The basic foundation of success for SMEs and startups majorly lies upon the proper management of its finances and having someone skilled in the field to look after the process. As per the Bureau of Labor Statistics, 20% of small businesses can’t even make it past the first year. Failing to understand the importance of best accounting practices can result in poor cash flow issues in businesses and hence leads to failure. Implementing simple accounting practices, having someone knowledgeable assigned to the process or outsourcing the task can be beneficial for business.
The following accounting tips can also provide insights on business growth while enhancing its financial management.
Effective Accounting Tips for SMEs and Startups
Every SME and Startup requires to follow simple accounting practices in order to have a strong financial position to grow and sustain and it includes:
Separate expenses (Business and Personal)
The very first step for SMEs and Startups to have a proper financial management system is to separate business and personal expenses. Opening a business bank account that solely serves to business purposes can help track business expenses accurately while offering personal liability protection to the owner.
An organized process of recording and tracking income and expenses is called bookkeeping. A proper bookkeeping can assist businesses in making sound financial decisions. Accounting is not among all small businesses’ skill set so businesses these days are investing in automated bookkeeping, cloud accounting software, skilled manpower or outsourcing the function.
Develop a budget
Developing a budget is a crucial part of a business plan which includes anticipated expenses and revenue projections. Making a budget helps businesses to effectively compare the estimated income and expenses to actual revenue and expenditure. According to a study done by Federal Reserve Banks of Chicago and San Francisco, 60% of businesses with outstanding financial health had made detailed budget plan and had maintained a separate payroll bank account.
Keep an accurate business records
The another major role for healthy finances of SME and startup owners is recordkeeping. Recordkeeping can be easily done through accounting software which automates and stores financial records digitally. Recordkeeping facilitates the tax deduction and other financial documentation process simple as it records the time, amount, place and purpose of business transactions.
The major list of recordkeeping for SMEs and startups are:
- Gross receipts include income from a business such as cash register tapes, cash and credit sales, receipt books, invoices, and forms 1099-MISC.
- Expenses include all costs that a business has spent to operate and such involves cancelled checks, documents that prove payment/ fund transfer, cash register tape receipts, account statement, statement and invoices, credit card receipts.
- Fixed assets should be recorded to assess annual depreciation and calculate loss/gain after its sale. SMEs and startups need to document their fixed assets in purchase and sales invoices, real estate closing statements, proof of documents, credit card receipts, cancelled checks.
An accounting method
SMEs and startup need to have a set of accounting rules to determine when to report its revenue and expenditure. Having a clear accounting method facilitates in taxation and other business purposes. Business can either opt out for cash basis accounting or accrual accounting.
Cash basis accounting is simple and straightforward as it records income as cash is received and deducts expenses as cash is paid from business’s account. Accrual basis accounting includes double-entry bookkeeping as it records the sales when a product is shipped or a service is delivered or sometimes income is not recognized for weeks or months after the sale. Accrual basis accounting is more preferable and accepted accounting principle as it shows the long-term picture of a business.
Keep the book up to date
Keeping the accounting book up to date is a must in order to have a clear picture of business’s financial health. Automating business operations ensures up-to-date accounting book. Another way for businesses to keep their books up to date is by linking their business account to their accounting software. That way, businesses can easily download receipts and bank statements and compute data in their own system.
Separate accounting functions
SMEs and startups usually have a single person handle many accounting functions which can have high risk of fraud and error. This risk can be minimized by assigning separate person for separate accounting functions such as one person for signing checks, another person for cutting checks and different one for reconciling the bank statements.
Keeping an eye on high-cost expenses is another major task for SMEs and startup owners to make their finances look healthy. Most of the time businesses overlook their expenses and by the time they realize high costs, it’s too late to manager or cut. So, it is important to keep track of high costs on regular basis.
Monitor tax preparation.
Every business needs to pay its tax so it is very much advised to estimate and monitor taxes prior to the payment. Tax preparation helps businesses to understand their expenses, avoid tax fines, and facilitate in tax returns preparation. Businesses can monitor their tax payment via tax calendar, or email reminders, etc.
Seek professional tax preparation guidance
Seeking a professional tax preparation guidance assists businesses to avoid federal taxes in hundreds and thousands. Businesses can get fines for submitting the wrong and inaccurate documents so, in order to avoid such federal fines, hiring a professional to do business taxes can be very beneficial. In terms of sole proprietor, the cost of seeking professional to do business taxes is deductible in business’s income tax.
Ensure data accuracy
Financial statement needs an accurate data of costs of goods sold (COGS) in its income statement. The inaccurate data of inventory and goods sold can impact the financial health of a business to a larger extent. So, it is necessary for SMEs and startups to understand the importance of data accuracy and data management in their system. Businesses can ensure data accuracy through inventory management system and accounting software.
Evaluate business performance via financial statements.
The three basic financial statements; income statement, cash flow statement and balance sheet, of a business facilitates in monitoring and evaluating the overall business performance and thus assists on making a sound financial decision making to its owners. Income statement assists on determining business profit/ loss, balance sheet provides a close picture on the financial position of a business at a given point of time by showing its assets, liabilities and shareholders’ equities and cash flow statement shows its cash in-flow and out-flow during a certain time period and also assesses the business’s ability to operate with remaining cash. Cash flow is equally helpful to determine a business’s ability to meet current obligations.
The likelihood of success of SMEs and startups highly relies on the ability to manage their finances and effective accounting processes. Many studies have shown that business which are usually number driven rather than establishing strong financial processes are likely to fail more often in a long-run. Implementing effective accounting steps and processes to ensure overall financial health for the long-term success is a sustainable way for businesses to operate and grow. SMEs and startups which frequently review aforementioned financial metrics have high chances of capitalizing on opportunities to grow and ensure excellent financial health.