Tips For Growing Businesses: Accounting Edition

Proper management of a business’s finances is a crucial component of success for small businesses and startups.

The Bureau of Labor Statistics points out that 20% of businesses hardly make it past one year, and only 30% of small businesses make it past ten years after their launch. Adherence to accounting best practices can help to prevent cash flow issues that lead to the failure of small businesses. 

Here are some of the accounting best practices that you can follow to ensure strong financial management for your growing business.

1. Get a Bookkeeper and a Bookkeeping Software 

Bookkeeping helps in tracking all business income and expenses. Effective bookkeeping requires business owners to use accounting resources to help them with financial management.

For many small business owners, accounting is not their area of specialization. Such people, therefore, need to hire qualified bookkeepers to provide them with the information they need to make sound business decisions. In some cases, outsourcing bookkeeping can be cheaper for your business.

You can also consider investing in accounting software to assist in financial management for your growing business. Accounting software improves efficiency by automating accounting processes, making them less error-prone and time-consuming.

A survey by Robert Half on the use of cloud-based software for accounting revealed that more than half of the respondents use cloud-based accounting solutions to enhance financial management. Although most small businesses start with basic accounting resources, they need to adopt Enterprise Resource Planning as they grow and their needs become more complex.

2. Develop a Budget

One of the most crucial accounting resources necessary for setting up a business is a business plan that includes revenue projections and anticipated expenditures.

The need for having a budget for your small business is emphasized in a study conducted by the Federal Reserve Banks of Chicago and San Francisco, which revealed that 60% of businesses that had healthy finances always had a budget.

Another important accounting practice that would enhance business success has a separate account for payroll.

3. Separate Your Business from Personal Expenses

After receiving your employer identification number, you can now open a business bank account. These business bank accounts offer various benefits over a personal bank account:

• Keeping business finances separate from personal funds, therefore offering personal liability protection.
• Provides the company with a line of credit to cover cash gaps.
• Making it easier to track business expenses and take advantage of tax deductions.

There are also other types of accounts that your business should open, including a savings account, checking account, merchant services account, and credit account, allowing your business to receive debit and credit card transactions from customers.

4. Manage Certain High-Cost Expenses

Labor and inventory are among the largest expenses incurred by small businesses. To reduce these expenses, companies often consider outsourcing work to contractors, as this ensures that billing is done hourly. This is often cheaper as contractors may not need 40 hours per week to complete work and may also not need benefits like permanent employees.

You can also invest in time-tracking software that would help you understand how much certain tasks cost your business. This can help you to lower inventory costs by calculating factors like inventory turnover ratio and inventory carrying costs, among other key metrics.

5. Separate Accounting Functions

Most small and startup businesses focus on operating under minimal finances. For this reason, they may have a single person handling all accounting functions for the business. This is risky as it creates an environment that introduces the risk of accounting fraud.

Business owners can reduce this risk by putting certain controls to ensure segregation of duties. For instance, business owners could ensure that the person who cuts the checks is not the same one that reconciles the bank statements.

6. Keep The Accounting Books up to Date

Keeping the accounting records up to date is necessary to ensure that the business owners and employees understand the company’s current state. Automating accounting processes like receipt and invoice capture can help to ensure that your books are always up to date.

Linking your bank account with accounting software can also help you to access your credit card information and bank statements, often making reconciliation easier.

7. Evaluate Business Performance through Financial Statements

Understanding your expenses and income is the basis for generating the three crucial financial statements. Through the income statement, the business can determine its profits or lack of, while the balance sheet helps to determine the company’s financial position by revealing the assets, liabilities, and shareholders’ equity.

The cash flow statement helps the business to determine whether there was enough money flowing in and out of business over a certain period.  

Conclusion

There’s no sure formula for instant business success. Unfortunately, growth is gradual as it requires patience, hard work, and dedication. Small businesses can improve efficiency and reduce their likelihood of failure by establishing strong accounting processes from the beginning.

Although bookkeeping is not the area of specialization for many small business owners, they must regularly review their financial metrics to capitalize on new growth opportunities.