Nowadays, most people want to start their businesses; yet, a daunting prospect is that 50 percent of small businesses fail within five years. There is a lot to consider before starting a small business. So are you thinking of making the first move in making your own business? That’s great!
No doubt, you would have many questions about how to set up your business and get a successful start. Here, we have explained the golden rules of accounting. This will help you to avoid some of the common mistakes that may have a bad impact on your business in the long run.
Accounting best practices for small businesses
- Managing Cashflow
Cash flow is the lifeblood of any business and ensuring that this is managed from the onset is paramount. Without an accounting system and processes in place, it is very difficult to manage cash flow as the data is not recorded or collected accordingly. Accounting correctly will help manage accounts receivables and payables to ensure that payments and receipts are timed appropriately.
- Preparation of a realistic business plan
Take as much time as you need to prepare a business plan that will give you a clear picture of what you are doing, what you want to attain, and how you can manage to get there. A business plan doesn’t have to be a detailed document; instead, it should include actionable steps to achieve your goals.
A useful business plan should outline:
- Details of the range of products and services
- Target market
- Pricing policy
- Amount of cash you have and how long it will last
Once you have put together the basic plan, keep reviewing and updating it. It won’t be a huge task, yet it will keep your business on track and provide you with a great starting point.
- Evaluation of financial transactions
The primary step of the accounting process is analyzing transactions efficiently and entering those related to business into the accounting system. For example, loans taken for personal use must not be included in the business records.
By recording financial transactions in their respective places, stakeholders stay informed of changes that influence the performance of the business. You can customize views in accounting tools so that the information that is most relevant to you stays in front of you all the time.
- Provision of financial statement
Financial statements are useful for making decisions related to the financing and expansion of the business. Their analysis is a way to understand the profitability and risk of your business. It also provides data analysis about company operations so that you can plan accordingly to get the best return on investment.
The basic financial statements that you need to keep an eye on including the income statement, balance sheet, and documents of cash flow. A lot of information can be easily communicated to various interested parties with the help of financial statements.
- Double-entry bookkeeping
Business transactions are kept in chronological order by using a double-entry bookkeeping system. It guarantees accurate financial records by revealing data entry errors. The system records a debit and credit for each final transaction.
Companies benefit greatly from this as it reduces fraudulent activity by leaving an audit trail. With the advancement of technology, numerous accounting software is providing double-entry bookkeeping automatically when a transaction is entered.
- Devising trial balance
A trial balance is there to make sure that the total credits are equal to total debits or not. The debits and credits column should be in a balanced proportion. If not so, then the trial balance surely contains errors that need to be corrected and adjusted with correcting entries.
It must be taken into notice that some errors may appear even if the credits are equal to debits. For instance, an error resulted from the omission of entries or by double posting.
- Specialization in Xero
Having the right cloud-based tools is the main key to running your business smoothly. Xero’s app marketplace includes many apps for improving the efficiency of your small business. These tools will support every area of business from recruiting, marketing, estimating and quoting to resource management, and much more.
Accounting software such as Xero is crucial for remote work or outsourcing as it enables you to manage bills, bank reconciliation, and invoices. It also helps you to connect with an accountant or bookkeeper. Most of these software's come with a free trial, which will help you to select the right software for your business needs.
- Accounting Ledger
A ledger is an assemblage of accounts that portray different changes made to each account based on previous transactions, as well as current balances in each account. It is an inescapable step while doing business accounting, as it calculates the position of loss or profit in the business.
All the entries are compiled in one place, so it becomes easier and less time-consuming to prepare further accounts like profit and trading accounts. The ledger will help you to signify the exact position of an account, whether they have an unpaid or owing balance at the time of closing the account.
Need for an accountant for small business
If you are running a small business, then hiring an accountant is most probably the best way to save your valuable time and money. You won’t have to deal with the accounting hassles.
Accountants can lend a helping hand to small business owners in the following ways:
- An accountant can aid you by providing a good business plan during the setup of your business
- Offer opinions on your business’s structure and promotion
- Help you secure obligatory licenses such as sales tax permission letters, business licenses, and employment accounts
- Maintain inventory documentation by stock number, purchase prices, dates sold, and sale prices
- Format your accounting software and chart of accounts
- Deal with complex sales tax issues and compliance in a proper systematic way
- Help you in meeting the requirements of licensing agencies
- Manage complex labor costs, including wage and compliance
Many times small business owners cannot afford to hire a competent and professional accountant. So in the meanwhile, they can consider cloud-based accounting software applications. Many of these applications, such as Xero, cover the basics of accounting from payroll to invoicing and payments. Accounting software can make it easy for you to keep accurate records and basic financial statements.
This article is written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of its contents.