Accounting is that boring part of running a business – it would not bring in the revenues and is, for the most part, a headache to be handled for compliance and reporting purposes. Of course, it isn’t without its benefits – it helps you get a clear picture of your business’s performance and aids decision-making. Now when you are a small business, you would not be able to afford a full-fledged accounting team; you might have to do with a single accountant handling everything that comes under accounting, which is why you must stay mindful of certain guiding principles that can make life easy for the accountant as well as for yourself.
Financial Statements
It would help if you learned how to read different financial statements, such as income or P&L statements, balance sheets, and cash flow statements. Even if you don’t need to publish such statements, you should prepare them to keep track of critical financial ratios such as the debt: equity ratio, interest service coverage ratio, current ratio, and so on. Moreover, you can also determine how profitable or loss-making the operations are, whether your balance sheet is healthy or accruing erosion of net worth and whether the company’s financial performance is improving year on year or is being impeded by any concerns.
General Ledger
The general ledger will list out all the different accounts and balances within each account. Accounts could include bank accounts and other financial classes such as equity, assets, revenues, expenses, and liabilities. Each time there is a business transaction, it needs to be recorded in the general ledger. By doing this, you would be able to have an easy view of different line items in a consolidated manner. Ideally, you adopt digital general ledgers as they are more accurate and information is easier to retrieve.
You need to track even the most minor transaction and record every monetary influx due to products sold or services provided, any returns generated through investments, loan payments, and so on.
Within the general ledger, you can choose to adopt a single-entry or a double-entry method. The single ledger is easier to use if you do your accounts using pen and paper. However, double-entry is usually the standard if you use accounting software, as it helps track credits and debits from the financial ledger and their corresponding entries in financial statements.
Tax Accounting
Depending on the nature of your business, it will attract a wide variety of taxes, such as corporate tax, payroll taxes, etc. Such taxes may change depending on the jurisdiction within which you operate. Therefore, you must be mindful of the necessary tax payment and returns filing requirements. Moreover, through various reporting techniques, it is possible to avoid taxes to some extent, at least in a perfectly legal way. You may want to plan various tax reporting tactics with your accountant to achieve such tax savings.
Budgeting
For every project you plan or a marketing campaign you decide to execute, you would need to set aside a meaningful budget. The actual expenditure incurred may be less or more than what was initially estimated. However, you need to track the costs you incur while in the implementation stage, as it will help you remain as close to the budgeted figure as possible.
Self-Auditing
Even if you are running a small business, you must establish a culture of regular audits of each business function, including the financial performance audit. This could involve reviewing the general ledger on a line-by-line basis to make adjustments for any data entry errors and closing accounts with temporary or outstanding balances (unpaid invoices, for example). Self-audits can give you a good idea of which account balances you should carry over to the next month or quarter.
Even if you are a small business, you must follow the above basic best practices of accounting to avoid facing regulatory inquiries. Moreover, by accurate reporting, you would be able to ensure a healthy credit rating, which will be a positive signal for potential lenders or investors.