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The 7 Best Practices in Accounting That You Should Be Aware Of

According to a recent study by the U.S. Bank, most new businesses fail within five years.  

82% of the time, cash flow management caused the problem. [1] This is disheartening since cash flow can be managed successfully with sound accounting practices.  

In the early stages of a business, such things may not seem like a priority.  Sales, production and marketing are considered more important than the accounting method.  But as the business grows, this mindset will catch up with the business owner.

Practically every business relies on monitoring its financial health.  And even small businesses should turn their attention to tracking their income and expenses if they want to remain viable. 

colleagues-looking-at-a data documentSource: Pexels

 

With these 7 best practices, you can reduce your company’s chances of becoming just another statistic.

#1  Implement a Processes and Procedure Manual

A big mistake is to hit the ground running without having processes and procedures to support the day-to-day functioning of the company’s activities.

This manual is a resource providing guidelines and protocols for all major decisions, including the order of communications between employees and what to do when a mistake occurs.

If workers do not know what can be done, who should do it and who has the authorization to make key decisions, it will impede the speed and efficiency at which tasks are completed.  

The same is true for managing financial information, which is the backbone of a business.  Sadly, the benefits of planning accounting tasks will only become apparent when things start to fail. 

An accounting professional who can document all business processes, and the effect they will have on financial affairs, will provide a firm foundation that will serve the company for years to come.

The input of the owner and management team, as well as the business plan, serves as a starting point for this manual.

The following criteria will help to focus the ideas for the manual:

– Decide between accounting methods

The two main accounting methods are accrual accounting and cash basis accounting. The main difference between them lies in the timing of when income and expenses are recognized [2]

  • Accrual accounting records revenue and expenses when transactions occur but before any money is received or dispensed. This method gives a more accurate reflection of the financial situation by including accounts receivable and accounts payable. It is the accounting method used by medium and large businesses since it will even out the earnings over a period of time. 
  • Cash basis accounting records revenue and expenses only when cash is received or dispensed. This method is popular with small businesses and sole proprietors.

– Set up your chart of accounts

The chart of accounts (COA) is an index of all financial accounts in the general ledger.  It provides an accurate view of the revenue and expenses to which transactions can be allocated. This chart drives the bulk of accounting work.

The accounting software will provide a section to set up the COA and manage it.  The accounting process coming from here will allow a balance sheet to be produced. 

– Put internal controls in place

Generally Accepted Accounting Principles (GAAP) are standards that document the complexities and legalities of business accounting. The 5 basic principles are

  • Revenue recognition principle
  • Cost principle
  • Matching principle
  • Full disclosure principle
  • Objectivity principle

Each principle regulates what is allowed and what is not.  

Internal controls are also necessary to regulate issues like the separation of personal and business finances, especially in cases where the owner is also the manager.

Internal controls and who monitors them are key items to be included in the procedure manual.

– Let the annual forecasting budget set the pace

Financial planning is done on a yearly basis.  The purpose of such planning is to forecast a company’s financial position and anticipate challenges. Managing accounts receivable, accounts payable and assets are key to these discussions. 

The company’s financial status will be an important factor should a loan be required or shareholders come on board.  This can be anticipated by annual forecasting.

people-in-the-meeting-looking-at-financial records

Source: Pexels

#2 Up-to-date accounting input and reporting

The integrity of financial data handled daily will affect the accuracy of the balance sheet.  The financial statements are documents that drive strategic decisions even at the lower levels of operation. 

Bringing consistency to the management’s daily input is the objective of all accounting professionals, especially those in bookkeeping functions.  

There are a few tips to keep the work up-to-date:

– Download bank statements daily and reconcile weekly

The funds that come into the bank account will determine the cash flow available. An employee that can download the bank statements, check the incoming funds and allocate these to the correct accounts is needed.  

Information like this is used by finance officers who are responsible for reporting the state of the cash flow to management.

– Do a monthly close off

Cash flow is the amount of money available for the business to conduct its activities.

The company’s financial health must be understood every month.  This is the only way to stop problems in their tracks.

Each invoice and expense affects the income statement, which in turn affects the balance sheet.  If a monthly close-off is not done, there is room for amending financial data months after the fact.  This makes the information given monthly unreliable and defeats the purpose of such data.

– Tax filing

The business must do tax preparation regularly and ensure that their returns are submitted when required by the relevant authority.  

Without updated records, it is easy to lose track of what amounts are due, leading to penalties and fines.  This can amount to thousands depending on revenue so it is a good idea to avoid such problems. 

– Back up your records

A thorough record of financials that are easily accessible is a stipulation of conducting business.

Accounting practices provide a cloud computing service that backs up your information as you produce it and generates reports. If your business is too small for this, a simple data transfer to Google drive is beneficial.

Envoice provides a way for you to keep all your data safe and access it when you need it. 

woman-working-on-laptop-with-documentsSource: Pexels

#3 Automation of accounting tasks

When discussing accounting best practices, the automation of accounting tasks cannot be left out. Hiring clerical staff to input basic data from invoices, expense claims and other documents worked until technology advanced. This is now an ineffective way to populate data. 

Accounting software can retrieve information from scanned or saved documents and automatically populate fields within the program. This advancement has caused the biggest disruption in the accounting industry in decades.  

Data input has always been time-consuming and prone to human errors.  Since cash flow tracking depends on the accuracy of reports, these errors need to be eliminated.  Large businesses that process thousands of transactions daily have found this innovation to be game-changing.

Some of the functions that can be automated include:

  • Invoicing process
  • Business expenses
  • Commission payments
  • Payroll processing

 

Envoice has developed powerful systems that will help you to automate your daily tasks.  Let their forward-thinking software reduce the cost of data input in your business!  

#4 Accounting software that drives your financial activities

– Plan for what you need

Accounting software is not something you should make a snap decision about.  

Plan out with the accounting team and IT team what kind of software will handle your accounting processes and allow integration with other business software

Software that will generate the financial reports you need is a must. 

Accounting software is one area that a small business cannot afford to lose money on.  The cost can be from $9 to $99 dollars a month per user.  More advanced accounting software will cost anywhere up to $375 per user and a $1000 license fee [3]

When cash flow is already restricted, wasting that hard-earned money on impulse buys must be avoided.  

– Types of accounting software

  • Spreadsheets to manage data – microenterprises often use MS Excel or Google sheets to manage financial transactions.  This is not ideal and even basic free software can be more effective at keeping records than spreadsheets.  
  • Commercial accounting software – Quickbooks, Xero and Freshbooks fall into this category providing basic reports and graphs
  • Enterprise accounting software – large enterprises that have to manage complex data and integrations with multiple systems will use this type.

Integrate your software with Envoice’s powerful system to get better financial information at your fingertips.

#5 Qualified staff that have experience

– Credibility of your team

The accounting department of your business is the hub around which everything flows.  Highly qualified and experienced staff who know how the different elements fit together are valuable to any business.

A team that can catch problems in advance and advise how to avoid them can be an asset.

This kind of expertise is not possible with inexperienced people. If this function is viewed as merely a data input department,  as opposed to a strong management function and support, it can cost the company dearly.

– Outsourced services

An online bookkeeping service or an outsourced accountant may initially be the right solution if you can’t or don’t want to employ full-time staff. However the service must have the same passion as you do for business.  As the business grows, you may benefit from committed employees who have as much interest in the success of the company as you do.  

– Separate responsibility and authority

One important internal control is the separation of responsibility and authority amongst the different levels of accounting employees.  This is necessary for compliance with financial standards.  It is dangerous to have one person who can input and authorize payments without any checks in place.  

Internal controls that are relaxed in this area can lead to fraudulent transactions and are considered unethical.

A team meeting of accountants

Source: Pexels

#6 A project and job costing system

– More accurate information leads to better decisions

Accounting best practices often do not include a mention of a decent costing system.  Business success depends on it as the profitability of taking on a job or project can affect the cash flow tracking of the business.

A costing system provides an effective way to calculate the exact cost involved in the materials, labor, and overheads of manufacturing an item. This allows you to evaluate intelligently whether you should continue to produce the product in question. 

It is disturbing to note how many businesses work out the costs of producing their products manually.  

#7 Tax consultants and Auditors

More advanced accounting practices have to do with taxation and auditing. It is not uncommon to utilize the services of a professional accountant, plus tax consultants and auditors to fulfill the more complex accounting services. 

– Tax consultants

A little help at tax time can take the stress out of the process and allow key staff members to focus on the business without losing valuable time attending to expert financial matters.

As a company grows in complexity, tax law is a skill that may be required.  To outsource such matters to a professional is not difficult, with many consultants available to work online.  

– Auditors

Financial records must be audited either by an auditing firm or an accounting officer qualified by the relevant body to sign off financial reports.  

These documents are more credible when the watermark of an auditing firm or registered professional accountant appears on them. Such matters are important when appealing to investors to back your business.

Last thoughts:

It does take time and effort to put processes in place – no argument hereHowever, business owners who conduct this exercise are never sorry that they did it.  

The cost of not doing this work upfront is much higher.  The loss of jobs and the defeat of failure does not have to be the fate of every new business. 

Rome was not built in a day, as the saying goes. We all need help from others who have gone before us to know what works.  Best practices are called that because they’ve proven their worth.  

Dare to try it for yourself!

Footnotes:

 

[1] https://preferredcfo.com

[2] https://www.investopedia.com/

[3] https://softwareadvice.com