Proper management of a business’s finances, and having someone dedicated to that process, is a crucial component of success for small businesses and startups alike.
According to Stats SA As government introduces new legislation to further support small, medium and micro-sized enterprises (SMMEs), recently released data from the 2019 Annual Financial Statistics (AFS) survey shows the growing role that small businesses play in the formal business sector. A breakdown of turnover by business size shows that small businesses were responsible for generating R2,3 trillion (or 22%) of the R10,5 trillion.
Adherence to accounting best practices and hiring or outsourcing a person dedicated to this function can help prevent the cash flow issues that are to blame for many business failures. Further, these best practices can also point the way to insights that can lead to small business growth.
Every small business needs to follow basic accounting processes to ensure strong financial management practices. These include:
- Separate business and personal expenses. One of the first steps a small business should take is opening a business bank account. Business bank accounts offer several advantages over personal ones, including:
- Making it easier to track and substantiate business expenses to take advantage of tax deductions.
- Offering personal liability protection by keeping business funds separate from personal funds.
- Providing the option of a line of credit that the company can use to cover cash gaps.
- Businesses should open a checking account, savings account, credit card account and merchant services account, which allows the company to accept credit and debit card transactions from customers.
- Get bookkeeping software (and a bookkeeper). Bookkeeping is the organized process of tracking all income and expenses. It’s a critical component of financial management that ensures business owners have the information they need to make sound business decisions. For many small business owners, accounting is not among their skill set. Hiring a person dedicated to the task or, for smaller businesses, outsourcing the function is often a wise investment.
Accounting software automates bookkeeping processes that are time-consuming and error-prone if completed manually, and makes it easier to find all of that information to complete financial statements. Small businesses are finding a lot of success with cloud-based accounting software. Although most businesses start with basic accounting software, as they grow and become more complex, they may need to invest in an enterprise resource planning (ERP) system. Once a company has an ERP system, it can add modules for other business functions, with everything tied to a single database.
- Develop a budget. One of the first steps in creating a business plan is coming up with revenue projections and a list of anticipated expenditures, and then comparing that budget to actual expenses and revenue.
- Keep accurate business records. Recordkeeping is one of the most important responsibilities for a small business owner. Accounting software can automate much of the recordkeeping process and digitally store financial records. That makes it easy to document the amount, time, place and business purpose of a transaction when you claim expenses as tax deductions. SARS requirements mandate keeping the records, in general, for at least fifteen years, a few worth calling out for small businesses and startups include:
Tax records that need to be kept for 15 years include:
books of account
fixed-asset register
annual financial statements.
Generally, it makes sense to store these documents offsite once they’re older than five years. This can save space and prevent loss in the event of a fire or break-in.
- Keep the books up to date. Without keeping the books current, owners and employees don’t have a clear picture of the company’s financial state. Automating receipt and invoice capture is one way to ensure the books are always up to date. Another important step is to link bank accounts with your accounting software. Businesses can download credit card and bank statements and manually import them as CSV (Excel), but some accounting systems offer a plug-in that will pull information from your bank account and automatically retrieve daily bank transactions and statement files. The business can define the matching rules in their system to reconcile the statements, which makes the reconciliation process much easier. Some accounting software offers a direct integration to banks, so the business owner can manage and complete all banking tasks in the accounting system without also logging into their bank account portal.
- Keep an eye on certain high-cost expenses. Labor costs are the largest expense for most small businesses, and inventory is often another. To reduce labor expenses, many small businesses outsource work to contractors that bill at an hourly rate. This can be cheaper because the contractors may not need 40 hours/week to complete your work and they don’t require benefits. Time-tracking software can help leaders understand how much certain tasks are costing the business, enabling the business to better budget and find ways to control these expenses. Companies can lower inventory costs by tracking inventory carrying costs, inventory turnover ratio, amount lost to obsolete inventory and other key metrics.
- Plan for major investments. By consistently tracking expenses and revenue, the business can identify the best time for large investments and establish the credit it may need to cover the cost. Business credit cards can help an organization establish a credit history so it has a better chance at qualifying for financing (and optimal financing terms), including lines of credit and loans, when it needs more capital. Securing these funding sources are important to a company’s overall financial health—45% of businesses with excellent financial health received loans or credit cards from a bank, compared to just 3% of companies with poor or below-average financial health, per the Federal Reserve study. Additionally, credit cards offer perks for the business such as business rewards or travel rewards.
By taking steps to establish strong accounting processes from the beginning, small businesses and startups increase their likelihood of success. Studies show that the more often a small business reviews its financial numbers, the better its financial health, which should ultimately drive long-term success. Although bookkeeping is not the passion of most small business owners, they must frequently review these critical financial metrics to capitalize on opportunities to grow and ensure their company is not on a path to insolvency. Accountica offers startups and small businesses alike a cloud accounting solution to assist businesses better manage their finances and grow their businesses.
