The sight or mention of any accounting thing is enough for many small business owners to immediately transform a smiling face into a contemplational face.
You could get away with maintaining your own books in the beginning. When your company starts growing and so does your taxes you might feel a little bit lost as your tax time approaches. Fees for wrong tax filing or messy bookkeeping may cost you very high and not to mention it will also take a lot of time in correcting mistakes.
Accounting is a necessary task for all companies, helping you in managing a business, planning ahead and preventing an audit. Follow these proven small business accounting practices to keep moving toward your long-term goals and improve profits.
Get to know your financial statements
It is essential that you know how to read this essential financial tool, whether you have an accountant or an employee managing your in-house accounting. They will notify you at any time of your financial situation. If you are financially informed, you will 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.
Plan your business budget
A business budget and plan will help you to plan and estimate the future expenditures and revenues necessary for the sustainability of your operations at the start of your business or the following operational years. When seeking external funding investment, a well-documented business budget and marketing plan is a must.
Decide your accounting method
Accounting method depends on the nature of your business. You have two choices in as far as accounting methods are concerned:
- 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.
Keep business and personal expenses separate
Even if you still have to make your first accounting entry, you should start opening your small business savings account already. Make sure no money is used for personal expenses in your business savings account. Do not be tempted to look for the apparently convenient option of only having a bank account, because you will find it hard to see if you have bought anything for yourself or your business. You'll also have trouble figuring out if a certain amount of money you've deposited into your bank account is for personal or business use if you don't open another one where you can store all the earnings from your venture.
Implement effective internal controls
Establishment and implementation of internal financial controls at an early stage in your company will help you achieve your financial objectives, including the protection of income from waste, error and fraud and financial obligations. These internal controls are a major part of your business.
Some of the most common of these measures include damage control planning and inventory policies & controls. You also need appropriate controls for the procurement of goods and services, as well as controls to oversee the release of processed goods and services into the market.
It would be challenging but fun to run your business. It's challenging because all of its success depends on your efforts and dedication. However, it would be much easier and more fun to run your business if you have established proper systems and follow the best accounting practices listed above!
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