Best Accounting Practices For A Small Business
Keep Accurate Records:
Establishing internal controls
- 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:
Determining Which Accounting Method Your Small Business Will Use
Use Cloud-Based Accounting Software:
Track Your Employee Time
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.
- 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.
Monitor Cash Flow:
Optimizing Chart Of Accounts
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.
- 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.
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.
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.
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.
Evaluation of Financial Record and Data On Regular Basis
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.
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.
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.