Bookkeeping is one of the oldest professions in the world. Every small business needs to have efficient accountants to thrive in this highly competitive marketplace. With a great bookkeeper, you can avoid several payment issues and use your financial reserves efficiently to grow your company.
To help small businesses prosper, we list eight essential bookkeeping best practices all small businesses should implement.
8 Key Bookkeeping Practices Small Businesses Should Adopt
Table of Contents
- 1 8 Key Bookkeeping Practices Small Businesses Should Adopt
- 2 Conclusion
1. Determine your Accounting Method
Your company can use two different bookkeeping methods, namely, cash and accrual. Accrual bookkeeping method records expenses and profits when they occur irrespective of cash transfers. Cash-based systems, however, register the profits when actual cash exchanges in the form of receivables and payables incur. Small Business Administration states cash accounting as a preferable option for effective cash management. In the initial stages, cash flow management for small businesses is tricky. Hence, using a cash-based accounting method is a more sensible option.
The accrual bookkeeping method suits larger businesses with adept accountants. Though it could be deceiving and confusing, it’s great to assess the financial status of a big company.
2. Have Separate Personal and Business Finances
Segregating personal and business funds are critical to keeping the books clean. So, ensure you enforce strict rules that restrict the use of company finances for personal use. Inaccurately allocating funds can cause cash flow issues that complicate tax filing and auditing processes. Avoid getting into legal trouble by separating personal and business funds. As a small business, you’re likely the one in control of the finances. In such cases, you must be even more careful to separate business expenses from personal ones. One great way to do so is to open different bank accounts and cards for your business. This move helps you avoid tax filing complications and keep business expenses strictly related to business.
3. Constantly Review Your Processes
Regular monitoring of your bookkeeping practices may create some additional work. However, we find it worth the effort. Before your invoice is approved, ensure it goes through the accounting department for review and verification. Additionally, we recommend you check each invoice properly before approving it. If you don’t have a robust bookkeeping team, outsource your accounting and bookkeeping work to a reliable firm that delegates duties and executes controls for you. Enforce robust and consistent review and approval processes across the firm to ensure everyone follows the same rules.
4. Leverage Technology
About 64.4 percent of small businesses own accounting software. As a small business owner, you have a lot on your plate. We recommend you leave your accounting troubles to reliable software. This software tracks your daily transactions, creates accurate estimates, manage invoices, and access them effortlessly. You can track your pending invoices and follow-up quickly to expedite payments. Technology makes generating profit-loss statements easier during tax times. We know you’re tempted to use excel sheets to control the data manually. However, consider how many errors you’ll avoid by leveraging technology to your benefit.
5. Establish Internal Control Authorities
Your bookkeeping is highly susceptible to fraud. Hence, you should implement internal controls to reduce the risk of fraud. Follow the standard bookkeeping practice of distributing your financial responsibilities among three different sections. Ensure no single employee can control authorization, record maintenance, and asset custody simultaneously. So, you can appoint one employee to write the check, another to check-in with the bank account, and a third one to complete the payment. Outsourcing is a great way to keep your accounting healthy and efficient for small businesses. Almost 37 percent of small businesses outsource their accounting and IT operations.
6. Hire the Best Talent
A Forbes article states hiring inefficient accountants is the biggest blunder small businesses make. Every small business place greater trust in its accountants. Great accountants end up saving you a lot of money in taxes due to their in-depth knowledge about the tax laws. Having the best technology won’t help unless your bookkeepers know how to use them efficiently. So, invest time and find the right people to run your accounting department. They’ll reduce errors, help you save taxes, and simplify the process for you. Even if they ask for a premium salary, we assure you, they’re worth it.
7. Plan for Taxes in Advance
If you’re ignoring your taxes for the end of your financial year, you’re making a huge mistake. Instead, prepare yourself for the tax season at least a year in advance to avoid unwanted situations. Entering expenses and deposits in the system after a substantial time passes is a bad overall strategy for small businesses. You can easily forget to include all the expenses, and that may cost your business serious tax trouble. So, ensure you record each loan, revenue source, fund, and profit statement clearly in your accounting system to manage taxes efficiently. Use the best software and the best talent you can afford to keep your accounts during the tax season.
8. Consider a Phased Methodology
If you’re still keeping books manually, be careful about optimizing too many processes at the same time. So, consider opting for a phased approach by streamlining a few processes first, and then, moving to others. Train the first batch of accountants on the new system and give them ample time to adjust to the system. Eventually, roll-out the solution to all accountants phase-wise and prevent shocking them significantly.
“Accountants are cowboys of information.” – David Foster Wallace
Every successful business stands on the firm foundation accountants build. Hence, having a great team that works towards the common goal of growing your business is critical for every small business. You already realize how vital bookkeepers are for your firm. So, give them all the tools and guidelines necessary to ensure they perform well and give you the desired results.