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16 Essential Accounting Practices for Small Businesses

Accounting Practices for Small Businesses

Detailed financial records reduce problems such as unpleasant financial surprises, forgotten paperwork, missed goals, large bills from your accountant and payroll and tax challenges. Accurate and efficient accounting helps a business make and keep long-term goals, smooth out the ups and downs of seasonal cash flow, improve profits and alleviate troubles with the CRA. However, the process of precise and systematic accounting can seem complicated and daunting. The following are some essential accounting practices for small businesses that assist in simplifying accounting procedures.

  • Keep business and personal banking separate: Open a dedicated bank account for your small business, preferably one with online access as this makes it easier to make payments and do bank reconciliations. If you need business money for personal expenses, do a regular transfer to your personal account. This will make accounting tasks much easier. Don’t use your personal credit card for work purchases and vice versa. 
  • Recognize business vs. personal expenses: You need to know what type of expenses can and can’t be claimed against your profit for the purpose of reducing tax. An expense that is directly related to the operation of the business and towards producing income is tax-deductible. An expense that is for your personal pleasure is not. Mixing personal and business does not mean a full claim for business can be made. If you’re in doubt about whether or not to claim an expense, contact your accountant. 
  • Develop a budget: Begin by coming up with revenue projections and a list of anticipated expenditures. Compare this budget to actual expenses and revenue. Adjust the budget as needed. 
  • Decide on an accounting structure: Consult with your accountant regarding which accounting structure is best for your small business, cash-based or accrual-based accounting. Cash-based accounting involves documenting revenue when money is received and expenses when cash is paid. This system is recommended for businesses which deal strictly in cash payments. With accrual-based accounting, income is reported when earned (not when cash is received) and expenses are documented when money is incurred (not actually paid). This method is more complicated but is the best accounting practice for small businesses which will be invoicing clients. 
  • Keep an eye on high-cost expenses: Labour and inventory costs are the largest expenses for most small businesses. To reduce labour expenses, consider outsourcing work to contractors that bill at an hourly rate. They may not need 40 hours/week to complete your work and they don’t require benefits. Time-tracking software makes it easier to understand how much certain tasks cost your business, enabling you to find ways to control expenses. Track inventory carrying costs, inventory turnover ratio, the amount lost to obsolete inventory and other key metrics. Work at understanding the benefit gained from each expense and document this thoroughly. 
  • Plan for major investments/purchases: Consider what expenses/purchases will arise in the next one to five years (upgrade of facilities, new office equipment, peaks in staffing costs, emergencies). By planning for major expenses/purchases, you can avoid taking money out of the company during good months and finding yourself short in slow months. Track expenses and revenue to help identify the best time for large investments. Business credit cards help establish a credit history giving you a better chance at qualifying for financing (lines of credit, loans) and they often offer perks such as business or travel rewards. 
  • Invest in accounting software: Using appropriate software is an essential accounting practice for small businesses. Accounting software saves time and resources while reducing errors. There are free software packages if you are on a tight budget (Wave, ZipBooks, Akaunting, SlickPie, GnuCash, CloudBooks). If you can afford it, purchase a good-quality program that comes with occasional updates (Cashbook, Quickbooks, Xero, Sage, Freshbooks, Zoho). Choose one that is easy to use and customizable, which produces charts for quick reference and combines different aspects of reporting from one period to the next. Ensure the program has the ability to scale with your small business as your company grows. 
  • Establish internal controls: To reduce the risk of fraud, establish internal controls in your small business’s accounting policies/procedures. 
  • Organize and store source documents such as: Quotes, orders, delivery dockets, sales and purchase invoices, credit and debit notes, payment/remittance advice, cheques, receipts, wage records and deposit slips need to be filed and archived for 5 to 7 years. Keeping source documents at your fingertips makes it easier to prevent fraud in your business, improve your accuracy and ease finding transactions when needed. 
  • Maintain, read and understand monthly reports: Keep your accounting system up to date and produce reports monthly (income statement, balance sheet, cash flow statement). Learn to read and understand these reports, in particular the income statement and the balance sheet. These reports give you, your accountants and potential investors an understanding of the financial health of your business. 
  • Reconciling bank statements is an essential accounting practice for small businesses.  It helps you get a fair picture of your financial health. Make sure the figures in your accounts are registered on your bank statements and vice versa. 
  • Keep on top of sales invoices: Late and/or unpaid bills hurt cash flow.  As soon as a job is complete or a product is delivered, prepare and send out customer invoices. Put a process in place to track your billing carefully (issuing a second invoice, a phone call reminder, penalties and/or extra fees). Be organized. 
  • Ensure inventory data is accurate: To prepare financial statements you need accurate inventory data. Track physical inventory either manually, by counting items on a regular basis, or by pairing counts with an inventory management system that automatically adjusts the numbers as sales happen (via integration with your point-of-sale system). Inventory management software makes it much easier to track inventory and the information will be more accurate. 
  • Make accounting a joint effort: Educate new employees on how your accounting process works and how they can contribute to smooth operations. Ensure that staff are aware of deadlines and cutoffs for payroll, expenses and payment runs. Inform your team of key performance indicators and how they can provide financial information that would support your goals. 
  • Become familiar with the law: It’s important to cultivate awareness of the federal, provincial and local regulations and laws required for small businesses. 
  • Know when to outsource: If you find accounting practices for your small business too difficult or don’t have enough time for it, outsource the task. This can be cost-effective and professional help will ensure accuracy. Professional accountants often give great business advice and assist with many tasks (recommend good software, attend meetings with your banker, explain accounts you find difficult, prepare the annual budget and cash flow reports, etc).

Don’t let poor accounting practices be the downfall of your business. Try these essential accounting practices to help you improve your accounting procedures, allowing you to spend less time on finances, focus on growing your company and enhance your customer relationships. When it’s time, get professional bookkeepers and/or accountants involved. 

Need help establishing an accounting practice for your small business? Looking for business advice? Contact Cook and Company Chartered Professional Accountants. We serve clients across Canada and the United States, providing high-quality tax, assurance and succession planning services for a wide variety of privately-owned and managed companies. Contact us for a complimentary consultation.

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