Best Accounting Practices for Small Businesses
Starting a business and managing it is very challenging. Small businesses at their nascent stage have a host of issues to manage. There are several aspects you as a business entrepreneur need to pay extra attention to, Accounting is one of those key aspects to take into consideration while growing your business. Accounting for small businesses requires extra attention as in case of any mistake, the small-scale firms have to bear heavy losses.
We have listed down some of the best accounting practices for small business owners to follow.
1. Separate Business and Personal Expenses
Most common mistake by an early stage business owner is spending business expenses from personal account. This makes it very difficult to track the money spent on business and evaluate cash flow and profitability of the business. A separate bank account should be opened and inflow and outflow of money should be routed through such account.
Advantages of separating business and personal expenses are :
- Making it easier to track and substantiate business expenses to take advantage of tax deductions.
- Offering personal liability protection by keeping business funds separate from personal funds.
- Providing the option of a line of credit that the company can use to cover cash gaps.
2. Right Accounting Method
Every small business must design a set of rules for determining when to report income and expenses. This provides a consistent accounting method for tax purposes. Though Cash basis accounting is straight forward and easier to manage for small businesses, Accrual basis accounting is most suggested as the Generally Accepted Accounting Principles prescribes the same and it provides a long term view of the business.
3. Identify an Appropriate Accounting Software
Bookkeeping in an essential component of Financial Management that helps business owners have right information to make timely business decisions. Identifying and implementing an Accounting Software which makes the Accounting processes faster, consistent and error free is a great advantage for a growing business. With the advent of Cloud based Accounting Solutions, businesses have option to choose the right solution depending on the stage of business they are in and scale-up to advanced solutions as their business scale up.
4. Develop a Business Plan and Review Performance
Developing a business plan in line with your Financial Goals with revenue projections and a list of anticipated expenditure is a very important step for a business owner, followed by comparing the budget to actual expenses and revenue on a periodical basis. Studies indicate that more than 65% of businesses with a forecasted business plan and robust review system have better chances of achieving their financials goals and an excellent financial health.
5. Automate your Receivables and Payables
Optimizing your working capital is very critical and crucial at the early stage of the business as the business will be self funded at this stage. Timely Invoicing, collecting receivables as per agreed credit terms helps to pay suppliers in time as per agreed payment terms. Such a system will increase the confidence of Customers and Suppliers and help building trade relationship. An automated system will ensure there is no slip in this cycle and the operating cycle of Working Capital will be most effective.
Regular and periodic reconciliation of accounts with your customers and suppliers also is a very critical activity which reduces the risk of non collection of receivables from customers and wrong/excess payments to suppliers.
6. Monitor your Fixed and Variable Expenses
Every rupee spent on the business has to be counted. It is essential to examine every single rupee going out of your bank account, more so high ticker and fixed overhead. Outsourcing routine and non critical activities will help converting fixed overheads into variable and controllable.
7. Establishing Robust Internal Controls
A small business cannot afford to have a qualified professionals and the chances of frauds and mismanagement of funds is high. A strong internal control system is a protection against unforseable internal frauds and mismanagement of funds.
8. Compliance with Tax Payments
Payment of tax is a compliance matter. Delayed payment or Non payment is a serious issue and can cost heavily in terms of fines & penalties. Non compliance can lead to undesirable consequences and a business owner will be held liable for such defaults. Engaging a right tax advisor/ consultant will help to plan and pay all your taxes, file returns on time and have a peaceful life.
9. Financial Statements for Performance Review
Review of Financial Performance is a must to understand if the business is progressing in the right direction and course of correction to be taken. Profit & Loss statement, Balance Sheet and Cash Flow statements are three key Financial statements that helps business in reviewing its performance.
Profit & Loss statements help the business determine its profits or losses, a balance sheet shows assets, liabilities and shareholders’ equities for a snapshot of its financial position at a certain point in time, and the cash flow statement shows whether the company has enough money flowed into and out of a business in a given period and how much cash remains. When combined with the balance sheet, however, the cash flow statement can show whether a company has sufficient cash to meet its current obligations. All three statements are required by banks and investors to secure financing or funding.
By implementing right accounting processes and practices, every growing business has very high chance of functioning smoothly and achieving its financial goals. Identifying risks associated with the business and implementing a mitigation plan is very critical. Financially compliant businesses have achieved long term success. Business owners must frequently review the critical financial metrics to capitalize on opportunities to grow and ensure their company creates wealth.
SBS Global is an ISO 9001:2015 & ISO 27001:2013 certified company serving since 2007. SBS Global offers a comprehensive range of Outsourced Financial Accounting Services, CFO Services, Compliance (i.e., Company Secretary services) & HR Services catering to the needs of Small & Medium Organizations across industry sectors to meet their changing needs & expectations. Our team includes employees having industry & domain expertise who have insights drawn from years of professional experience.