Starting your own small business can be a dream come true. Among other things, it’s a way to follow your passion, control your destiny, choose who you work with, get an incredible sense of satisfaction and of course, make money. However, some of the responsibilities that come with it will be outside your area of expertise – for one, it's no secret that accounting can be tricky and tedious.
Luckily, there are ways to keep on top of what can be an arduous task. This article outlines tips that can help make your small business accounting process simpler and more efficient. After all, getting a better handle on your money will help you to ease your stress, set and achieve long-term goals, iron out inconsistencies in your cashflow, save time and even improve your revenue.
Use purchase orders
Purchase orders (or ‘POs’) can revolutionize small business cashflow. Being in control of your costs is extremely important – and purchase orders put the customer and supplier on the same page. Both parties agree on the details of a purchase when transacting goods or services, and knowing what bills are coming up puts you in better control of cashflow.
Purchase orders also help you control spending. If orders are placed via phone or even from a staff member’s email account, it can be tricky to get a smooth, reliable process in place. Purchase orders let you ‘raise’ orders in your accounting software and have them okayed by an approving manager before they’re sent to the supplier.
The process is more secure than carrying a credit card, check or cash, as purchase orders alone give your business the authority to buy goods. Rather than handing over money to receive the product or service, all you need is a robust approval system – which most accounting software provides.
Keep on top of invoicing
Keeping proper records of which invoices need to be sent, paid and chased up is an extremely important measure for small businesses to take. Failure to do so can mean late, unpaid or forgotten bills, so it’s important to have a process in place, as getting paid on time is vital if you want to maintain a healthy cashflow! Luckily, there are measures you can take to increase your chances of getting paid on time.
For example, make sure you invoice contains all the necessary information. It’s important the invoice is accurate the first time to prevent any delays down the track.
What’s more, it’s a fact that the earlier you send invoices out, the quicker you'll get paid. Get a system in place so invoices are sent out as soon as the work is done. If you don’t have software that generates invoices to be sent out instantly, assign a staff member to track your invoices and have a manual process in place to deal with unpaid bills. Chase up your debtors by issuing a second invoice, emailing or phoning them. If you charge late-payment fees, this can serve as a particularly helpful reminder.
Consult and collaborate with a trusted adviser
Although it costs to hire an accountant, it’s worth it for your peace of mind – just think how much an accounting error could cost. An accountant’s familiarity with finance and tax laws will save you money in the long run. They’re more likely to find deductions, process financial data quickly, stay on top of tax law changes, be able to answer your questions and help you avoid penalties.
The right accountant can also become a trusted advisor to your small business. You’ll be able to collaborate and consult with them on budgeting and forecasting, growth plans, cashflow management, risk assessment and business performance.
Of course, finding the right accountant is crucial. Small businesses have particular, complex accounting needs and fewer resources than medium and large businesses. When you’re looking for an accountant, make sure they understand these needs and have experience in 1. working with small businesses 2. dealing with businesses of a similar structure to yours, and 3. your industry. Find out exactly who in the practice you will be working with, and have a chat to make sure they will be a good fit as an advisor and ally.
Take advantage of technology
If, by some chance, you haven’t yet – get a computer. And get online.
If you’re reading this article, it’s likely that you’ve got this sorted – but if you’re passing this information along to someone else, make sure to stress this point!
Most of your customers, suppliers and business partners will be using computers, computer software, and the internet. Your accountant almost certainly will be. It’s imperative that you are able to share this medium with them to enhance collaboration, maximise your relationships and improve your services.
If you still print and snail-mail correspondence and invoices to your clients, you might be surprised at how much computers will save you (and the planet!) on paper, envelopes, postage and time. If you’re not sure where to start, check out the Paperless Coalition for tips and applications that can help you leave those piles of papers and boxes of files where they belong – in the past.
Using a computer means reducing the chances of human error when it comes to your financial data. For example, accounting software automates countless processes which were previously manual, ensuring accurate figures. Online accounting in particular lets you easily track income and expenses, view your businesses financial activities in real-time and backs up records for safekeeping.
Track and manage your expenses
Get a system in place that will help you monitor and record your financial activity. Come audit time, you’ll be grateful to have a system that lets you trace all financial movements. Ideally, you should be able to track activity for at least the past year.
For example, make sure to keep track of your receipts. You can save space by taking a photo of or scanning your pesky scraps of paper so you can file them digitally. Even better, apps like Receipt Bank turn receipts and invoices into data you and your company can use.
Another tip is to keep in mind which expenses are deductible. Small business accounting programs supply a ‘chart of accounts’, which lists of all the accounts used by a business to code their transactions to – including the most common tax-deductible business expense categories. For example, business travel and meals, insurance, using your personal car for business, office supplies, payroll and subcontractors may all be tax-deductible, providing the primary purpose is serving your business. As the IRS puts it, “a business expense must be both ordinary and necessary”.
Plan for upcoming expenses
As well as tracking your existing expenses, it’s important to plan for the future. Think about the expenses you have coming up over the next six months, five years, decade. Will you need a new premises? New office equipment? More staff? Extra insurance?
Chat to your accountant or financial advisor, as they are more likely to think of anything you might have missed, provided they have a good understanding of where your business is headed.
It’s also important to set aside money for taxes. Again, your accountant will be able to help you plan to put away a dedicated amount of money each month – or each time you receive a large payment – so the funds are there when you need them.
Use an accounting system you have tried and trust
Using a spreadsheet to keep track of small business finances no longer cuts it. Accounting software – particularly online accounting software – can revolutionize the way a business runs. There are plenty of affordable options designed to simplify small business accounting and maximise financial performance – most of which offer free trials.
The benefits of using an accounting system are numerous. For starters, the good ones are user friendly – because small business accounting software is designed especially for its intended users. If you find the right package for your business, it should be intuitive, easy to use and get jobs done in a few clicks. Another huge user benefit is how accessible it is. Because your information is stored online, you can view real-time financial data at any time, anywhere, from any device with an internet connection.
Online accounting software can also integrate with hundreds of business applications. This means your CRM, payroll, reporting, inventory, invoicing, debtor tracking and more, can sync up and work as one package, tailored to your needs. This way, you can manage all aspects of your business without having to transfer data manually. Having an overview of all you business data and financial position means you have all the information you need to run your business at your fingertips.
Online data is also extremely secure. Because your data isn’t stored on your computer, if your hardware is lost, stolen or damaged, all your data is completely safe and accessible, waiting for you in the cloud. What’s more, security is one of the highest priorities for online business software companies. They spend millions making sure the data in your accounting software is encrypted to the same level as your internet banking.
Applying these tips to your small business accounting will help you comply with tax laws and put you in a better position to monitor the health of your cashflow and the day-to-day running of your finances. And the more organized your finances are, the more time and clarity you’ll have to focus on making your business a success.
Lucy Godwin lives in Wellington, New Zealand, and works for Xero accounting software. In her role she engages with the small business and accounting communities and blogs for them about finance, marketing and cloud computing. Get in touch on Twitter @LucyJaneGodwin.