overlooked by Small Business Owners 9 of 21
• 5 Ways Small Business Owners Can Reduce Their Taxable Income 10 of 21
• Top 10 Home Business Tax Tips 11 of 21
• Write-Off vs. Write-Down: What's the Difference in Accounting? 12 of 21
• How to Make Estimated Tax Payments 13 of 21
• Small Business Tax Obligations: Payroll Taxes 14 of 21
• 7 Ways to Avoid Self-Employed Tax Penalties 15 of 21
• Best Tax Software Programs for Small Business 16 of 21
• 16 Self-Employed Tax Deductions and Benefits 17 of 21
• The Small Business Healthcare Tax Credit 18 of 21
• Business Tax Credits: Meaning, How They Work, Example 19 of 21
• 7 Insurance-Based Tax Deductions You May Be Missing 20 of 21
• Indian Employment Credit (IEC): What It Was and How It Worked 21 of 21

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Module 16: Accounting and Finance

What is accounting, learning outcomes.

• Explain the role of accounting as a form of business communication
• Identify the users and uses of financial accounting
• Identify the users and uses of managerial accounting

Why Do We Need Financial Information?

Each business needs financial information to be able to answer questions such as the following:

• How much cash does the business need to pay its bills and employees?
• Is the business profitable, earning more income than it pays in expenses, or is it losing money and possibly in danger of closing?
• How much of a particular product or mixture of products should the business produce and sell?
• What is the cost of making the goods or providing the service?
• What are the business’s daily, monthly, and annual expenses?
• Do customers owe money to the business, and are they paying on time?
• How much money does the business owe to vendors (suppliers), banks, or other investors?

The video below gives a brief overview of many of the topics in this section. Before you review the video, consider these questions:

• What is accounting?
• What is business?
• Who are the three people that want to know the story of your business?
• What language of accounting does the government use?
• What language of accounting do investors use?
• What language of accounting do internal users employ?

You can view the transcript for “Accountant Jobs – What is Accounting ?” (opens in new window).

Accounting Is the Language of Business

Every business organization that has economic resources, such as money, machinery, and buildings, uses accounting information. For this reason, accounting is called the language of business. Accounting also serves as the language providing financial information about not-for-profit organizations such as governments, churches, charities, fraternities, and hospitals. However, in this module we will focus on accounting for business firms.

The accounting process provides financial data for a broad range of individuals whose objectives in studying the data vary widely. Bank officials, for example, may study a company’s financial statements to evaluate the company’s ability to repay a loan. Prospective investors may compare accounting data from several companies to decide which company represents the best investment. Accounting also supplies management with significant financial data useful for decision making.

Definition of Accounting

As the video explained, accounting is “the language of business.” The American Accounting Association defines accounting as “the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by the users of the information.”

This information is primarily financial—stated in money terms. Accounting, then, is a measurement and communication process used to report on the activities of profit-seeking business organizations. As a measurement and communication process for business, accounting supplies information that permits informed judgments and decisions by users of the data.

Internal and External Users

Users of accounting information are separated into two groups, internal and external. Internal users are the people within a business organization who use accounting information. For example, the human resource department needs to have information about how profitable the business is in order to set salaries and benefits. Likewise, production managers need to know if the business is doing well enough to afford to replace worn-out machinery or pay overtime to production workers.

External users are people outside the business entity that use accounting information. These external users include potential investors, the Internal Revenue Service, banks and finance companies, as well as local taxing authorities. Accounting information is valuable to both groups when it comes time to evaluate the financial consequences of various alternatives. Accountants reduce uncertainty by using professional judgment to quantify the future financial impact of taking action or delaying action. In short, although accounting information plays a significant role in reducing uncertainty within an organization, it also provides financial data for persons outside the company.

Financial accounting information appears in financial statements that are intended primarily for external use (although management also uses them for certain internal decisions). Stockholders and creditors are two of the outside parties who need financial accounting information. These outside parties decide on matters pertaining to the entire company, such as whether to increase or decrease their investment in a company or to extend credit to a company. Consequently, financial accounting information relates to the company as a whole, while managerial accounting focuses on the parts or segments of the company.

Because the external users of accounting information vary greatly, the way that financial information is presented must be consistent from year to year and company to company. In order to facilitate this, financial accountants adhere to set of rules called G enerally Accepted Accounting Principles (GAAP). GAAP are a uniform set of accounting rules that allow users to compare the financial statements issued by one company to those of another company in the same industry. These principles for financial reporting are issued by an independent non-profit agency created by the Securities Exchange Commission (SEC) called the Financial Accounting Standards Board (FASB) . The FASB’s mission is to “establish and improve financial accounting and reporting standards to provide useful information to investors and other users of financial reports and educate stakeholders on how to most effectively understand and implement those standards.” [1]

Tax accounting information includes financial accounting information, written and presented in the tax code of the government—namely the Internal Revenue Code. Tax accounting focuses on compliance with the tax code and presenting the profit and loss story of a business to minimize its tax liability.

Accounting is more than just reporting income to taxing authorities or providing revenue and expense information to potential investors. As the language of business, accounting is used for decision-making as well.

Managerial accounting information is for internal use and provides special information for the managers of a company. The information managers use may range from broad, long-range planning data to detailed explanations of why actual costs varied from cost estimates. The employees of a firm who perform these managerial accounting functions are often referred to as Cost Accountants. Managerial accounting is more concerned with forward looking projections and making decisions that will affect the future of the organization, than in the historical recording and compliance aspects of the financial accountants. There are no reporting guidelines such as GAAP; therefore, managerial accounting reports will vary widely in both scope and content. Also, much of the information generated by managerial accountants is confidential and not intended to be shared outside of the organization. Managerial accounting focus on range of topics from production planning to budgets for raw materials. When a company makes a decision to purchase a component part instead of manufacture it in house, that decision is based primarily on managerial accounting information. For this reason, many managerial accountants consider themselves to be providing “accounting information for decision making.”

Bookkeeping vs. Accounting

Accounting is often confused with bookkeeping. Bookkeeping is a mechanical process that records the routine economic activities of a business. Accounting includes bookkeeping, but it goes further to analyze and interpret financial information, prepare financial statements, conduct audits, design accounting systems, prepare special business and financial studies, prepare forecasts and budgets, and provide tax services.

Importance of Accounting

You probably will find that of all the business knowledge you have acquired or will learn, the study of accounting will be the most useful. Your financial and economic decisions as a student and consumer involve accounting information. When you file income tax returns, accounting information helps determine your taxes payable.

Understanding the discipline of accounting also can influence many of your future professional decisions. You cannot escape the effects of accounting information on your personal and professional life.

Practice Questions

• "FASB, Financial Accounting Standards Board." FAS 131 (as Issued). Accessed March 01, 2019. https://fasb.org/jsp/FASB/Page/SectionPage&cid=1176154526495 . ↵
• Revision and adaptation. Authored by : Linda Williams and Lumen Learning. License : CC BY: Attribution
• Practice Questions. Authored by : Nina Burokas. Provided by : Lumen Learning. License : CC BY: Attribution
• What Is Accounting from Financial Accounting. Authored by : Debbie Porter and Lumen Learning. Located at : https://courses.lumenlearning.com/finaccounting/chapter/chapter-1/ . License : CC BY: Attribution
• Accounting Defined from Financial Accounting. Authored by : Debbie Porter and Lumen Learning. Located at : https://courses.lumenlearning.com/finaccounting/chapter/accounting-defined/ . License : CC BY: Attribution
• Numbers and Finance. Authored by : Reynermedia. Located at : https://www.flickr.com/photos/89228431@N06/11322953266/ . License : CC BY: Attribution
• Accountant Jobs - What is Accounting?. Authored by : Accountant Jobs. Located at : https://youtu.be/Yj24JwZVd54 . License : All Rights Reserved . License Terms : Standard YouTube license