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10 ways to improve small business accounting

Tom Vilsack once stated that “small business is the life blood of America.”  Small business owners generally go into business because they are good at what they do, but as a small business owner myself, I recognize all the hats that business owners wear—marketer, sales professional, accountant, bookkeeper, consultant, and more!

Small businesses often see money in the bank and believe if there is money in the bank account, they must be making money, and this can be untrue. Good accounting systems help ensure that small businesses understand the flow of money into and out of their account.  Accounting systems can help to ensure that they stay in business.  It measures success and allows the business owner to make informed decisions about their money.  Peter Drucker said, “You can’t manage it if you can’t measure it” and that is so true.

In this article, I will discuss the advantages of accounting and 10 accounting tips that can help small business owners measure their businesses success.

1. Separate business and personal expenses

Co-mingling of funds is a very common mistake in small business bookkeeping and one that can cause many headaches and frustration for your business. Opening a business bank account or a separate DBA bank account for the business as soon as you have gone through the startup is essential for your business’s financial health.  An example of why this is problematic for the business would be if you co-mingle and have both personal vacations and business trips on the account, it is difficult to prove to the IRS that they are not all personal vacations.

2. Keep accurate records of business expenses

For any expenses that you will be planning to deduct from your income for the year maintain detail records.  The best way to do that is digitize your receipts with programs such as cam scan, turbo scan, or receipt bank.  All allow you to do this from your phone.  I would recommend that you write in any additional relevant information on the receipts before scanning them in.  For example, if you took a potential client out to dinner, write that on the receipt and include that person’s name.  Ask yourself this—12 months from now are you really going to remember who you took to dinner for that $160 meal?  Do this immediately so that you have a record of it and if asked about it, it can jog your memory.

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3. Use a cloud based filing system.

Once you have gotten into the habit of uploading all the receipts, you are going to need a place to store them. Dropbox is a good example of a free place to store receipts. It is easily accessible so even if your computer crashes or your kids drop your phone in the toilet, you will still be able to get access to your account. Personally, I feel that it is easiest to create 12 files (one for each month) and upload your receipts in that month’s file.  Then you can go back and find them easily instead of digging through a year’s worth of receipts.

4. Automate where you can.

Investing in accounting software for your small business is a great tool.  Linking your bank account, credit card, and any other accounts you may have will allow the accounting software to import the transactions directly to your accounting software every day if you choose.  This increases the ease with which you can track expenses and income.  It also allows you to quickly and accurately categorize each expense while it is fresh in your mind.  Software like QuickBooks Online allows you to attach individual receipts to every transaction if you wish to so that your receipts are at your fingertips.  Software like QuickBooks also allows for sending out invoices, bills, and project costing as needed.  This allows you to place all the business’s financial information in one easily accessible place.  

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5. Accurately record income

Now that you understand the importance of having a separate bank account, keeping your receipts, digitizing those receipts and organizing them in one place, and getting accounting software the next step is to accurately record your income. This can be done in the same accounting software referenced above. Income from loans, revenue from sales, and refunds for goods or services are easy to lose track of but keeping track of your actual income is extremely important. For example, if you incorrectly categorize your refunds for goods as income for the whole year, it could add up. In theory, if this added up to $10,000.00, you could end up having to pay taxes against this additional $10,000.00 that is shown as income rather than money being put back into the business tax free.  

6. Accounts receivable management

“Never take your eyes off the cash flow because it’s the life blood of business” – Richard Branson. This is extremely true for all businesses. Money coming into the business is extremely important. Like I said above, just because there is money in the bank does not necessarily mean that you are making a net profit. Some small businesses wait days or weeks to invoice clients. Sometimes they forget to bill entirely for a job that they completed because they are so busy it slips their mind. Ensuring that every invoice is sent, even for what may be an insignificant amount, will help the company. All the smaller amounts add up to large sums for the business over time. 

Measuring days sales outstanding or DSO is the number of days that it takes a company to collect cash after a sale is made.  The higher the DSO, the longer it takes for the company to collect the cash it is owed.  To calculate the DSO, you divide the accounts receivable by the total credit sales and multiply it by the number of days it takes to collect.  A lower DSO is important to a company as it allows the company to reinvest and helps the business grow. Coming up with a management plan to minimize DSO will help the business growth. Strategies such as offering an early payment discount to clients who pay before the bill is due or on time can sometimes be a good incentive. Offering an online payment portable such as Stripe, Square, or PayPal can increase the ease at which they client can pay. Something as simple as following up with client with friendly reminders as the invoice’s deadline approaches can also prove to be beneficial.

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7. Account payable management

Payables are all the ways your company spends its cash. It can be for a variety of things from supplies and materials to payroll taxes owed. It is managing all the ways that money leaves your business. Here are a few ways to manage your payables:

    • Log the date and source of all payments to find out how much you are spending and how frequently with each supplier.
    • Track your upcoming bills in an aging report so you know when each bill is due and how much is expected to go to each supplier.
    • Review expenses and supplies frequently to catch any mistakes that may have been made and to lower costs.
    • Use credit cards to pay bills to slow the payment process when necessary and consider payment terms as well as the price when choosing a supplier.
    • Find out if potential vendors offer discounts for paying early. It could increase your bottom line.

8. Know the basics of small business accounting

Unless you have the money to hire a professional accountant or bookkeeper, you should learn the basics of bookkeeping. This will ensure at tax time there is not a lot for the CPA to do. Most CPAs charge a premium to do your end-of-year bookkeeping and ensure that everything is where it needs to be before filing your taxes. Having up to date bookkeeping will minimize the cost of your CPA bill. Additionally, it helps you ensure that your expenses are categorized correctly.

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9. Dedicate time to update your books

Block out weekly time in your calendar to get necessary paperwork together and in order. Avoid letting receipts, invoices, or invoiced receivables pile up. Make sure to stick to that time you have set aside every week to catch your books up. This will ensure that at the end of the year it is not overwhelming to the point where you just throw your hands up take all of it to a CPA and get charged a premium for them to fix the books and deal with your receipts. Utilize the software to make it as quick and easy as possible to get through the bookkeeping and then move onto other tasks. At first it may seem like a daunting task, but once you have the hang of it, you will fly through it in no time.

10. Hire a small business accounting professional

Just like you are knowledgeable and understand your business, there are professionals out there that specialize in businesses like yours. They make it their job to understand that different businesses have different needs, categorizations, and that everyone may have different amounts of knowledge when it comes to accounting.  If all of this sounds overwhelming or you do not have the time because you are being pulled in so many different directions, hire someone to do it for you. This will greatly reduce the amount of time you sit and do your own accounting. Most accountants have a filing system they use to keep your receipts organized. The question is—if you invest in an accountant and it frees you up from having to do this work, what would you spend that extra time doing?  That could free up so much time to do other things to help your business grow!  Hiring an accountant can seem intimidating, but it can take a lot of the time away from you having to focus on the books to you focusing on how to continue to grow and increase profits.  So, with that in mind, the accountant can help to pay for its own services!

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