While it’s not the most exciting task in the world, accounting is one of the most crucial elements that holds a business together. Moreover, bookkeeping and financial management are more than just something your accountant does.
Big companies have entire departments that cover this aspect and anyone who has ever been in an executive position understands the importance of keeping clean and well-organized financial records. Otherwise, it’s easy to miss crucial aspects that can put you out of business.
In addition, poor accounting practices are the main reason why 82% of businesses can’t manage their cash flow, which is the lifeblood of a company, regardless of size. So, to make sure you’re avoiding a financial disaster, make sure to implement healthy accounting practices that will be helpful on the long-term.
Below, we listed some of the most used by businesses who managed to keep on going despite various financial difficulties in the market.
#1: Use the Right Tools to Measure Business Financial Health
The financial success of a business is highly dependent on how its leaders understand and know how to use financial documents such as:
- The balance sheet – designed to highlight the worth of a business at a given point in time, it can be used by investors or lenders to estimate the liquidity of your company;
- The profit and loss statement – includes the revenues, losses, expenses, and gains of a business, and can be used to verify its profitability;
- The cash flow statement – it’s a report of the cash generated and used during a given time period and can be used to calculate estimates for any future investments and plans.
While these are not the only financial documents required to run a business, they stay at the basis of any well-designed business plan. As such, both the CEO of a large corporation and a small business owner should know how to use them.
Moreover, these three statements are connected and, when used correctly, can highlight any financial problems, mistakes in registering financial documents, or even missing funds. So, successful businesses also use them as a method of control and monitoring of their financial flow.
This is important to keep in mind, especially if you’re running or administering a business that’s growing rapidly. According to specialists, times of rapid growth are the perfect ground for a wide array of silly mistakes that could cost at a later date.
#2: Use a Reliable Accounting Software
Did you know that about 18% of small businesses don’t use software to automate their finances? Also, only 21% of the ones that use such software, didn’t take the next step, which is integrating it with invoicing and payments products.
The right software can make your job easier (as a business owner) as it helps organize documents, keep track of expenses and income, and offers the accountant a clearer view of the entire financial process.
Moreover, depending on the size of your business, you may not need a complicated system. However, regardless of size and complexity, the software must be designed for your niche and the type of operation you are running.
For this, here are the features that make accounting software reliable and useful:
- It responds to your needs – the software should have the basic functions, reports, and characteristics required by your specific business;
- Customization possibilities – the software should allow users to customize invoice templates, create personalized receipts or add customized reports;
- Easy to use – you don’t need to be a rocket scientist in order to use accounting software, so make sure it has a user-friendly interface that’s easy to understand;
- It is industry-specific – each industry uses different documents and features, which is why there are various types of accounting software on the market;
- Backup functionality – this feature is crucial in a world where more and more small companies are hit by cybercriminal attacks;
- Secure to use online – if your software allows access from any location, check the type of servers and connection they use. The developer should use an encrypted connection, to prevent any data loss when you’re connecting from a remote location, and the servers should be fast, secure, and updated regularly.
- Customer Support – make sure you can reach the developer anytime you have a question, or something doesn’t go according to plan. Software tools can have hidden bugs or faulty updates, so you should have access to reliable support.
- Scalability – if you plan on growing the company anytime soon, check if the software can support a more complex financial system.
#3: Keep Business & Personal Accounts Separate
This rule is mostly aimed at small business owners, who handle purchases and payments on their own. However, it is also a reminder for bigger companies.
The business and personal accounts must be kept separate to avoid cash flow problems, tax filing complications, and even legal consequences.
For instance, in the US, the IRS makes a clear distinction between businesses and hobbies when it comes to expenses you can deduct. Now, if the expenses for the business go through your personal account, you run the risk of your activity being classified as a hobby. As such, in the case of an audit, it will be difficult to convince the government that your deductions are according to the law.
Not to mention, mixing business and personal expenses is a messy record-keeping practice that will cost money, time, and frustrations when it’s time to declare your income.
When you maintain accurate records of expenditures and income, it’s easy to put together the necessary statements and follow your business’s progress. The resulting reports can be used to predict the financial future on the short and long term, and they are at the base of your business vision.
But more importantly, if you plan on finding investors and supporters, no one will want to consider your offer if the books are not clear and clean.
#4: Implement Internal Controls
You need to know where every dollar goes in your business and to what outcome. For this, you may want to put together a series of internal documents (such as professional customer receipts) and other control forms to keep track of your money.
Specialists recommend using dual control for various processes, to maintain a transparent and safe internal environment.
For instance, you shouldn’t assign just one employee to be in control of making or receiving payments. There should be one person to write the check and another one to authorize the payment. The same goes for receiving checks, which should be done by a different person than the one organizing the finances.
It helps to have organized lists of payments and expenses, with the name of the employees who initiate and authorize them. While it may be a bit of a hassle in the beginning, as the business grows, these practices will save you a lot of pain and sorrow.
#5: Hire an Experienced Accountant
Whether you choose to work with an independent CPA or company, it’s important to choose one that is reliable and experienced in your field of work. While they all deal with statements and financial reports, accountants tend to specialize in a certain niche.
Other factors to consider are the accountant’s location (some people work remote), their level of certification, and the type of software they use (especially if you already have one in-house).
The location of your accountant is no longer an issue due to collaborative software and cloud-based technology. However, you may still want to be able to have face-to-face meetings at least on a monthly basis. So, it may be best to search a collaboration at a local level first.
To make sure you are selecting a reliable partner, do your research first. This involves asking around about their work ethic and reputation, looking for reviews and even asking for recommendations from previous collaborators.
Successful companies always collaborate with certified accountants because they were vetted by a governmental organization. This shows they are prepared to deal with various financial situations and that they are serious about their career.
While it may be cheaper to work with an accountant who is not certified, if you plan on growing the company, it’s wise to start with a reliable expert. If you’ve ever audited or in need of loan, a certified accountant will make sure everything is in order.
Accountants tend to work with a specific type of software, and they won’t move to a new one just for your business’s sake. So, to make sure you will be able to send the financial documents and reports in the format they need, ask about the software they use.
Most accountant software programs will export in various formats, but if the one you’re using is not a match to the one used by your accountant it can add unwanted frustration.
Even though accounting and finance are crucial for the success of any business, about 60% of small business owners feel they don’t have a solid grasp on these aspects. This opens their projects to failure due to poor cash flow management and missed opportunities.
Moreover, because they don’t understand how the system works, business owners place the accountant in a trusted advisory role. However, even when working with a reliable person, this is not a practice that leads to a successful future since the accountant is not the decision-maker of the company.
Finally, due to new technologies and better accounting software, it becomes easier to keep up with changes in the world of finance. As a result, business owners may be more open to learning the intricacies of the system and using the accountant as a collaborator.