Managing Your Finances
5 Accounting Principles You Should Follow to Succeed
Accounting best practices and principles can seem out of reach for those new to tracking their own expenses and following their own paper trail of invoices. It’s also daunting for those who just don’t identify as a “numbers” person.
Understanding cash flow versus profit, wrapping your head around the best available technologies, or organizing your existing paperwork to make tax time easier for small businesses isn’t something that comes naturally to most of us, but it doesn’t need to. Here are five of the most common small business accounting mistakes, and how to avoid them.
1. When It Comes to Accounting Principles, Don’t Mix Business Finances with Personal Finances
Mixing your business and personal finances is an easy way to mess up your business’ finances.
If you combine personal and business finances, you risk not really knowing where your business stands.
One of your first steps, when you launch your business, is opening a designated bank account. You need to run all your business income, costs, and expenses through this business bank account.
If you combine personal and business finances, you risk not really knowing where your business stands, how you’re doing in terms of cash flow, and even confusing your business income with personal profit (more on that below).
Having a business account will also help you track and categorize your business expenses accurately. No more sorting through a single account trying to remember which lunch was with a client and which one was with a friend.
Even if you’re not rebilling those expenses to clients, they’re valuable tax deductions. If there is no record, you can’t deduct it, which will cost you dollars in lost tax deductions.
Solution: Make an appointment with your bank to discuss the best bank account set up to run and manage your small business.
2. Forget Clunky Spreadsheets: Use Software or Cloud Technology
Are you toiling away on Excel? According to Forbes, nearly 90% of all spreadsheets contain at least one error. Humans make mistakes, and when you’re dealing with something as critical as your business finances, avoiding errors is key.
Investing in accounting software that lives on the cloud sets your business up to be healthy on the inside and out.
You reduce time spent on manual data entry and can extract and leverage data across a number of different platforms (tracking expense receipts on the go, for example).
You also gain the efficiency of automated bookkeeping, budgeting, and reporting, freeing up more time to do the main work of your business that you most enjoy. Plus, with handy dashboards automatically generated, you’ll know at-a-glance where your business stands.
More than this, your clients will be impressed with your professionalism. No more invoices hastily saved over or inaccurate time-tracking.
Solution: Entrepreneurs often feel they need to do everything themselves. Don’t cut off your nose to spite your face, though: Investing in the right tools and resources will save you time and allow you to grow revenue by spending that time on billable work instead of paperwork.
3. Free Yourself: Manage Your Finances On-the-Go
You use your phone for music and photographs. Checking your email across devices is completely normal. So why are you still strapped to your desk for accounting?
What if we told you that the ease and convenience of answering an email on the go also exist for following a lot of these basic accounting principles? Well, it does.
How exactly is your phone a good accounting principle? Well, doing things on the go helps you maintain timely, accurate, and accessible information. Whereas losing receipts in your wallet, glove compartment and pockets means a painful month-end chore, with the compounding problem of relying on your own memory.
It’s not just expenses that can be managed on the go. Imagine sending an estimate or invoice right after your client meeting. It all means you get paid faster, which helps with that dastardly cash flow. Plus your clients will be impressed by your timeliness.
Moreover, with accessible solutions like this, you or your employees can look at your business’s financial data from anywhere at any time, without having to download anything on a desktop. There’s nothing worse than not knowing where your business stands – and it can lead you to poor decision-making. Mobile apps give you the visibility you need into your accounts to make informed decisions.
Solution: Look for accounting solutions that also have highly-rated, user-friendly apps.
4. Don’t Lose Information You Need for Tax Time
Most small business owners learn this lesson the hard way: They sit down to file quarterly or year-end taxes and realize they’re missing paperwork.
Invoices have been saved over, expense receipts are faded and illegible, or just plain lost. They can’t remember which dinner receipt was a client meeting and which one was catching up with a friend. Or valuable reports are buried in the hard drive of that dead computer.
It ends up hitting where it hurts: Their wallet. When you have to pay more tax than you needed to, it’s a wake-up call to get better organized for the next tax year. Get to know your accounting principles, set aside money for tax or pay in installments throughout the year.
Solution: Consistently using the right tools and tracking systems will help you prepare for an easier year-end. Nobody likes tax time, but it doesn’t have to be an oogly-boogly experience where you submit your taxes through gritted teeth.
5. Always Know Where Your Business Stands: Cash Flow versus Profit
There are many accounting principles and financial indicators that you’ll learn to track and analyze, but perhaps the most important is understanding at a very high level where your business stands day-to-day.
In accounting principles, this means understanding the difference between your profit and cash flow.
When you have cash coming in regularly from good clients, you can easily assume your profits are soaring.
Not exactly: Cash flow is the money that flows in and out of your company from financial transactions, investments, and other operations. Profit, on the other hand, is what remains from sales revenue after subtracting your company’s expenses.
Say you scored a contract to design a marketing campaign for $3,000. You received a deposit of $500 and have a 60-day timeline to complete the job. You’ve just pocketed $500 and noted that $2,500 will be coming your way.
But what if the client is unable to give you the money on time (within 30 days of billing)? And what about the bills you need to pay in the meantime? You may not have the cash despite the money you’ve just earned.
A profitable month on paper can quickly go south if that profit gets tied up in receivables that take longer to collect. This is one of those basic accounting mistakes that can lead to bankruptcy. Closely monitoring your accounts receivable can also illustrate trends or behaviors in your customer base.
Solution: Avoid mistaking profit for cash flow by reviewing your accounts receivable regularly. Understanding and tracking your business expenses is also key. If your business is not reconciling your accounts each month, a simple problem can snowball into a major mess.
Before you take on a new client, evaluate that client’s ability to pay on acceptable terms and in a timely manner. Good money management will ensure your profits will become cash and protect against the slumps that growing businesses typically experience.
That’s a Wrap on Accounting Principles
Good accounting principles are more than just managing spreadsheets and measuring KPIs. These metrics are usually built upon a solid foundation of the right tools and practices.
Good accounting principles are more than just managing spreadsheets and measuring KPIs. These metrics are usually built upon a solid foundation of the right tools and practices.
If you’re not an accountant, don’t wing it. Adopt tools and practices to make following basic accounting principles a cinch. Trust us: You’ll just naturally make better decisions for your business and your clients as a result.
Whether you are a solopreneur or you employ staff, survival hinges on clear financial objectives and easy visibility into where you stand. Experts agree that cash flow issues are one of the most common reasons small businesses fail.
So stay ahead of the game. Make sure you have processes in place that promote rigorous record-keeping and a well-defined financial strategy. It may just make the difference between success and failure.
Don’t Forget About KPIs
