Did you know that over 82% of businesses fail because of harmful and poor cash flow management? This is such an alarming statistic. Hence, all business owners need to take accounting seriously.
All businesses can benefit from understanding basic accounting practices. Accounting is vital whether you’re running a major enterprise or a small business. It’s an essential part of any business and can affect how your company grows or succeeds.
Accounting incorporates a lot of tasks. These tasks include basic data entry and balancing your invoices. However, you may need to hire a certified public accountant to assist you with the process.
Accounting is the backbone of your business’s success. Hence, below are nine best accounting practices you should incorporate in your business:
Table of Contents
Define Your Business’s Accounting Method
There are two different accounting methods; accrual and cash accounting. Accrual accounting is where a company opts to record all transactions and put them on the books immediately they happen. Accrual accounting is less common as businesses prefer using cash accounting.
Cash accounting occurs when the company registers transactions after making or receiving payments. Before settling on one method, do some research and take your time. Do your homeowner and understand the advantages and disadvantages of each accounting method.
Cash accounting is more straightforward and easy. This makes it the better option for company cash flow management. However, it provides less long-term transparency and clarity compared to accrual accounting.
Do you want a clearer and more transparent picture of your business’s finances? Then, you should use accrual accounting. That’s because it allows you to record an expense related to any item and the revenue it brought in.
But, accrual accounting can be quite deceiving. It’s also more challenging and complicated to manage than cash accounting. Typically, accrual accounting is better for complex business. The more complex your business, the better accrual accounting will be for you.
That’s because it will provide complex businesses with snapshots of their finances. It will also give you better accounting management decision-making tools.
Always Keep Accurate Records of Transactions
Keep in mind that accounting is essential for the success of your business. It’s easy for your business to fail if you don’t keep an accurate, up-to-date record of your accounting.
These accounting records are vital for guiding you on tax filing. You can also use the records to make informed financial decisions.
Investors and lenders can also use your accounting records and financial statements. The records will help them decide whether to lend you money or invest in your business.
The IRS recommends that companies use journals to record all financial transactions. It also advises that businesses record the journal’s totals in a ledger. You should also organize the ledger into different accounts.
Whether you use software or a ledger, it’s critical to record all your transactions. Additionally, you should maintain a daily and monthly summary of your cash receipts. You should also keep track of your business checkbook and employee compensation.
Also, record depreciation worksheets, check disbursements, and journal records. For the most accurate accounting, ensure you record all the transactions on a daily basis.
Track Your Expenses
If your business is new, it’s easy to record your financial transactions on a spreadsheet. This means tracking all your accounts payable and expenses and recording them. However, as the business grows, you will need a more sophisticated accounting method.
That’s because you will have a lot of new transactions to track. This is when you should consider hiring an accounting firm to assist. If you’re looking for a reputable firm, check out Templeton.
You can also get accounting software. When recording your financial transactions, ensure you include the following items:
- Biller or supplier name
- The account number
- Type of expense
- Invoice number
- Invoice amount
- The date your business received the invoice
Recording all this information is essential for your business’s accounting. You should also keep an accurate record of your receipts, incoming bills, and credit card statements in your accounting system. This ensures that you are properly managing your company’s cash flow.
Always Separate Business and Personal Finances
Accounting for small businesses can be pretty confusing. Additionally, it’s very easy to mix up your personal and business finances. This is especially true when you’re starting, and there are no clear boundaries.
When launching your business, ensure that you open a new business account. Use this account for business-related transactions only.
Resist the temptation to keep personal and business finances in the same account. This is key if you want a clear picture of your finances and how your business is performing.
Additionally, separating your finances will help you maintain accurate records for tax filing. It also enables you to track your cash flow and forecast your business’s financial health.
It will also be easier to prove to potential investors and lenders that your business is performing well. In some businesses, mixing personal and business finances could result in personal liability.
Such business structures include Corporations and LLCs. Hence you should separate your finances if you’d like to avoid these liabilities.
Consider Outsourcing Accounting to Professionals
All big corporations started as small businesses and grew into what they are today. And at one point, your business will grow, and you will have more employees and increased sales. This means that you will need some help with bookkeeping and accounting.
As the business grows, you should consider hiring a professional CPA or a bookkeeper. You will likely benefit more from this step than just saving your time. A qualified professional accountant will give you essential business advice.
They can also act as consultants and help you make the best financial decisions for your company. Sometimes, businesses fail because the managers leave all the financial decisions to accountants.
After hiring an accountant, you are still responsible for your business. The responsibilities aren’t entirely taken off your hands. You still need to step in and make essential financial decisions.
The only difference is that you will have the extra help and advice of your accountant. Their expertise is handy, especially when handling complex financial issues and taxes.
Conduct Monthly Accounting Reviews
Any small business needs to have monthly accounting reviews. This means meeting with your accountant to check accounts receivables and payables. You should also go through all the invoices.
This helps you determine how much money has been sent, what the money paid for, and what hasn’t been paid.
It’s advisable to balance your accounting books at least once every month. You can also handle other accounting tasks more frequently. That’s because the more frequent you handle these tasks, the easier they become.
Automate Accounting Tasks When Possible
All businesses should ensure to stay on top of their accounting. But, this doesn’t mean you spend every minute of your day handling all the tiny details of your accounting. You can use software programs to automate your bookkeeping practices.
There are many accounting software tools in the market today. You can use these tools to automate your accounting and bookkeeping practices. But ensure you choose the right software based on your accounting needs.
Limit Your Accounts Receivable
No small business is set to adopt and use inefficient accounts receivables policies. Unfortunately, many small companies have such policies, and it’s a widespread occurrence.
Some companies fail to keep accurate billing records. Others forget to follow up on their customers when their accounts are past due.
Another common mistake businesses make overriding credit. This often leads to bad debt. The cost your company will pay for inefficient account receivable practices is high.
You may find your business going into bad debt at a higher APR due to cash flow problems. These problems are often brought on by ineffective accounting practices.
You have to develop strategies to remedy any weak accounting policies. Below are three examples to help you fix the problem:
- Ask your customers to pay before service or product delivery
- Ask for a percentage deposit for bulk orders
- Fine customers who don’t pay on time
These steps help reduce the risk of losses if the customer fails to pay on time. You should also train your accounting team to ensure accurate billing of transactions. Ensure they record all payments and match them with their invoice the same day the customer pays.
Backup Your Financial Records
Do you have a backup for all your financial records? What would happen if your office caught on fire or your computers were stolen?
The insurance would likely pay for the physical damage. But, losing your financial information can be devastating for your business. You don’t have records to know which customer paid and didn’t pay.
You would also be in the dark about which products were delivered and which weren’t. Tis could result in losses worth thousands of dollars. It may also lead to a loss of trust from your customers.
Whether your business keeps financial records in hard copy files in the office or you have cloud-based storage, always have a backup. The backup helps you get all your financial information if something happens to the original files.
Backing up your information protects your business against both cyber and physical attacks. In fact, over 93% of data breaches happening to small businesses are financially motivated. Hence, it’s critical to take the proper steps to ensure your business is safe and protected.
Follow the Principles of GAAP
GAAP or Generally Accepted Accounting Principles are standards and rules used for business financial reporting in the U.S. The GAAP standards were set by the Governmental Accounting Standards Boards and the Financial Accounting Standards Boards (FASB). The standards apply to all non-profit, governmental institutions, and for-profit businesses.
GAAP principles require that all organizations follow the below four standards:
-Measurement: All organizations financial statements should measure the financial results according to GAAP standards
-Recognition: Financial statements should reflect a business’s liabilities, assets and expenses correctly
-Disclosure: This means that the financial statement should include additional information and notes to help users easily interpret the financial information
-Presentation: Financial statements for any period should present a balance sheet, income statement, statement of shareholders’ equity, and a cash flow statement
GAAP standards ensure that all businesses have accurate financial reports. It also helps investors make informed decisions and choices based on the accurate financial information of any business.
Following these principles helps improve your consumers’ confidence in your business.
The Basic Principles of Accounting
According to GAAP, all publicly traded organizations and institutions should be familiar with the GAAP accounting principles. They should also follow these principles to ensure compliance.
Below are the five basic principles of accounting you should know about:
Objectivity Principle
The objectivity principle states that all accounting data and information presented by a publicly-traded company should be fact-based. This urges that businesses refrain from using assumptions in their financial statements. Ensure that vouchers, invoices, and receipts support all your financial data.
Full Disclosure Principle
This principle is directed to all publicly-traded companies. It states that they should disclose their financial information to their stakeholders. This is key when sharing financial statements with the stakeholders.
The stakeholders can use this information to make informed decisions. This means including both negative and positive financial details.
Cost Principle
Your accountant should record all business expenses when. This is especially important when paying for services or goods from third-party vendors. Whether your company has paid for the services or not, you should record the transactions.
Matching Principle
This principle means that all business expenses should match the revenue you receive. You should also track the revenue within a given accounting period.
Hence, your accountants should track the costs associated with the production of goods.
Revenue Recognition Principle
This states that all businesses must record the revenue gained from selling products. Hence, your accountant should record the payments made by customers for sold goods. This is also known as accrual accounting.
Accounting Practices You Should Consider
If you want your business to succeed, you must be on top of your bookkeeping and accounting. Implementing the above accounting practices is essential for any small business administrator.
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