Integrate these best practices and take your business to the next level.
By: David Rudofsky
Sound business decisions and good accounting practices go hand in hand. The majority of small business owners are not CPAs, and differentiating between “good”, “better” and “best” accounting practices may not be a priority. But putting the appropriate system in place will not only inform you about everything from marketing spending to product pricing, it will make preparing tax returns and selling the business much easier. The following guidelines will help you judge whether your business’ current accounting practices are good, better or best, and how to reap the benefits that come from upgrading.
Good Practice |
| Your accounting practices yield accurate profit and loss reports (P&L) and balance sheets that you can use as the basis for tax payments (and to help you through an audit) and to show to potential lenders. |
An accurate P&L and balance sheet is the minimum accounting practice for any business. At this level, you have a reliable cash accounting system in place for recording the transactions of your business. Most likely, you or one of your employees is responsible for producing these reports at regular intervals.
Most businesses use software that produces P&L at the click of a mouse; the key to good practice is to make entries on a timely basis – weekly or every two weeks. Although very small business owners findthey can get by with recording revenues and expenses in an Excel spreadsheet or checkbook register, inputting entries into accounting software the day they occur makes it vastly easier to produce accurate profit and loss statements at the click of a button. (See “Does Your Software Do It for You?” here.)
The Internal Revenue Service (IRS) does not require small business owners to use a bookkeeping system, but it does expect you to keep “adequate documentary records or sufficient evidence to support your own statements.” In the event of an audit you may be asked to provide invoices, receipts, bank deposit slips, canceled checks or other documents. Efficient and systematic use of an accounting system that includes software and a process for filing will help you pull records quickly and easily.
Better Practice |
Your accounting practices have sufficient scope and functionality to enhance controls and management of the following key business functions:
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The benefits of better accounting controls include reducing the risk of fraud or theft, keeping expenses under control and tracking sales against your budget and more. These processes will also help you identify customer credit problems and project cash flow.
For many businesses, using better accounting controls means using the “accrual” basis of accounting. Most small businesses use the cash method (cash is recorded when it is actually received, and expenses are recorded when actually paid). Under the accrual method, you record business income when a sale occurs, whether it be the delivery of a product or the rendering of a service on your part, regardless of when you get paid. You record an expense when you receive goods or services, even though you may not pay for them until later. Accrual paints a more accurate picture of profitability (but not cash flow). For businesses that get paid in lump sums, accrual accounting is a better practice if the owner wants to be able to understand the true economics of his business. Once your business hits $10 million annual revenue, you no longer have the option; you must then use accrual accounting – at least for tax purposes.
The key to stepping up to “better” accounting practices for your business is to hire a bookkeeper, controller or accountant to make adjusting entries (entries made at the end of an accounting period to allocate income and expenditure to the period in which they actually occurred). Visit AIPB.org for more about the certified bookkeeper designation. A “full-charge” bookkeeper is capable of running accounts receivable/payable aging reports and has the financial literacy to interact with the organization¡’s outside accountant.
A bookkeeper, accountant or controller can help close your books quickly after the end of the month. Closing involves ensuring that all transactions have been properly recorded; making adjusting entries (if applicable to reflect accrual-based accounting); and confirming that payroll is reflected and reconciled with the accounting system.
Your full-charge financial person can then help you produce a P&L and balance sheet every month. Trends to look for are decreases in revenue (if you find an increase in revenue, you will want to know why), increases in expenses, significant decreases in accounts payable or increases in accounts receivable or inventory, among other things. The financial person can also reconcile your cash balance per your accounting system against the cash shown on the bank statements.
Small businesses with “best” accounting practices have prepared a budget in the previous year on a monthly basis. Then, at the end of each month, these businesses are comparing budgeted vs. actual results. Those businesses also take this analysis several steps further in order to make better business decisions. For example, expenses should be grouped into “cost of goods,” “sales and marketing” and “general administration.“These groups will allow you to understand changes in the margin structure of your business (e.g., what percentage of your revenue is contributing to your gross margin). If there are key decision makers in your organization with spending authority and budget responsibility, organize your accounting records so you can capture actual spending and assign it to these individuals’ “cost centers” at the time that the expense is recorded. This will enable you to hold your managers accountable for meeting their budgets. Cost centers will also help you spot opportunities to redeploy funds from one area of the business to another as needed to drive sales.
Best Practices |
Your accounting system is fully evolved to support higher-level costcontrol and decision support, such as:
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In order to support profitability analysis – by product line, by department and by service – look for opportunities to define separate lines of business for use by your bookkeeper (in QuickBooks, these are referred to as classes”). Recording revenue and expense data by line of business will make it easier to analyze and act on differences in profitability.
Good, better or best, the accounting practices your business adopts will be determined by the size of your business, the needs of your customers and vendors, and your industry.
This article was published originally in The New York Enterprise Report.
