Thursday, 27 October 2011
Money is the bottom line (literally) in any business, large or small. The difference is that large businesses can often survive a loss of cash now and then. But, to a small business, a loss of money can be devastating and often lethal. That is why keeping track of your money, both coming in and going out, in a small business is critical. Good money management requires good accounting practices and these practices need to be in place before you even start conducting business.
As part of the preparation of opening a new business you need to consider how you are going to handle your accounting needs. It may not be as much fun as designing a logo or setting up a retail space, but establishing sound accounting practices from the onset can do more to insure a healthy and long lasting business than any other action you take.
No matter how great your idea for a new business is, you aren't going to be successful if you don't know how to financially handle the business. You should start by doing a little "homework". Talk to others in the same industry and get some advice about accounting systems that they use. Weigh their opinions on accounting practices that they find essential; but, don't just rely on the advice of others. Do some research for yourself. If you don't know much about accounting, then it's time to take a crash course. You can buy, or borrow from the local library, some books on accounting, or you can take a course from your local community college. Become familiar with the terminology, what accounting practices are necessary for a small business, specific accounting for your type of business, and the options available.
One of the first major decisions you will need to make is what type of accounting system you are going to use for your business. Basically, there are two types of accounting: cash basis method and accrual method. The cash basis method of accounting means that you acknowledge the cash in your ledgers when you receive it and, likewise, you recognize the expense in your ledger when you pay the bill. This is the simplest form of accounting and used for many small businesses. The accrual method of accounting means you account for incoming cash at the time of the transaction even if the actual cash is not received until a later date. And, you record an expense when it is incurred even if the bill is not paid until a later date. This method of accounting is more complicated and you may wonder why someone would choose this over the cash basis method. Well, you may not have a choice if you deal with inventory or have a small business that deals with manufacturing. In such cases, the Internal Revenue Service requires businesses to use the accrual method of accounting.
You should consult a certified public accountant, CPA, before starting your business. They can be an invaluable resource for all aspects of accounting from inventory to payroll to taxes. Even if you decide to hire an accountant on a more permanent basis, you should still develop a working knowledge of basic bookkeeping. This will give you a clear picture of how your business is running and provide valuable insight into the future progress of your business. Also, doing your own bookkeeping will save you money and allow you to hire accountants for more complicated issues such as taxes and payroll. There are payroll services that can be hired just to handle payroll issues for small businesses. This should be something to consider if you have to hire employees as your business grows. Payroll accounting can be complicated and time consuming. Delegating this to a firm that specializes in payroll accounting can save time and insure that you comply with all the laws and tax codes surrounding employee payrolls.
If you are going to take responsibility for your accounting practices, then you will need some sort of system to handle the day to day operations. There are numerous accounting software programs available on the market for small businesses. Don't just buy the first one you see or the one that has all the "cool" tools. Evaluate what are the needs of your business and then compare that list to what each program offers. Keep in mind that many programs offer basic packages with added features that cost an extra fee, so be sure to factor the extra costs into your final purchase price. Also, keep in mind that you want a program with the capability to expand with your business. You don't want to have to go out and buy a new program every couple of years. Besides the added expense, you will have to take time to learn the basic operations of each new program you install. It is cheaper and wastes less time and manpower to learn one accounting software program with the ability to upgrade services as needed.
It is a good idea to make a habit of monthly financial accounting. That means reconciling your monthly business bank statements and preparing monthly financial reports on the progress of your business. Even if your business is extra small to begin with and this seems like overkill, go through the motions. Once your business grows, you will appreciate having that financial information at your fingertips each month as you have to make important decisions about the direction and growth of your company. Establish these key accounting practices while you are in the startup stage and have time to devote to learning something new. You will appreciate the effort when your day to day business operations become more hectic and you need that information at a moment's notice.
Accounting for a small business can seem overwhelming, but it is not insurmountable. You just need to spend a little time up front educating yourself and surrounding yourself with experts in those areas where your knowledge is lacking and you will develop a solid financial backbone for your small business. A little homework can pay off in the long run with big dividends!