I can't tell you how many hours I've spent with an accountant at year end looking at the records and thinking "damn, how did I get into this mess". The reality is that while operating a growing business and dealing with the headaches of such (like your 3 employees that decided they needed a day off in the middle of the week), sorting out transactions is just a low priority.
BUT as it did, in my case, it all catches up to you in the end! Paying a CPA hourly to sit with you and get things cleaned up is not cheap.
The best solution is proactivity when it comes to accounting and booking and with that comes the benefit of knowing where your cash flow is going at all times!
So, what would be the best accounting practices for small businesses to keep their books tidy?
Small businesses should follow five best practices to keep books tidy. Most importantly, the owner should prioritize accounting. Still, separate bank accounts, hiring accounting professionals, and using accounting software with a simple chart of accounts are just as important.
Small business owners need to understand the importance of accounting for their business. A properly set-up accounting system would provide business owners with accurate and timeous information, which is vital for decision making. Implementing the five best accounting practices will keep the books tidy, helping the owners to better understand the information supplied.
Best Accounting Practices to Keep a Small Business' Books Tidy
Accounting information is vital to any business, big or small. Owners and managers use accounting information to make crucial decisions. As small business owners are often not accountants and need help understanding accounting, they could find it difficult to interpret such data. However, some principles could keep the books tidy, making them easier to understand.
1. Prioritize Accounting as a Small Business Owner
Although achieving sales targets and keeping costs low are essential, proper accounting is just as important. Only accurate accounting records can show whether your business is profitable, so small business owners must prioritize accounting. After all, achieving your sales targets won't mean anything if you are not making an actual profit.
Prioritizing accounting doesn't mean forgetting about sales targets and customer service. When you prioritize accounting, you, as the business owner, set aside dedicated time that you can spend looking at the reports. How much time you set aside for accounting depends on the business size and the number of transactions.
Any business owner should work through financial reports at least once a month, long enough to understand what is happening. However, slightly bigger businesses with more transactions might require the owner to look at the reports twice a month or sometimes even weekly. This is especially true when prices of goods sold or used fluctuate regularly.
2. Ensure you Have a Separate Business Bank Account
This might sound logical, but many small business owners use one bank account for personal and business transactions. One of the reasons some small business owners don't open a separate business bank account is to avoid double bank charges. As a sole proprietor is not legally separated from his business, some feel it's unnecessary to separate their finances.
To accurately determine the business' profitability, it is crucial to only record actual business transactions in the business' accounting records. The easiest way to accomplish this is by keeping separate bank accounts for the owner's personal finances and the business. This will ensure that bank reconciliations can still be done and keep non-business transactions out of the books.
Many banks offer small business bank accounts at reduced costs, often with a list of services to assist small businesses. These include Bank of America, Capital One, US Bank, and Chase. Suppose the business owner already has an established relationship with a bank. In that case, they can often offer the best deal on a business bank account.
3. Consider Hiring a Professional
Most small business owners are experts in their field of business but don't have much accounting knowledge. Although it is vital for a small business owner to be very hands-on with business finances, most need the help of persons with sound accounting backgrounds to set up and maintain a tidy set of financial records.
Most small businesses would not generate sufficient income to justify hiring a full-time accountant or bookkeeper. However, other options are available, like part-time bookers, who only come in one or two mornings a week to record all the transactions. Businesses could outsource their accounting function to professionals who can assist with much more than just record keeping.
Accounting specialists would not only maintain the business' accounting records but also provide several other services to the owner.
Accounting specialists can help interpret financial results for the owner, helping him make decisions, provide advice, and even submit statutory returns for the business.
4. Use Good Cloud-Based Accounting Software
Many small businesses make the mistake of doing their books manually. Although this might be the most cost-effective way to do so, there are two major risk factors. Firstly, with no records backup, everything must be done over again if the documents are lost in a fire. The second obvious risk of manual recordkeeping is inaccurate recordkeeping, as errors could easily slip in undetected.
Some small business owners prefer to use spreadsheets for their financial record keeping. Although this might significantly decrease the risks of manual record keeping, backups still need to be done regularly, and you still have a significant risk of undetected errors. Setting up a spreadsheet for financial records is time-consuming, and a business owner could spend that time elsewhere.
Several good accounting software packages are available on the market, which would be ideal for small businesses. There are many affordable cloud-based offerings from companies like Sage, Xero, and Quickbooks, to name a few. Using cloud-based software will save money. All the information is automatically backed-up, eliminating the risk of losing your accounting information.
5. Keep a Simple Chart of Accounts
Whether you use a manual or automated accounting system, the General Ledger will be what the accounting system revolves around. The Chart of Accounts is all the accounts that appear in the General Ledger. You would need an account for every asset, type of expense, revenue, each liability, and the business's equity, which is the owner's investment in the business.
However, the longer the Chart of Accounts, the more cluttered the books would appear and the more difficult it would be to make sense of the financial information. A larger Chart of Accounts would also increase the risk of accidentally posting a transaction to the wrong account, leading to inaccurate financial information and even affecting decision-making.
It is vital to keep the Chart of Accounts as small as possible to decrease the risk of posting errors. As each business is different, there is no clear-cut rule regarding how big or small a chart of accounts should be. Still, it would be best to avoid any unnecessary accounts. Some businesses need a more complex chart of accounts, but they should keep it as simple as possible.
Accounting can be daunting for any small business owner, but it is vital to business success. The owner first needs to prioritize accounting in his business, but should also open a separate business bank account, hire accounting professionals, use accounting software, and keep a simple chart of accounts to keep the books tidy and uncluttered.
(Related: Best Project Accounting Practices to Stay on Budget)