Every business needs a good accounting system for the survival of the business. By accounting, I mean cash book, payroll records, sales invoice, credit book, credit purchase book, debit book, cash payment vouchers, payroll records, assets records, stock book and bank transaction book.
Before the era of internet, all these books were maintained separately and manually; thus making it very stressful to keep stock especially for large organization. But nowadays, there are account software that make the job of keeping accounting records of business so easy. In this article, I will discuss topics like, advantages of accounting to small business and 10 top account tips for beginners.
3 Importance of a Good Accounting System for Beginners
- Helps You Evaluate the Performance of your Business-: A good accounting system gives you a thorough overview of the financial performance of your business. If you don’t have an accounting record, how will you know if your business is growing or depreciating? So your account records helps you know if your business is growing, stagnant or deprecating.
- Helps You Manage Cash Flow and Meet Deadlines-: Cash flow management means knowing what you do with the cash that comes into the organization. Your accounting system helps you know areas that need cash. For instance, cash may be needed to finance your debts, or make major renovations or order for new stocks, and it is your accounting system that will help you know this. In short, no business will growth further without a good cash management system. Also, your accounting books help you know when bills like your rent needs to be paid.
- Needed for Business Goal Setting-: Your accounting system will help when setting new business goals for the week, month or year, as seeing the business performance for the last financial year will help you project and set goals for the New Year and plan ahead of the business.
Now that you have seen the importance of a good accounting system to a business or company, its time to mention accounting tips that will help keep your accounting books or software in order. You must not be a professional accountant to have a good accounting system, I will provide 10 tips that will help beginners’ management their business accounting better.
5 Important Accounting Metrics for Small Business Owners Must Know
Warren Buffett, the world’s richest investor once said that “accounting is the language of business” and I believe it is the truth in its entirety. There are several accounting metrics that entrepreneurs and managers must understand to run a business successfully but below are five of these business metrics. If you are ready, then let’s proceed.
a. Cash Flow
The most important aspect of any business is cash flow. Even a profitable business with great margins, booming sales, an innovative product and healthy balances in inventory and accounts receivable can fail if it can’t access the cash necessary to maintain day to day operations. Keeping an eye on cash flow is one of the most important aspects of any small business manager’s duties. Some key concepts of cash flow to keep in mind are:
- When credit is extended to customers on sales, cash receipts will lag behind actual sales
- A small increase in accounts receivable may have a significantly negative impact on cash reserves
- Customers will generally delay payment as long as they’re able to in order to leverage their own cash
If a business is suffering from cash flow issues, but all of its other metrics are healthy, managers could consider some of the following measures to shore up cash reserves and avoid cash flow deficiencies in the future:
- Apply better inventory management – inventory can tie up a significant portion of a company’s cash reserves
- Offer discounts to customers who pay in full within a certain period of time – if cash is low, keeping enough cash to keep the business going may be a higher priority than collecting slightly more revenue down the road.
- Look for ways to leverage credit when purchasing – buying inventory with credit terms or paying major capital expenditures in installments can free up precious cash
b. Gross Margins
The gross margin of a business (sales minus direct costs) is the amount of money remaining after the costs directly associated with the sale of the product – e.g. production labor, raw materials, shipping – are accounted for. This number directly impacts the ability of a small business to earn a profit; therefore, properly managing gross margins is one of the keys to ensuring that a business can reach profitability.
For example, a bakery can approach its production capacity, but still not generate a profit if its pricing is so low that it does not generate enough income to cover its fixed expenses. Without understanding gross margin and being able to identify low gross margins as the problem, the hypothetical bakery owner might make poor decisions to compensate for the business’ losses, such as lowering prices to increase its ability to compete with other businesses.
Managing gross margins can be tricky, as the business owner has to constantly keep the competition in mind when managing pricing. However knowing the exact gross margin on each sale is crucial to the operation of a small business.
c. Days Sales Outstanding
If cash flow is king, then it stands to follow that managing accounts receivables is a vital aspect of running a small business. Days Sales Outstanding, or DSO, is the number of days that it takes a company to collect cash after a sale is made. A high DSO means it takes the company longer to collect on its accounts receivable. DSO is calculated by dividing accounts receivable by total credit sales and multiplying by the number of days it takes to collect.
DSO is important because of its significant effect on cash flow. A lower DSO means the company has more opportunity to reinvest the funds to grow the company. For company’s facing cash flow problems, lowering the DSO may even be essential to survival.
No business on earth can survive without sales. Even technology startups that rely on free user acquisition to gain market share must eventually be acquired by a company that can leverage their users into sales. A business can have a high gross margin and low fixed costs, but without sales, it is doomed to fail.
e. Tax Liability
Every small business owner must be fully aware of the tax obligations that come with operating a business. From federal taxes, to state taxes, to municipal taxes, failing to keep track of your business’s tax liability can severely dent a company’s financial picture.
Although small businesses may not have as much room to maneuver around taxes as larger companies, structuring a small business to minimize tax liability can be crucial to a company’s success. Through proper planning, selecting the right legal structure, making the right deductions, and proper tax return preparation, small businesses can minimize their tax liabilities and ensure that there are no unpleasant surprises from the IRS that could cripple the business.
10 Accounting Tips for Small Business Owners / Beginners
1. Know the Basics of Accounting and Bookkeeping-: Unless you have the money to hire a professional accountant, you should learn the basics of bookkeeping and how to keep accounting books. This will save you a lot of money which you will spend on hiring the services of a professional accountant. There are any free online courses on basic accounting and bookkeeping that will help you get started.
Go back to the roots of accounting and get acquainted with the procedures of bookkeeping, even though you don’t intend being a bookkeeper. Maybe you have delegated the task of bookkeeping to an employee or to your business partner, but that shouldn’t mean that the bases will always be covered. It is your duty as an entrepreneur to know everything about your business.
2. Keep It Separate: One big mistake most small business owners make is that, they don’t separate their business transactions from personal transaction. Imagine having a single bank account for both business and personal related expenses, you will start making personal spending from money meant for business. Have a separate bank account for your business and another one for personal use. Also, you need to separate your personal expenses from business expenditures.
3. Keep It Simple-: If you cannot understand details of each of your accounting books at glance, then it means that you are not keeping it simple. Have a separate book for your expenses, your income, your debts and many more; So that you can you don’t end up confusing yourself.
You should try and make your record keeping as simple as you can. The early years of your business should serve as a learning process to you and you should build up your accounting methods slowly. Rushing into things that are complicated can at times be an avenue for disaster, and you diving into something you really do not fully understand is simply overwhelming.
4. Consider Every Little Detail-: There are some tiny expenses that we tend to over look, which add up to become problematic for us in the further. Expenses you made or hiring the services of a laborer, little incentives you give your employee should all be recorded in your accounting books, because whether you consider it or not, they are part of your credit entry or expenses.
5. Get It Online-: I mentioned above that there are accounting software that will help you make your accounting task easier and less boring. Examples of online bookkeeping software you can use for your business include: Kashoo, Invocera, Xero and Quickbooks online. You can also opt for cloud storage of your data to help you have access to them whenever you wish, and avoid loss of data because paperless accounting is the main thing now.
6. Periodical Review-: Always set out time constantly to balance and reconcile your accounting books both online and offline. It can be weekly, or monthly; whichever works for you. This way, you will keep ahead of your finances and know when your business starts defaulting. You should always take note of your monthly and even daily account balances. If someone is doing it for you which is the necessary thing, always take time to occasionally check and ensure that they are being done.
7. Review Your Tax Reports-: As a business owner, there are certain taxes you are expected to pay, and it is expected that you pay them as at when due. Always involve your tax payment as part of your expenses to avoid non payment penalties from piling up. This is a form of evitable debt that you can avoid.
8. Monitor Your Expenses to Check for Unwanted Expenditures-: There are some expenses you make from time to time that do not contribute to the positive growth of business. These are expenditures that your business and do without. Review your books, find those expenses and find a way to cut it out.
Making and sticking to budget will always assist to keep expense in line, and permits you to see the actual outcomes reflecting planned ones. This will surely assist you to guide your expenses and keep your profits up.
9. Keep Track of Your Debtors-: Credit sale in business is inevitable, always keep track of your debtors. If possible, open a debtor account book to keep track of them, and send them reminders once in a while to remind them to pay up as your need the money to run your business.
10. Employ the Services of a Pro-: In as much as I mentioned that it is cheaper to keep your accounting records, but if at any time you start getting confused, don’t hesitate to seek the advice or services of a professional accountant. Also, as you business begins to grow and expand; the services of a professional accountant may become inevitable. Look for an accountant that will work with you. When in doubt, it is very essential to invite or call up an accountant that will work with you and as well assist you to meet all your financial goals or objectives.
11. Apply two methods both electronic bookkeeping and paper
Bookkeeping on paper might not sound worthwhile but believe it, it is really worthy. To many, electronic bookkeeping is easily confusing mess of unbalance numbers that does not make any sense. Paper record keeping always feels more hands on, and in much case, it is easier to discover where you have gone wrong. Be sure to keep printed copies of important documents in cases of emergencies if you prefer to work on the computers.
In conclusion, it is important you know that no business can be run successfully without proper accounting and financial documentation. So the earlier you start setting up an accounting process for your business, the better for you and your business.