Often the most time consuming and stressful part of running a small business is the process of keeping clear and accurate financial records. Even those who manage to keep their books organized can find it challenging to use them strategically in their business decision-making. As a result, many small business owners simply throw all of their receipts into a shoe-box and give it to their accountant at tax time, which causes them to miss out on a lot of valuable information about how their business is performing.
Maintaining a good record keeping system throughout the year is crucial to ensuring that your small business reaches its full potential. This system can be used in many ways to make business decisions. For example, it can easily determine things like: whether or not you are making any money, how financially strong you are at any given time, and be able predict rough patches before they happen.
Here are some tips for setting up your accounting system so that it can be used year-round as a business decision-making tool, not just for tax season.
Before you start: Choose Your Accounting Software Wisely
If you are just starting out and do not have a lot of transactions then a manual record-keeping system could be a good option for you. It is a low cost option but does require someone (likely yourself) to maintain it regularly. The other disadvantage of this method is that you typically end up spending most of your time on the number crunching, leaving little time to analyse and understand the numbers.
As your small business grows you will want to consider moving to a computer software solution that can handle more transactions efficiently. These programs can provide you with the ability to customize your records to suit your business and the level of detail that you require. They also offer valuable reporting tools that will help you to better understand how your business is performing throughout the year.
Before you start, make sure that you get proper training on how to use the system that you have chosen. These programs can be more complicated to use than people often realize. If the software is not used as intended then the data that comes out of it may be compromised, which can be very time consuming to fix.
Daily: Maintain Records
As a small business owner, you should be regularly monitoring the progress of your business by updating your accounting records daily. You know the financial condition of your business only when you maintain accurate records. Make it a daily habit to review your bank balances, record all payments made, record all sales/cash receipts, correct any entry errors, and record any inventory sold/purchased. Follow this process daily and find out how easy it can be!
Weekly: Review Accounts Receivable/Payable
A small business can run into major problems if its customers are in the habit of paying their invoices late. To reduce the risk of late or non-payment, you should clearly state your credit terms and conditions on your invoice, along with an interest penalty to be imposed if the payment is past due. In some cases, these precautions may not be enough. It is recommended that you review your accounts receivable on a weekly basis and take action on any slow payers. If your customers know that you are on top of your accounts receivable, they are more likely to pay on time. For the same reason, it is also a good idea to review your accounts payable on a weekly basis to ensure that you stay in good standing with your vendors.
Monthly: Reconcile Your Accounts
An accounting system is only useful to you if the records are complete and maintained accurately. For this reason, it is important to have your financial records reviewed and reconciled monthly against the bank, petty cash, and credit card statements to confirm that all entries have been recorded in the correct accounts.
Now Reap the Benefits
Once your accounting records have been reconciled, you are then in the position to actually use this vital information to help discover profit opportunities, cost savings and efficiencies.
A clear and accurate Profit & Loss Statement, Balance Sheet, and Statement of Cash Flows hold an abundance of these clues! These reports can be populated right from the accounting system. It is important to review these reports in detail to ensure that you have a thorough understanding of what is happening and if anything unusual needs to be investigated.
You should always consider seeking the advice of an expert to ensure that your accounting systems are designed to suit the specific needs of your business. An expert can review your financial records and uncover tax savings, profit opportunities, and underlying issues that may otherwise go unnoticed.
Published in Medium. (URL: http://ow.ly/k6PG30f8rlD)