A primary reason why some businesses fail – or don’t perform as they should – is down to poor financial management; an otherwise sound business that meets a need in the marketplace can falter purely because bookkeeping and accounting is weak or non-existent.
Setting up an effective bookkeeping and accounting regime is paramount for business success, so understanding effective accounting is a key objective.
According to the SBA (Small Business Administration), some 50% of businesses fail in their first five years so don’t let financial mismanagement put yours in jeopardy.
Tech can help
Day to day financial admin can be time consuming, so modern and adaptable accounting software suitable for your business, perhaps including POS (Point of Sale) automated systems to help speed up transactions and record them accurately, is a worthwhile investment.
Bookkeeping and accountancy
The two terms don’t mean the same thing:
Bookkeeping – is the act of recording financial information in the correct fashion; expenses, sales and transactions have to be recorded accurately as this information is central to your business finances.
You may choose to use the services of a bookkeeper – easy enough to outsource – or do it yourself; it’s a key business function that should be completed regularly and accurately.
Part of the bookkeeping function could be generating invoices and doing the payroll if you have employees or other regular people you outsource to.
Accountancy – it’s basically the way the information recorded and prepared by bookkeeping is measured and processed to provide information as to the financial health and direction of the business, and to project tax liabilities.
This information is also used to prepare records for inspection by the IRS (Internal Revenue Service) for tax assessment.
Outsourcing financial admin
You may choose to ‘do the books’ yourself rather than hire a bookkeeper, but you’d almost certainly have to hire an accountant unless you’re a qualified professional yourself.
Regarding the bookkeeping side, whilst you may feel doing it yourself saves money you might consider outsourcing it for the following reasons:
Time taken – your time might be better served on income generating tasks than bookkeeping.
Long term cost – if you neglect the bookkeeping, it could cost you in the long run as finances could suffer through poor record keeping.
That said, if your business or form of self employment entails very basic bookkeeping and maybe not much time spent on it, then doing it yourself may be the best option – at least to start with.
Your financial knowledge
Even when hiring bookkeepers and accountants, you need to understand certain business finance documents such as the following:
Balance sheet – understand how they work and the information they’re showing you.
Profit and loss account – it’s important to understand how profits are being made and of course how much, and what it’s costing to provide your product or service.
Cashflow record – this is vitally important and something you should refer to regularly as how much cash is flowing in and out of your business can determine its viability. Many successful businesses in terms of sales have ultimately failed purely due to cashflow problems.
Understanding the above – especially your cashflow situation – enables you to have a valuable overview of your business’s financial position at all times.
Financial admin is far easier if undertaken in an organized fashion rather than waiting until things have piled up before having a blitz.
Filing paperwork effectively and keeping track of items such as receipts makes it easier for you (or your bookkeeper) to record information and keep things neat and ordered. You may even save money on their fees if records are easy to access rather than their having to spend time trawling through them.
As mentioned above, consider how tech such as accounting software can help automate, speed up and improve accuracy.
Whilst it’s important to spend some regular time reviewing your finances, do get your accountant involved periodically – not just when it’s time to do the yearly tax preparations for the IRS.
A regular session with your accountant can help you see how things are and what the future may look like financially speaking.
Keep on top of your accounts and maybe look at ways of refining your procedures; your business’s finances will be all the better for it.