Accounting Best Practices
20 Tips for Small Businesses
As an entrepreneur, your task does not end with Business Registration. In fact, that is just the beginning. What then follows is a long “to-do-list” to keep your business plans, goals and reporting requirements on target. If the ”list” is not managed properly, you will end up exhausted, regretful and frustrated because you will soon realize that you are actually working longer hours than when you were working for somebody else. What was an 8 to 5 job for an employer becomes a 24/7 headache for your business.
Entrepreneurs, like me, agree that one of the most daunting and intimidating tasks in running a business is accounting (or financial management in general), unless, that is, you are an Accountant by profession. We find it so intimidating that the moment we are in possession of those receipts, invoices, VAT returns and other accounting documents, we go into a trance like state, staring at the increasingly large pile of papers, picking them up and putting them down again hoping by some magical spell they will disappear.
HOWEVER, if you want your business to succeed, you cannot ignore the fact that accounting (financial management) is an integral part of the entire business and it is extremely important to keep your “books” accurate and in proper order at all times. If you follow these accounting best practices (or financial management best practices), running your business will be a lot easier and result in fewer sleepless nights.
Familiarize yourself with your financial statements – Balance Sheet, Profit & Loss, and Cash Flow Statement
Whether you have an outsourced SME accountant or an employee managing your in-house accounting, it is imperative you know how to read these essential financial tools. They will inform you of your financial position at any given time. Being financially informed will help you make sound business decisions.
- Balance Sheet – this shows the company’s total assets, liabilities and capital at a particular point in time
- Profit & Loss or Income Statement – shows the revenues generated and expenses incurred during a particular period
- Cash Flow Statement – shows details of the flow of cash (inward and outward) as a result of the company’s operating, investment and financing activities.
Prepare business budget/plan
At the beginning of your business operation or of the succeeding operating years, a business budget and plan will help you project and estimate future expenses and the amount of income or revenue needed to sustain your operations. A well-documented business budget and marketing plan is a must when seeking external funding investment.
Decide what accounting method you will use – Cash Basis Method or Accrual Method
Accounting method depends on the nature of your business.
- Cash Basis – is the simplest form of accounting. You recognize and record revenue when cash is received. Expenses are recorded when bills are paid.
- Accrual Method – Revenues are recognized and recorded when earned. Expenses are recognized and recorded when consumed or when an invoice is received. Remember, when using this method, revenues and invoices don’t have to be paid before recording them in your books.
Separate business and personal expenses
I believe it was Benjamin Franklin who wrote “in this world nothing can be said to be certain, except taxes and death.” When running your business it can be tempting to declare certain “personal” expenses as legitimate business expense. I would advise you to resist the temptation for two reasons: 1. It distorts the true financial performance of your enterprise. A factor that may deter external investors; and 2. It is advisable to keep the revenue authorities on your side. A clean set of accounting books leads to clean audit and less hassle from the tax authorities. So back to Benjamin, whilst the former may be deferred by keeping accurate “clean” books thus creating less stress, the latter is, unfortunately inevitable.
Enjoy a terrible accounting joke from time to time
Automate payments and invoicing
You have to learn to take advantage of accounting technology. Enroll recurring bills on e-Payments and regular customers in e-Invoicing. This practice avoids past due bills and un-accounted revenue.
Automating payments and invoicing with an AP (Accounts Payable) automation tool has several advantages for businesses. First and foremost, it can save time and increase efficiency. With an AP automation tool, invoices can be processed and paid quickly and accurately, reducing the need for manual data entry and reducing the risk of errors.
Plus, an AP automation tool can help businesses stay organized by keeping track of payment deadlines and providing real-time visibility into payment status. This can help businesses avoid late payment fees and improve relationships with vendors.
Identify and strictly implement best practice internal controls
Setting up and implementing internal financial controls at a very early stage of your business will help you achieve your financial goals. These internal controls may include processes protecting revenues from wastage, errors and fraud; and meeting financial obligations.
Plan your purchases
Buy only the things you need and essential for the business. Always follow this golden buying rule: “Will my business benefit by making the purchase?”
Set a routine of closing your books and stick to it
Practice closing your books at the end of each month. This would allow you to see how your business performed over a given period. This would also enable you to plan ahead, change or adjust your existing plans, and make sound business decisions.
Reconcile your bank account regularly
A monthly reconciliation of bank account is pretty standard. As soon as you receive your bank statements, make it a habit to reconcile them right away. Make sure that the balance you have in your books matches your bank account.
Pay your bills on time
This practice will build you a good credit score and relationship with your suppliers. This can be helpful in securing a more lenient payment terms especially when you need to expand operations. In the long run, you will actually save money because you avoid past due charges.
Submit and pay your tax liabilities at least two weeks before the deadline (income tax and payroll taxes)
These are obligations that you have to pay whether you like it or not. Creating separate account for your tax liabilities will be helpful in remitting payments on time.
Plan your hiring
Like buying an equipment or asset, you have to plan the hiring of personnel. You have to know the duties and responsibilities of each member of your team – specifically, their added value to your company. Every employee must have clear documented details of their responsibilities, accountabilities, hours of work, reporting relationship, compensation and benefits. Employing people can be minefield but there is plenty of free advice available from business groups and or trade associations.
Monitor your receivables
Closing a deal or signing another customer is awesome! But remember, a sale is not a sale until money is exchanged. It goes without saying that effective monitoring of accounts receivables will improve your cash position. It would help to monitor your outstanding invoices and learn the accounts receivable ageing report.
Hire a reputable accounting firm
Starting a business takes courage and perseverance. Some are discouraged because what they immediately see are the tasks involved. They don’t realize that there are so many resources that they could use. Accounting, as one of the important aspects of a business, can easily be carried out in-house with the use of simple or more complex software, depending on the nature and size of your operations. Or, you may also use the skills of an outside source like an accounting firm or freelance bookkeeper.
In conclusion, running your business should be challenging but fun. Challenging because its success all depends on you…on how much effort and dedication you are willing to give. But, if you have set up proper systems and follow the above accounting best-practices, then running your business would be a lot easier and FUN!
Updated: June 03, 2019