Good financial management and having someone dedicated to that process are critical components of success for small businesses and startups alike.
So, how can folks who are just starting out join this winning team? Implementing accounting best practices and hiring or outsourcing a person specialized to this position can help to avoid the cash flow problems that cause many business failures. These best practices can also help small businesses develop by revealing insights.
To achieve strong financial management procedures, every small business must adhere to basic accounting processes. These are some examples:
- Separate business and personal expenses. Opening a company bank account is one of the first things a small business should take. Corporate bank accounts have various advantages over personal bank accounts, including the following:
- – Making it easier to manage and pay business expenses to claim tax breaks.
- – Supplying personal liability protection by keeping business and personal funds separate.
- – Offering a line of credit that the company can use to bridge liquidity shortfalls.
Companies should open a transaction account, a savings account, a credit card account, and a merchant services account to take credit and debit card payments from customers.
- Get bookkeeping software (and a bookkeeper). Bookkeeping is the systematic recording of all revenue and expenses. It’s an important part of financial management since it guarantees business owners get the knowledge, they need to make informed business decisions. Accounting is not a skill set that many small business owners have, therefore hiring a person dedicated to the work, or outsourcing the function for smaller organizations, is often a worthwhile investment.
Accounting software automates manual bookkeeping processes that are time-consuming and error-prone, and it makes it easier to access information to complete financial statements. Cloud-based accounting software is proving to be quite beneficial to small firms. Although most firms begin with basic accounting software, as they expand and become more complex, they may need an enterprise resource planning (ERP) system. When a corporation has an ERP system in place, it can add modules for different business functions, all of which are linked to a single database.
- Develop a budget. Making revenue predictions and a list of expected expenditures is one of the first steps in developing a company plan, and then comparing that budget to actual expenses and income is another. Planning well means laying the groundwork for your small business’s success.
- Keep correct business records. One of the most crucial obligations of a small business owner is recordkeeping. Accounting software can automate much of the record-keeping process and store financial data digitally. When claiming expenses as tax deductions, you can easily document the amount, time, location, and business purpose of a transaction. Follow your country’s record-keeping requirements and consult an accountant for best practices. Yet, a few examples for small firms and startups are:
- – Gross Receipts
- – Expenses
- – Fixed Assets
- Choose an accounting method. Every small business and startup must decide whether to use accrual or cash accounting to decide when to record income and expenses. For tax purposes, this supplies a consistent accounting technique. Accrual accounting is required by many large or publicly traded organizations, and it records sales when a product ship or service is given. Accrual accounting supplies a more correct picture of a company’s financial health since it takes a long-term view of the business. Smaller enterprises and sole proprietorships may prefer cash basis accounting since it is simpler and easier to handle because revenue is recorded after payment is received. Similarly, expenses are removed when money is withdrawn from the company’s account.
- Keep the books up to date. Owners and employees do not get a comprehensive view of the company’s financial situation unless the books are kept up to date. One technique to keep the books up to date is to automate receipt and invoice capture. Another critical step is to connect your bank accounts to your accounting software. Some accounting software integrates directly with banks, allowing the business owner to manage and execute all banking duties in the accounting system without having to enter their bank account portal.
- Optimize AP (Accounts Payable) terms and invoicing. Take advantage of credit arrangements from major suppliers to extend the life of your cash. Pay bills on a schedule that maximizes your cash flow and pay early with vendors who give a discount for doing so when available. To ensure consistent cash flow, do everything possible to encourage consumers to pay on time. This could involve offering discounts for advance payment, doing credit checks on potential clients before doing business with them, and revoking credit conditions when appropriate. Accounting software that can automate invoicing procedures by automatically sending out bills and follow-up reminders may also aid in preventing the accumulation of delinquent invoices.
- Separate accounting functions. Regulations requiring measures to keep the division of duties must be followed by public businesses. Small organizations are more likely to have a single person handling many accounting functions, yet this presents a danger of accounting fraud. Owners can reduce this danger by implementing a few simple controls. One useful check is to make certain that the same person who approves bills does not also pay them and reconcile bank accounts.
- Keep an eye on certain high-cost expenses. Most small firms’ main expense is labor, and inventory is often another. Many small businesses choose to outsource work to freelancers and consultants who bill on an hourly or project basis to reduce labor expenses. Companies can lower inventory costs by tracking inventory carrying costs, inventory turnover ratio, the amount lost due to obsolete inventory, and other key metrics. Laws governing the use of independent contractors and consultancies differ by market, so speak with your legal counsel to ensure that all contracts are following local labor regulations.
- Plan for major investments. By continuously measuring expenses and revenue, the company may figure out the best moment for major investments and secure the credit necessary to meet the cost. When a company needs more capital, business credit cards can help it create a credit history so that it has a higher chance of qualifying for financing (and getting the best financing terms), such as lines of credit and loans. Furthermore, credit cards supply benefits for businesses such as business incentives or travel rewards.
- Carefully check tax preparation. Choosing a reliable tax preparer is just one part of carefully checking your tax preparation. Keeping and reviewing copies of all documents plays an integral part in the preparation.
- Seek professional tax preparation guidance. With the effort needed, it is not surprising that most small businesses employ an external accountant or tax agent to help with their tax preparation. For a sole proprietor, there are even more advantages because the expense of employing someone to prepare your business’s tax return is deductible.
- Ensure inventory data is correct. The company needs correct inventory data to compile financial accounts. For the income statement, it must compute the cost of goods sold (COGS), and for the balance sheet, it must compute the value of inventory on hand. Physical inventory is tracked either by manually counting items on a regular basis or by combining counts with an inventory management system that, if coupled with the point-of-sale system and accounting software, may automatically change the figures as sales occur. Inventory management software makes inventory tracking easier and ensures the information is more reliable.
- Use financial statements to evaluate business performance. These three basic financial statements are generated by logging expenses and income. A balance sheet reveals assets, liabilities, and shareholders’ shares for a snapshot of the firm’s financial condition at a specific point in time, and a cash flow statement shows whether the company has enough money flowing into and out of a business in each period and how much cash stays. But, when paired with the balance sheet, the cash flow statement can reveal if a company has enough cash to satisfy its existing obligations. Banks and investors require all three declarations to get financing or funding.
- Generate financial projections. Financial predictions help firms estimate future income and spending to decide if they require financing or should make capital expenditures. Financial forecasts aid business leaders in estimating cash flow and figuring out when to alter pricing or production plans.
Small firms and startups can boost their chances of success by setting up effective accounting practices from the start. According to studies, the more often a small firm checks its financial figures, the better its financial health, which should lead to long-term success. Although most small business owners dislike bookkeeping, they must analyze these essential financial data on a regular basis to capitalize on growth possibilities and keep their firms from going bankrupt.
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