Best Accounting Practices For A Small Business
Accounting is an essential function for any business, regardless of its size. However, small businesses often struggle with managing their finances and maintaining accurate records.
In this article, I will discuss some of the best accounting practices that small businesses can adopt to improve their financial management and ensure their success.
Keep Accurate Records:
The first step to effective financial management is keeping accurate records. This means recording all transactions, including sales, expenses, and payments. Using accounting software can help automate this process, making it easier to maintain accurate records.
Establishing internal controls
It is another important accounting practice that can help small businesses prevent errors and fraud. Internal controls are processes or procedures put in place to ensure that financial information is accurate and reliable, assets are safeguarded, and legal and regulatory compliance is maintained.
Here are some examples of internal controls that small businesses can establish:
- Segregation of Duties: Small businesses should ensure that no single person has too much control over financial transactions. This means separating duties like authorization, recording, and custody of assets.
- Approval Procedures: Small businesses should have a clear process for approving financial transactions, purchase orders or invoices. This can help prevent unauthorized or fraudulent transactions.
- Physical Controls: Small businesses should implement physical controls to safeguard assets. For example, locking cash and other valuable assets in a safe or secure location, and restricting access to key areas.
- Regular Monitoring: Small businesses should regularly monitor financial transactions to detect errors or fraud. This can include reviewing bank statements, reconciling accounts, and conducting regular audits.
- Training and Education: Small businesses should provide training and education to employees on financial policies and procedures, as well as how to identify and prevent fraud.
Separate Business and Personal Finances:
Small business owners often use personal accounts to manage their business finances, which can make it difficult to track expenses and revenue accurately. It is important to open a separate business bank account and use it exclusively for business transactions.
Determining Which Accounting Method Your Small Business Will Use
Your business should clearly choose one accounting system in the start to keep it going in the right direction. The two main accounting methods are cash accounting and accrual accounting.
Cash Accounting: In cash accounting, revenue and expenses are recorded when cash is received or paid. This method is simple and easy to understand, and it can be useful for small businesses with straightforward transactions. However, it may not provide an accurate picture of a business's financial health, especially if it has a significant amount of accounts receivable or accounts payable.
Accrual Accounting: In accrual accounting, revenue and expenses are recorded when they are earned or incurred, regardless of when cash is received or paid. This method provides a more accurate picture of a business's financial health, especially if it has a significant amount of accounts receivable or accounts payable. However, it can be more complex and may require the assistance of a professional accountant or bookkeeper.
Small businesses should consider factors including size, industry, and type of transactions when deciding which accounting method to use. For example, cash accounting may be appropriate for a small retail business with simple transactions, while accrual accounting may be more appropriate for a small consulting firm with complex transactions.
It is important for small businesses to choose an accounting method and consistently apply it. Changing accounting methods can be time-consuming and may require restating financial statements, which can be confusing for stakeholders.
Overall, in my opinion, determining which accounting method to use is an important accounting practice that small businesses should do. By choosing the appropriate accounting method and consistently applying it, small businesses can ensure accurate financial reporting and make informed decisions about their finances.
Use Cloud-Based Accounting Software:
Cloud-based accounting software is becoming increasingly popular among small businesses. This software allows business owners to access financial information from anywhere, at any time, and collaborate with their accountant or bookkeeper in real-time. Some popular cloud-based accounting software options are QuickBooks Online, Xero, and FreshBooks.
Track Your Employee Time
Tracking employee time is an important accounting practice that can provide valuable insights into a business's productivity, profitability, and compliance.
By tracking employee time, small businesses can manage labor costs more effectively, ensure accurate billing and invoicing, and make informed decisions about their resources and staffing levels.
Employee time tracking involves recording the time spent by employees on various tasks or projects, and can provide valuable insights into the productivity and efficiency of a business.
Here are some reasons why small businesses should track employee time:
- Cost Management: Tracking employee time can help small businesses manage labor costs more effectively. It can help business owners identify areas where time and resources are being wasted, and make informed decisions about staffing levels and resource allocation.
- Billing and Invoicing: If a small business bills clients based on hours worked, tracking employee time is essential to ensure accurate and timely invoicing. It can also help business owners identify opportunities for upselling or cross-selling services.
- Compliance: Some industries require businesses to track employee time for compliance purposes. This includes tracking overtime hours and tracking time spent on government contracts.
- Profitability Analysis: Tracking employee time can provide valuable insights into the profitability of a business. By comparing the time spent on different projects or tasks to the revenue generated from those projects, business owners can identify areas where they are making a profit or losing money.
There are several tools and software available that can help small businesses track employee time, like time clocks, timesheets, and project management software. Small businesses should choose a tool that is appropriate for their size and industry, and provides accurate and reliable data.
Monitor Cash Flow:
Cash flow management is crucial for small businesses. Monitoring cash flow can help business owners identify potential issues before they become serious problems. It is important to regularly review accounts receivable and accounts payable, and forecast future cash flow to ensure adequate cash reserves.
Optimizing Chart Of Accounts
Optimizing the chart of accounts can help small businesses generate accurate financial statements and make informed decisions about their finances. It can also help business owners identify areas where they can cut costs, increase revenue, or improve their operations.
A chart of accounts is a list of all the accounts used by a business to record financial transactions, and it is the foundation of a business's accounting system.
Here are some ways that small businesses can optimize their chart of accounts:
- Organize Accounts by Function: Accounts should be organized by their function, such as revenue, expenses, assets, liabilities, and equity. This will make it easier to track transactions and generate accurate financial statements.
- Use Descriptive Account Names: Account names should be descriptive and easy to understand. This will help business owners and stakeholders better understand the financial information presented in the financial statements.
- Keep It Simple: The chart of accounts should be kept as simple as possible to avoid confusion and errors. Small businesses should only create accounts that are necessary for their operations and financial reporting.
- Create Sub-Accounts: Small businesses can create sub-accounts to provide more detail and granularity to their financial reporting. For example, a revenue account can be broken down into sub-accounts for different products or services.
- Review and Update Regularly: The chart of accounts should be reviewed and updated regularly to ensure that it is accurate and reflects any changes in the business's operations.
Overall, optimizing the chart of accounts is an important accounting practice that small businesses should perform. By organizing accounts by function, using descriptive account names, keeping it simple, creating sub-accounts, and reviewing and updating regularly, small businesses can improve their financial reporting and decision-making processes.
Reconcile Accounts Regularly:
Reconciling accounts is a crucial accounting practice that small businesses should perform regularly to ensure their financial records are accurate and free from errors.
The process of reconciling accounts involves comparing a company's financial records, such as its bank statements, to its internal accounting records, such as its general ledger and accounting software.
By doing so, small businesses can identify any discrepancies or errors in their financial records and take corrective actions to prevent further issues.
Here are some reasons why small businesses should regularly reconcile their accounts:
Identify Errors: Reconciling accounts can help small businesses identify any errors or discrepancies in their financial records, such as missing or duplicate transactions. By identifying these errors, small businesses can correct them promptly and prevent future issues.
Prevent Fraud: Regularly reconciling accounts can help small businesses detect fraudulent activities, such as unauthorized transactions or check tampering. By identifying these activities early on, small businesses can take immediate action to prevent further damage.
Ensure Accuracy: Reconciling accounts can help small businesses ensure the accuracy of their financial records. By comparing their internal accounting records to bank statements, small businesses can verify that their transactions are recorded correctly and that their account balances are accurate.
Improve Cash Flow Management: Reconciling accounts can help small businesses better manage their cash flow. By ensuring that their accounting records match their bank statements, small businesses can avoid overdrafts, late fees, and other cash flow issues.
Comply with Regulations: Regularly reconciling accounts can help small businesses comply with regulatory requirements, such as tax reporting or auditing standards.
Track Inventory:
If a small business sells physical products, it is important to track inventory to ensure accurate financial reporting. This can help business owners make informed decisions about purchasing and pricing.
Inventory tracking involves monitoring the quantity of products a business has on hand, sold, and ordered. Proper inventory tracking can help small businesses manage their cash flow, optimize their inventory levels, and avoid overstocking or under-stocking.
Small businesses can use inventory management software to help them track their inventory more efficiently and accurately. They can also work with an accountant or bookkeeper to ensure that their inventory tracking methods comply with accounting and tax standards.
Here are some reasons why small businesses should track their inventory:
Cash Flow Management: By tracking inventory, small businesses can manage their cash flow by knowing when to reorder products and how much inventory to keep on hand. This can help them avoid stockouts or overstocking, which can tie up valuable cash.
Cost of Goods Sold: Inventory tracking can help small businesses calculate their cost of goods sold (COGS), which is the cost of producing or purchasing the products sold. Accurately calculating COGS is important for calculating gross profit, which is the difference between revenue and COGS.
Productivity and Efficiency: Inventory tracking can help small businesses optimize their inventory levels and avoid overstocking or understocking. This can help improve productivity and efficiency by reducing the time and resources needed to manage inventory.
Sales and Marketing: By tracking inventory, small businesses can identify which products are selling well and which are not. This information can help them make informed decisions about sales and marketing strategies, such as promotions or product changes.
By managing cash flow, calculating COGS, improving productivity and efficiency, making informed sales and marketing decisions, and complying with industry standards, small businesses can optimize their inventory levels and improve their overall financial health.
Compliance: Depending on the industry, small businesses may be required to track their inventory for compliance purposes, such as for tax or regulatory reporting.
Evaluation of Financial Record and Data On Regular Basis
Evaluating your financial data on a monthly basis is an important accounting practice that small businesses should do to stay on top of their finances and make informed decisions.
Small businesses can use accounting software to generate financial statements and reports quickly and easily, making it easier to evaluate financial data on a monthly basis. They can also work with an accountant or bookkeeper to help them interpret financial data and make informed decisions.
Monthly financial evaluations involve reviewing financial statements, such as income statements, balance sheets, and cash flow statements, and comparing them to previous months or periods.
Here are some reasons why small businesses should evaluate their financial data on a monthly basis:
Monitor Performance: Evaluating financial data on a monthly basis can help business owners monitor their business's performance, identify trends, and make informed decisions about future investments or changes.
Identify Issues Early: Monthly evaluations can help business owners identify financial issues, such as declining revenue or increasing expenses, early on and take corrective actions before they become bigger problems.
Plan for Taxes: By reviewing financial data on a monthly basis, small businesses can plan for tax payments and avoid unexpected tax bills.
Plan for Growth: Monthly evaluations can help small businesses plan for growth by identifying areas where they can increase revenue, cut costs, or improve their operations.
Share with Stakeholders: Regular evaluations of financial data can provide stakeholders, such as investors or lenders, with valuable insights into a business's financial performance and health.
All the above points can help small businesses monitor their performance, identify issues early, plan for taxes and growth, and provide valuable insights to stakeholders. By using accounting software and working with an accountant or bookkeeper, small businesses can streamline their financial reporting and decision-making processes.
Hire a Professional:
Small business owners may not have the expertise or time to manage their finances effectively. Hiring a professional accountant or bookkeeper can help ensure accurate record-keeping, timely tax filings, and strategic financial planning.
In conclusion, effective financial management is crucial for the success of any small business. By adopting these best accounting practices, small business owners can improve their financial management and make informed decisions to grow their business.
