A business’s success relies on its product or service excellence; the ability to stand above the competition; and most importantly, finances. This is especially true for small to mid-sized businesses as they operate on a tighter budget and lower margins while they grow. As a business owner, it is vital to know the ins and outs of your business finances, where you stand with cash flow, your budget, assets, and liabilities. Accounting for every business will look different. However, there are four standard accounting best practices every business should follow.
Accounting best practice #1: Cover the basics
If you’re a small business owner just getting started, there are a lot of basics to cover. We go in-depth on this topic in a previous blog: 5 Steps to Set You Up For Success. In addition to those five points, you will want to choose an accounting method that fits your business best and abides by generally accepted accounting principles (GAAP) for best practice. Accrual and cash-based accounting methods each have their advantages, and it really comes down to the timing of when expenses and revenues are recognized.
If your business is already up and running, you may want to consider a few items:
- Do you keep your personal and business expenses separate?
- Do you have a clear view of your cash flow?
- Are your accounts properly categorized with transactions up-to-date in cloud accounting software?
If you answered no to any of the above questions, it might be time to enlist the help of an experienced expert.
Accounting best practice #2: Enlist the help of experts
Depending on the size of your business, financial status, and goals, you may need the help of either a bookkeeper, CPA, or outsourced CFO. Accounting is a specialized area of expertise. Unless you went to school for accounting, chances are it’s not your specialty. You may understand some basics, but in order to propel your business forward, the knowledge and experience of a financial expert may be necessary. A financial expert can:
- Help you gain an understanding of your business’s books and accounting terms
- Identify financial and non-financial metrics to track
- Prepare reports and teach you how to interpret them
- Advise you on many types of business decisions
- Assist with compliance and audits
- Offer ongoing support to varying degrees
While enlisting the help of an expert comes with a cost, in most cases, the benefits (both financially and professionally) far outweigh the costs and help your business to scale sustainably.
Accounting best practice #3: Adopt cloud-based accounting solutions
While many businesses in the past have started their business ledgers in Excel, don’t be tempted. Some business owners may feel as though starting off in Excel is a good option as it costs very little and has few learning curves (especially if you are already an avid Excel user). However, this is a mistake that could very likely hurt your business in the long run and cost you down the road. Even if your books are fairly straightforward, utilizing a cloud-based accounting app, such as Xero, has incredible benefits and can help prepare you for the time when your books aren’t so simple. Cloud-based accounting apps can set you up for success, making it that much easier to scale. Adopting a cloud-based accounting solution can:
- Reduce costly human error
- Prepare you for tax filings
- Automate tasks
- Give you real-time insights into your business finances
- Save you valuable time
- Enable virtual collaboration, in-office or remotely
There are few investments that provide the significant ROI possible with a cloud-based accounting app. As your business grows, there are additional cloud-based apps that focus on industry-specific tasks and business-specific tasks such as payroll, expenses, and inventory management. These apps seamlessly integrate with Xero, providing endless benefits, with automated time-saving solutions.
Accounting best practice #4: Understand the three core financial statements
Whether you master this understanding on your own or with the guidance of a financial expert, it’s an absolute must for business owners. There are three major types of financial statements that are important to understand, as well as to communicate the financial health of the business to outside members.
- Balance Sheet: Measures assets, liabilities, and shareholder equity, providing insights into the business’s net worth at a given point in time.
- Income Statement: Also known as a profit and loss (P&L) statement, the income statement shows the company’s net income or loss over a period of time. If a business loan or investment opportunity is on the horizon, having a bulletproof P&L statement will greatly improve your odds of gaining funding.
- Cash Flow Statement: Measures the incoming and outgoing cash during a period of time. A cash flow statement provides insights into how much cash you have on hand, which is incredibly important to be aware of at all times. The number one reason start-ups and new businesses fail is due to a lack of cash flow; staying on top of these numbers can allow you to make informed changes needed to keep the business afloat.
Even if you do not feel as though you need to prepare financial reports right away, it is a best practice for even new business owners to get in the habit of understanding these reports as they will only grow more complex as the business scales. If you’ve adopted a cloud-accounting app, such as Xero, pulling reports is simple and can be done from in the office or on the go from any supported device.
Following the universal accounting best practices above allows you, as a business owner, to make well-informed decisions, set budgets, monitor expenses, and identify new opportunities for growth. A well-planned strategy for implementation is key to a successful back office. If your business is in the conception stage, looking to grow, or in a period of rapid expansion, we want to make sure your accounting is on the right track for success. Send us a message to schedule a consultation. We can discuss your current accounting processes, areas of opportunity and education, and a strategy to improve and automate processes.