For many small business owners, the sight or mention of anything to do with accounting is enough to instantly turn a smiling face into a contemplative one.
Is accounting one of the duller aspects of business ownership that you’d rather do without?
I’m sorry, that won’t happen; can’t do, won’t do…perhaps in the next life.
Your small business just can’t do without accounting.
This is the only way to keep your records accurate and complete; there are just too many numbers to memorize.
Effective accounting will help you to make considerable tax savings.
Sound bookkeeping is the simplest way to assess and confirm your business’ cashflow, profitability and growth.
Additionally, why risk being yanked into a lawsuit for possible funds commingling?
Here are 11 accounting practices that will do a whole lot of good for your business:
1. Getting familiar with and using the three tools of measuring business financial health
Successful accounting is more or less pegged on understanding how the following financial documents work:
- The balance sheet – it’s used to tell the worth of a business
- The profit and loss statement – it’s used to confirm whether or not a business is profitable
- The cash flow statement – it’s used to anticipate a business’ future cash balances
With the help of these three documents you can make informed decisions about how best to use business credit and how best to commit funds to business operations. Understanding how these three financial documents work will also help you to make sense of other financial documents.
These three tools are indeed the basis of creating sound business plans. Many potential lenders scarcely have time for anything else; a quick glance at your financial statements is enough to make or break your attempts to secure funding.
Again, if you are considering the acquisition of a business, or to have yours acquired, it’s worth appreciating the fact that sound decision-making cannot be possible without a thorough evaluation of financial reports.
2. Hiring a reputable accountant and bookkeeper
You have three choices in selecting an accountant.
First, you can opt for an independent Certified Public Accountant (CPA) professional.
Second, you can consider hiring an accounting firm; the scope of services will be wider but the fees much higher.
For lack of national certification standards like there are for accountants, using referrals is perhaps the best way to hire a competent bookkeeper.
There are different categories of bookkeepers. Basic ones handle tasks like receipts processing and bill payments. Full-service ones can make a summary of all your business’ bookkeeping activity which you then submit to your accountant to facilitate tax returns preparations.
NB: Accountants are well placed to recommend a good bookkeeper based on the quality of work submitted to them by various bookkeepers.
3. Identifying a good accounting software program
This is another consideration where your accountant’s advice will come in handy.
Of course it’s very advisable to know what different accounting software business owners in your industry niche use and how effective each is.
Nevertheless, it’s quite impossible to overlook off-the-shelf solutions like Sage 50 Accounting and QuickBooks. Ultimately, though, whatever you settle on must correspond to your business’ accounting requirements and budget.
4. Identifying a suitable accounting method
You have two choices in as far as accounting methods are concerned:
a. Cash basis method – This is the simplest option. Basically, income is acknowledged upon receiving cash, while an expense is acknowledged after the bill is paid.
b. Accrual method – Here revenue is matched with expense without concern to when the cash may or may not be collected.
Simply put, if you on day X sell a product whose payment is due after 30 days, you will record that sale on day X – not 30 days afterwards when the cash is collected. Similarly, if your business incurs an expense on day X with payment due after 30 days, you will record the expense on day X – not 30 days afterwards when you make payment.
This is the method of accounting the IRS requires for businesses that deal with inventory and manufacturing.
5. Keeping business and personal accounts separate
Without exception, your personal and business records should be separately maintained. This is essentially done to ensure that only relevant records are used for the compilation of income tax.
6. Issues of tax liability
There are two issues that you and your accountant must sort out:
a. Income taxes – Sole proprietorship businesses report business activity on Schedule C of IRS form 1040. You, as a sole proprietor, are required to pay income tax on business income, as well as the social security tax levied on this income, and which is separately reported on the income tax return.
Evidently, considering that the social security tax is approximately 15% of net income, and that this is paid in addition to income tax, small business owners have no choice but to be hawkeyed about their financials.
This should be enough motivation to find a competent accountant capable of setting up estimated tax payments. These payments will help to make your final tax bills lighter as well as to avoid penalties for defaulting on tax payments.
b. Payroll taxes – If you have employees, you need to apply for the state and federal payroll numbers required for filing payroll tax returns. Your accountant will be better placed to handle this. The federal payroll number or Federal Employer Identification Number (FEIN) is obtained using form SS-4.
For every state, different local and state tax payments are required. Paying these taxes requires you to apply for a State Identification Number.
7. Consulting reputable sources of financial and technical assistance
Quite often pro-small business agencies and organizations provide financial and technical assistance to startup businesses. It’s worth finding an accountant who is quite conversant about some of these organizations. Examples include:
- The Small Business Administration (SBA)
- SBA-guaranteed loans via banks
- Service Corps of Retired Executives (SCORE), a non-profit organization focused on helping small businesses to succeed.
- Trade organizations
- Tax incentives provided for hiring minority employees
- Local community banks (with funding from the federal government)
8. Implementing effective internal controls for your business operations
“Internal controls” describes the objective required in the handling of funds, where money, be it cash, credit cards, or checks, is exchanged for goods and services.
The purpose of this objective is to ensure that your business will receive all the income due to it without losing any of it through wastage, carelessness, employees’ dishonesty, fraud, etc.
Effective internal controls must therefore be initiated and your accountant should identify appropriate controls suitable for 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.
Considering these requirements, it is clear that hiring an accountant who is conversant with your industry’s operations and procedures is well advised.
9. Prompt submission of quarterly returns
- file quarterly payroll tax returns
- send money withheld from employees’ checks to the federal government
- send the employer’s share of social security taxes to the federal government
- account for withheld state income taxes
- account for state unemployment tax that employers pay to the state
- pay sales tax (in states where this is applicable) depending on your sales volumes
Your accountant should from the start ensure that systems are in place to facilitate prompt payment of these taxes therefore avoiding penalization for late payment or non-payment.
While your business may routinely have to deal with being cash-strapped, holding off your obligation to pay some of these taxes is ill-advised considering the backlash that ensues when government agencies act to counter taxpayer delinquency.
10. Accurate bank account reconciliation
A difference in these two balances may result when checks you’ve written are yet to be cleared at the bank. In this case the checkbook balance will be lower than the bank balance since the bank is yet to make payments from the checks.
In reconciling therefore, you will need to subtract the outstanding checks from your bank balance. If the two balances are now corresponding, you will have successfully reconciled your account.
Have your accountant explain this to you; you can save money by doing it personally.
11. Adopting a cost-effective employee benefits policy
As your business hires more employees you will need to figure out the following:
- The number of hours they will work
- The holidays they are entitled to
- The vacation policy you will adopt
- The types of policies you will provide in case you choose to cover employee medical costs or medical insurance
- The type of sick leave policy you’ll offer
These are certainly very weighty considerations and you need solid advice to make proper decisions. Your accountant and lawyer should get you started on the right track.
Adopting effective accounting practices is guaranteed to buoy your business’ chances of becoming successful.
Considering the various financial requirements and engagements you must enter with the state and federal government, suppliers, clients and your employees, having a competent accountant by your side is imperative.
Do you have an accountant?
If so, have the services you have received proven to be beneficial for your business?