Small Business Accounting: Your Ultimate Guide to Financial Literacy
Small business accounting is a skill that does not have a lot of awareness. Many small business owners are not aware of the importance of accounting. Most of them do not understand the importance of accounting and the role it plays in their business.
This post aims to help small business owners understand the importance of accounting and the role it plays in their business.
What is small business accounting?
Small business accounting is the process of tracking and managing the financial transactions of a small business. This includes:
- Recording,
- Categorizing,
- Reporting the financial transactions of the business.
Small business accounting is important for maintaining accurate financial records, which can help the business track its progress, make sound financial decisions, and plan for the future.
How to maintain the books for a small business
Bookkeeping may initially appear to be a maze of tax codes, VAT forms, and accounting language. In actuality, it is relatively simple. Essentially, it involves tracking the amount of money that entered and left the business. By keeping track of this data, HMRC can compute the amount of tax you owe.
Here is all the information necessary to perform bookkeeping for small enterprises.
1. Document all transactions.
Keeping an accurate record of all transactions is an essential bookkeeping responsibility for small businesses. You must record this information whenever you make a purchase or receive a payment.
Traditionally, this would have been recorded in a ledger book or a spreadsheet, but cloud accounting software makes the process much more efficient.
Each time a consumer makes a transaction, you must record the amount they spent (and, if you offer things, what they purchased).
Additionally, you should document every time you acquire something for the firm, pay a supplier, or pay your employees. Record the amount that left the business bank account and the nature of the purchase.
Keep a copy of all your receipts for a minimum of six years.
Bookkeeping using software
Managing your books with cloud-based accounting software saves time, money, and human error. Cost-effective, user-friendly software is available to automate your record-keeping.
You can use it, for instance, to automatically pull transaction records from your bank account, eliminating the need to manually enter each transaction.
A competent accounting solution can manage all of your crucial business data and show it in an at-a-glance format to assist you in making the best decisions.
At any given time, you can customize your reporting based on your priorities. You may desire a concise daily overview that focuses on the particulars of the day.
Real-time tracking of your revenue and expenses is a significant time saver. Your accounting software may offer a mobile application for recording income and spending on the go.
The finest accounting apps contain features that make it easier to keep track of the specifics, such as storing images of receipts so that you do not need to save paper copies.
Manual bookkeeping
You may control your cash flow using spreadsheets, such as those you can make in Microsoft Excel.
Manual bookkeeping may appear acceptable at first, but it is time-consuming and prone to mistakes and duplications.
2. Reconcile transactions
Transaction reconciliation is the second most important bookkeeping process for small business owners and is often performed at the end of each month.
Examining your business’s monthly bank statement and comparing your financial records to the credits and debits listed on the statement constitutes bank reconciliation.
The purpose of reconciliation is to provide an accurate picture of the financial health of your firm. It can help you detect problems like unexplained expenditures and multiple payments, for example.
Bank reconciliation should help you determine the rationale behind any unexplained purchases or payments.
Manual reconciliation might be difficult to perform. Using accounting software, however, can make bank reconciliation duties simpler and faster.
The software can automatically match your bank statement’s income and expenditures with bills you’ve sent and expenses you’ve incurred.
3. Cash flow management
Cash management in a small business is a crucial skill for any entrepreneur. The good news is that there are ways to simplify life, such as outsourcing a portion of the work to an accountant or using cloud accounting software.
It is also important to note that you can work alongside an accountant while using your accounting software, which means they can see your figures in real time and offer business-improving recommendations.
How to manage your cash flow
1. Consider Your Payment terms
Choosing adequate payment terms is an important component of managing your small business’s cash flow. Many companies that sell directly to the final consumer require prompt payment. For instance, a restaurant receives payment after the customers have finished their meal, whereas a plumber or electrician will expect payment as soon as their work is complete.
However, firms that sell to other businesses frequently offer credit in the form of 7, 14, 30, 60, or even 90-day payment terms. Credit extended to consumers and clients can be an efficient approach to attract new business and create trust, but it will have an immediate effect on your cash flow. Providing 60-day payment options may be appealing to a consumer who can “buy now and pay later,” but how will you continue to operate while you wait for payment?
There is also the recurring issue of late payments to consider. Late payments are a primary cause of cash flow issues, therefore you should consider ways to encourage consumers to pay on time. There are a number of techniques to explore, including charging interest on late payments, offering early payment discounts to encourage consumers to make prompt payments, and enforcing “due on receipt” payment terms.
2. Choose your business partners carefully
As a small business, you must be careful in your clientele and perform credit checks on new prospects before agreeing to do business with them. Rejecting possible new contracts based on a credit check is not easy and requires steely commitment, but it may be the best thing you can do for your firm.
Imagine the impact on your cash flow if you spent a month fulfilling a single customer’s request, only to have them accept the items and refuse to pay. You could pursue legal action to obtain the money you are entitled, but doing so would be costly and time-consuming. How will you function during that time without the ability to purchase new inventory, pay bills, or pay staff wages?
Credit firms such as Creditsafe and Experian enable rapid online credit checks for businesses. If the business has a less-than-stellar credit history, you may opt not to extend credit to them or not to do business with them at all. Monitoring the credit activity of the company’s key personnel could also prove advantageous. If they have been linked with prior failed organizations or are the directors of numerous firms at once, it may be best to avoid them.
3. Establish requirements and make it waterproof
Assuming a prospective customer has a great credit history and you are willing to sell them your products or services, you must now ensure they understand the terms under which you will conduct business. Although a verbal conversation may be used to initially agree on payment terms, you should ensure that this is followed up with payment terms and conditions that are legally binding.
This should address everything, from delivery terms to the consequences of nonpayment. Creating payment terms may sound like a time-consuming task, but depending on the type of your business, you may discover that a standard set of terms and conditions is available online and has all the pertinent information.
4. Cash Flow Statement and Forecast
Creating a cash flow statement and forecast is the most effective strategy to monitor the inflow and outflow of cash for your firm. These straightforward financial paperwork will provide an overview of your actual and projected monthly cash flows.
The accounting software you use today should provide a cash flow statement as one of its usual reports. However, if you do not have accounting skills, creating these documents is simple and does not require any prior knowledge. This simple cash flow template and the associated article from the Association of Chartered Certified Accountants provide all the necessary information.
Conclusion
As a small business owner, you will face many financial decisions. Some of these will be very simple, such as paying your employees. Others may be much more complex, such as when to invest in new equipment. Whether you have been in business for years or you are just getting started, you will want to be able to make the most informed financial decisions.