The Scientific Method for Small Business Accounting

Michael Pignatelli
Nov 29, 2021

Disclaimer: Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.

In a world of seven billion people, it's easy to get lost within the human jungle. In a fish tank full of ideas, how do you even know yours is going to matter? This is the cross every starting business owner bears. 

Having a concrete idea of wanting to start your own business is not enough to actually do it. You'll encounter many difficulties along the way, most of them coming from your own mind. Running a business is no walk in the park, after all. You might get lost at some point, run out of breath, or need a rest. But no matter what, you go through the process of constantly learning about it. 

Naturally, there are many business processes that you constantly have to do. From billing, tracking cash flow to your bank account, sales, inventory, payroll, and more, if you are a small business owner, it's more practical to do it all yourself. 

But the one thing that most entrepreneurs have trouble with, especially in the beginning, is small business accounting. Just like how the nervous system is the center of our bodies, accounting is the backbone of your business. You must have an inkling to at least know how accounting works to have a full understanding of how your business is doing. After all, there's truth in the famous saying, "follow the money."

So how do you do your own accounting? Tax season looms every year without fail, but you probably have someone do your taxes for you. Besides, tax preparation doesn’t equate to running a business. It's a whole different thing, especially given the complexity of a business. 

Well, when in doubt, never fail to ask for help. Even great philosophers didn't figure the universe out in one go. The greatest modern discoveries also started with the desire to know more and improve our way of life. These discoveries were made using one fool-proof process: the scientific method. But can we apply this to accounting as well? 

Step 1. It Begins with a Question

Let's forget titles for a little bit and say you are a scientist searching for ways to do accounting that's perfect for your business. No one else has done this, and you are the pioneer. Isn't it exciting? Aren't you intrigued? 

Every scientific process, of course, starts with a question, a desire to learn something new about the world. In your case, it's a desire to learn something new to run your business successfully. 

Now, of course, you can ask different questions in one scientific process. Nothing is preventing you from doing so. Have you got your questions ready? Well, to help you flesh them out, here are some things to think about: 

  1. What is accounting? 
  2. What are the different types of accounting? 
  3. Which one is perfect for your business? 
  4. Can you do your own accounting? 
  5. Where to find the resources for accounting?

Of course, these questions are just secondary to the main topic of doing your business's accounting successfully. Think of them as guides to eventually reach the answer to your main inquiry. Nevertheless, keep them in mind as we go through the next steps of the scientific method. 

Step 2. Research

Contrary to popular belief, researching is just a part of the whole scientific process, not the process itself. However, it is a step that we can use to answer some of the guide questions we laid out in the first step. 

What is Accounting? 

According to Investopedia, accounting is the recording of all financial transactions for your business. It doesn't just end there, however. The reason accounting is so important to any business is because it acts as regular central storage of information. 

Through proper and thorough accounting, you will have a clear picture of how your business is faring. If everything is well and good, you can give yourself a pat on the back and maybe treat yourself to something nice. If unfortunately, there are some struggles, you can make sound business decisions based on the information you see on your accounting records. 

What are the different types of accounting?

As if just the term accounting didn't sound complicated enough already, now you’ll learn that there are different types of accounting. We'll explain it simply, so it's easy to digest. 

There are two main types of accounting that are commonly used in businesses: financial accounting and business accounting (also called managerial accounting). They are basically the same thing when it comes to recording financial data. But the difference lies in the scale and small details. 

Financial accounting is something that is done only once in a fiscal year. Think of it as a year-ender for your business. Since it's done annually, there is so much financial information like income statement, retained earnings, revenue, cash flow, and more, to be imputed that an external accountant is needed. Simply put, financial accounting is best done by a certified public accountant to give you a summary of how your business did in a whole year. 

Financial reporting for a business needs a CPA because there are guidelines to be followed in submitting it to the authorities.

For small businesses, especially starting entrepreneurs, financial accounting is not an immediate concern. It's more practical to take things slowly instead of worrying about the big picture.

Managerial accounting, on the other hand, is something that you should do once a month at the very least. It's basically a smaller-scale financial accounting that puts every small detail into perspective. Roughly put, managerial accounting is more useful for internal decision-making, while financial accounting is something you do for the tax season. 

Which one is perfect for your business? 

While both financial and managerial accounting should be used in running a business, you should focus more on what helps you manage your business seamlessly. Business accounting is a more suitable type for you in this case. 

Step 3. Hypothesis

A hypothesis is often defined as an educated guess. In accounting, one possible hypothesis is that you can do your accounting on your own. 

To test this hypothesis, there needs to be some kind of experimentation. In every study, there are at least two possible outcomes—finding out whether the hypothesis is true or not. In a small business, whether the owner can manage the accounting or not depends on many factors. 

The nature of the business itself is a big factor in running it. Some businesses are more physically demanding than others. New entrepreneurs also need to devote most of their time to the operations side of the business instead of focusing on the back office. 

There are so many things to consider in the operational side of your new business. At the same time, you'll be handling inventory management, account receivables and account payables, cash flow, income statements, double-entry bookkeeping, payroll taxes, recording transactions, and many other financial aspects.

As a result, it's trickier to test your hypothesis. But it's not completely hopeless, as proved in the next step. 

Step 4. Experimentation

Nothing is stopping you from managing your own books. However, like every good scientific study, you need a solid methodology. This includes the tools you need for your accounting and the processes you need to follow. 

Thanks to the technology we have now, accounting services are easily available to purchase online. Some common accounting software is Xero, Quickbooks, and Zoho Books. You don't have to do your bookkeeping and financial reports by hand and worry about the records all the time. A possible challenge is learning how to navigate this accounting software. It can take some time to familiarize yourself with how and where you should input information. But once you get the hang of it, you're good to go. 

Another complicated part of accounting is actually organizing your transactions into different categories. You have to keep track of expenses, sales, and other business transactions. For that, you'll need to organize everything to the smallest details. 

The best way to see if you can manage your own accounting is to take everything slowly. Get help wherever you can get it, and try to do the operations and accounting simultaneously for short periods of time until you get the hang of it. 

Step 5. Analyze the Data

After about a month of doing your own accounting, you must have enough experience to know if you can do it long-term or not. It would be better to get other people's input in evaluating how well you do. You can ask a certified public accountant (CPA), bookkeeper, or whoever is doing your taxes to oversee your progress for a whole month. 

Step 6. Drawing Conclusions

Now that you have tried the gruelling process of accounting for your own business, it's time for the verdict. Make your decision based on the evaluation at the end of your "trial" month.

If you're one of those people who want to be in the know about everything in your business, you must be honest with yourself. Can you do your own accounting or not? Micromanaging your own books when you don't have the knack or time for it will cause your business to suffer. You might even have to nip it in the bud before it flourishes. 

The bottom line for the question of running your own small business accounting is dependent on your skills and resources. If you can do it adequately, go ahead and do it yourself. But if you can't find the time for it, don't be afraid to ask someone for help. 

We are always available to help you out here in Unloop. We're only a click or a phone call away. 

We can give you expert business advice while we keep your books in order. If you want, you can schedule an appointment with one of our accounting consultants to help you utilize your resources and grow your business. 

Come tax season, we can get you set up with a certified public accountant (CPA) that is credible and near your area. They'll know how to file your books efficiently. 

Let us help you unloop from your business and free up some time for yourself. Give us a call. We'll be waiting for you.

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Unloop is the first and only accounting firm exclusively servicing ecommerce and inventory businesses in the US and Canada. With the power of people and technology, our team dives deep into COGS and inventory accounting.. You are paired with a dedicated bookkeeping team that prepares accurate financial statements, financial forecasts, and can also pay bills or run payroll for you. Come tax time, everything is organized and ready to go, so you don't need to worry. Book a call with an ecommerce accountant today to learn more.
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