“DOING THE RIGHT THING”
(Apr. 13, 2020) — Just because you’re only still a small business, this doesn’t mean that you can relax about finances. On the contrary, all the more that you’ve got to be so concerned about employing an excellent finance and accounting system.
You’ll want your financial goals to be met, above anything else. Then, there’s also that fear of not falling into the mistake or trap of business closure. Or else, all the efforts that you gave to come up with the needed finances of your small business will only go down the drain.
Small businesses naturally wish to grow and be successful. With this endeavor, it’s important to note that improper accounting and financial practices may only be inhibiting this growth. Economic challenges will always be there, but this also doesn’t necessarily mean that you’ve got to succumb to these difficulties.
There’s so much room for you to improve even if you don’t have any business background and you wish for your business to succeed. If you’re a small business, this article is for you. Here, you’ll learn more about the best practices and tips to apply to have a sound accounting and financial system in your business.
1. Keep Accurate Records Of Every Transaction
This first tip is an essential reminder, even for small business owners. Even if you’re just starting in business, you must be able to record every single transaction. Whether big or small, note it all down, especially when you’re not yet using an automated system.
The basis of accounting always boils down to proper recording, and you’ll only have messed-up systems in the future if you don’t have a recording system in place.
Even more importantly, make sure that your records are timely, well understood, and are also all stored in one place. That way, should you look for any information, you can easily find it.
Keeping your records accurate is vital to small businesses if you want to succeed. It helps your business achieve the following:
- It increases the chances of your business operating efficiently.
- It assists you in preparing accurate financial statements.
- It allows you to immediately check the health of your business and make changes or corrections immediately when needed.
- It improves the efficiency and productivity of your entire team, as so much time and effort are now saved.
- It helps in detecting any possible theft within the business.
2. Always Keep Your Business And Personal Finances Separate
Since you’re still a small or startup business, it can be very tempting to think that you don’t need to open a separate account for your business finances yet. That shouldn’t be the case. Even this early, running your business smoothly relies on having a separate account for your business. That way, you’re not confusing any inflow or outflow from your finances with that of your business accounts.
One way or another, you’re always going to come across challenges in the future when you’re going to mix your personal and your business finances. Having a separate account right from the start protects your business from these uncertainties. Then, it also allows you to gain advantages such as the following:
- Your business is taxed separately from that of your personal finances, so it’s also imperative that you have a sound tracking system of this outflow.
- It strengthens your professional image when your business has its own business account.
- It makes it easier for you to track the financial performance of your business.
- It may enable you to secure better and higher business credit loans in the future when you see this need, such as for business expansion.
- It’s easier to audit when your finances don’t intermingle.
3. Keep All Of Your Receipts
If it’s been a habit of yours to keep receipts for your personal transactions, then there’s no reason at all why you also shouldn’t do the same for your business transactions. At all times, always keep the receipts of your payables and even of the duplicate receipts of sales made from your business.
As you keep your receipts, organize them also by category. That way, should there be any transaction that you’ll need to look back to and verify, you can do so with so much ease. Additionally, for tracking purposes, it’ll be easier for you to know where your money is spent and how you can cut back on specific areas of your expenses.
Here are other compelling reasons as to why you need to keep all of your receipts:
- It makes it easier for employees to ask for the accurate amount of reimbursements, whenever needed.
- It helps solve chargebacks better, such as when a customer will dispute a certain financial transaction with your business.
- It’s easier for you also to check and verify your transactions made against your credit card
- It’s easier for your accountants to prepare your records, come tax filing season.
- It keeps your chance of claiming warranties for specific equipment, tools or appliances that you may have bought for your small business.
4. Determine The Best Method For Tracking Small Business Finances
For small businesses, in accounting, there are generally two types of tracking your finances. These are the accrual basis method and the cash basis method. There’s no one method that’s better than the other. The choice of your accountant or your business is dependent on the needs and the preferences of your business.
As a brief background, here’s the difference between both types of financial tracking or accounting:
- Under the accrual basis of accounting, the revenues and expenses of the business are recorded at the time when they are earned. This is without regard as to when the money is received or is paid.
- Under the cash basis of accounting, this method recognizes when the cash is received, and when the expenses are also paid. In this kind of system, there are no accounts payable and accounts receivable.
The choice between both boils down to the preference also and the financial operations of your business. The bottom line is that small businesses should keep track of both their expenses and their earnings.
While there’s no one-size-fits-all approach as to which type of financial recording is the best, you can follow tips in choosing the accounting method for your business. Some of these are the following:
- Utilize an accounting system that also sits well with your accountant
- Take special note of all other expenses of your business that doesn’t necessarily fall within “operations,” such as business travel
- Record expenses directly as they happen, as this will also form the backbone on how to structure a balance sheet of your business
- Use software to track and analyze all of your business expenses
5. Learn How To Invoice Correctly
When you started your business, can you confidently say that you know how to send out invoices? This may not always be the case. More so, if you don’t have any business background at all. If this speaks to you, you must learn to send out invoices correctly to have the ability to manage your business more effectively,
This begins with prompting each one of your clients to always pay on time. When you have a sound invoicing system in place, you’ll know which of your clients with payables have settled their bills. You will also determine which clients fail to pay within the agreed period consistently.
To help you along this line, here are some tips to get you started on a good invoice management system:
- Never add to an invoice once it has already been finalized
- Have an invoicing software or platform, whenever possible and when needed
- Set automatic payment reminders to clients that still have accounts payable
- Don’t create multiple versions of the same invoice, as this will only get you even more confused
- Use a consistent method of formatting that works well with your sales and accounting team
6. Employ A Professional Accountant
Even if you’re still a small business and you feel and think you don’t need it, don’t take any chances. It’s better that you’ll also leave your accounting to the experts.
Employ a professional accountant, even when you also know to account for yourself since it’s easier for you to miss out on or skip minor business errors. You will prevent or minimize discrepancies if you let a third-party accountant responsible for your financial records. Hence, you can rely on the truthfulness and accuracy of your business records when an outside accountant completes it.
These small business errors that can easily be overlooked include any or one of the following:
- Losing receipts
- Recording current transactions in the wrong business period
- Listing expenses in the wrong category
Especially when you start to have any doubt or reluctance about the accuracy of your financial records, then it’s best to have it verified instead by the experts. Here are other good reasons why you should hire an outside accountant:
- You can carry on your business operations with peace of mind that your financial transactions are recorded accurately.
- You can have a smoother process of tracking the numbers of your business whenever you ask for it.
- You can run through possible challenges in your finances on a more collaborative approach.
- You can meet deadlines on time, all the time.
- You can have a third-party picture of the current standing of your business.
7. Create A Monthly Profit And Loss Statement
Even when you’re still a small business, you’ll still want to create a monthly record of your business’s profit and loss statement. These documents are records that summarize the expenses, costs, and revenues that your business has on specific dates. So, your businesses need them to reveal information about your company, whenever needed, as to its ability to generate a profit.
These are some of the reasons why it’s imperative, even for small businesses, to have a profit and loss statement:
- It forms the basic building blocks of sound accounting information that your business will need.
- It enables your business to look to the future now with a more sound ability to make better financial decisions.
- It helps your business have a more accurate forecast of the expenses that you’ll occur in the next month, such that now you’re more equipped to prepare for these expenses.
- It enables management also to have more firm management decisions that are well-thought-of.
- It prepares you for the filing of your taxes.
For your business to enjoy the benefits of having a profit and loss statement, as enumerated above, you must first also collate the following information:
- All sources of income of your business, which includes both cash and credit payments
- All petty cash transactions and other inflows and outflows of your business, all accompanied by their corresponding receipts
- Information for any returns, price deductions or discounts that your business has given your customers
- Records of all the purchases that you’ve made
Now that you also know the documents that are necessary to ensure the accuracy of your profit and loss statements, here’s another bonus for you. These are the steps that your business must undertake in creating a profit and loss statement:
- Always keep clean records of all your transactions, so that you won’t experience any difficulties in preparing your profit and loss statement.
- Select the period which will be the basis of when to begin and when to end the records needed to come up with your profit and loss statement for a specific accounting period.
- Calculate the overall revenue of your business during that accounting period that you’ve identified.
- Calculate the corresponding expenses of your business in the same period.
Without a doubt, one of the scariest parts of running a business will always have to do with the accounting part and the managing of finances. Especially for small businesses that are also owned and managed by first-time entrepreneurs, there’s always that doubt as to whether or not you’re doing the right thing.
If you don’t know what you’re doing, unfortunately, you can also run deep in a pit of financial trouble. Thankfully, with the tips that you’ve just read, now you’re enlightened that it’s not going to be that daunting.
Excelling well financially is doable, especially so with the right amount of effort. Keep these tips in mind, and you’re sure to be one step closer to making your small business grow.
Sharon Rondeau has operated The Post & Email since April 2010, focusing on the Obama birth certificate investigation and other government corruption news. She has reported prolifically on constitutional violations within Tennessee’s prison and judicial systems.