America’s small businesses are facing unprecedented challenges. Small business bankruptcy filings rose 78% last year, driven by impending changes to bankruptcy laws and continued uncertainty about the overall economic outlook.
The biggest concern is whether, when and by how much the Federal Reserve Bank of the United States will begin cutting interest rates. Higher “Fed” interest rates mean small businesses pay more money for loans, which directly affects how much of each sale they get to keep for themselves.
As an entrepreneur, you actually wish things were easier. On the other hand, you also know that great challenges often bring great opportunities. By laying the foundation for your business to survive now, when conditions are difficult and uncertain, you are setting your business up for success even in good times.
And of course the uncertain times that will undoubtedly follow. They call it the “business cycle” for a reason.
Among the many things you can do now to position your small business to succeed is modernizing its bookkeeping and accounting processes. If you haven’t given much thought to your small business’s accounting goals lately, that needs to change as technology is quickly making old accounting assumptions obsolete. A few simple tweaks could dramatically improve your financial visibility and increase your company’s profitability, while saving you valuable time and of course money.
Don’t know where to start? Before you call an overpriced accounting firm, find out what other small businesses have done to improve their financial accounting. Then follow their lead and use these five simple small business accounting improvements.
1. Establish clear, consistent accounting procedures to track transactions
Your first step should be to set the rules for your accounting processes. In other words, you need to establish clear, consistent accounting procedures to track your small business transactions on both sides of the ledger.
Switching to cashless payments makes this easier. On the revenue side, many modern payment processing systems automatically assign incoming transactions to a specific point of sale or channel, while providing additional information about the buyer and purchase method (e.g. credit card type or customer bank). This eliminates much of the need for manual accounting, at least in advance.
On the payment side, electronic payments definitely make accounting easier. Your bank account or credit card should automatically categorize your payments into general spending categories. It will likely allow you to create narrower categories (or “tags”) as needed to understand exactly where every dollar spent goes.
For payments not made with a credit or debit card, use your bank’s e-check or direct debit capabilities (or set up direct debit with your providers) to ensure the same detailed level of transaction accounting and categorization. This is not as much of a problem for standardized payments such as payroll and tax transfers, but requires attention for other payment types.
Cash receipts can be more difficult. If you run a retail store with multiple cash outlets, you need a standardized system for tracking what cash (and how much) is received through each vector. For efficiency and cost reasons, you probably only want to make one or at most two bank deposits per store per day, so you’ll need to set up this system in-house rather than relying on your bank. But it is doable.
2. Use technology to streamline accounting and gain insights from data
Once you’ve standardized your accounting processes, your next step should be to invest in technology that streamlines and secures your business accounting to ensure these efforts aren’t in vain.
Off-the-shelf solutions like Quicken or QuickBooks are popular book management tools that you’ve probably heard of. These programs have grown over time and now automate much of the accounting work while streamlining important financial processes like contractor payments, tax reporting, and budgeting.
These software solutions are helpful, but only as good as the users’ ability to enter and manage the data. Consider implementing an AI-powered financial solution on top of your accounting software to monitor and get the most out of your data.
Platforms like Hub Analytics allow entrepreneurs to monitor their company’s financial activities without having to pay a CFO’s six-figure salary. This is made possible by subjecting inputs to a proprietary 150-point analytics engine to ensure transactions are accurate and ready for reporting, enabling custom KPI tracking, and using your unique business data to make customized “profitability” recommendations ” to deliver.
“These days, if you don’t automate your accounting, you’re essentially playing catch-up,” says Tommy Vincent, the company’s vice president. He adds that using financial technology to reduce the manual aspects of accounting allows you to “work smarter, not harder” and get much closer to achieving financial freedom for your business.
3. Reconcile accounts frequently to increase accuracy
Robust accounting processes and best-in-class accounting technology improve your accounting and reduce errors. Still, they can’t guarantee that you won’t make a serious mistake that will negatively impact your company’s finances.
If you think about it, there are no guarantees in business. However, the best protection against avoidable accounting errors is to reconcile your accounts regularly and correct errors as you find them.
“Reconciliation activities are a critical part of business and serve as the last line of defense against financial fraud and errors,” says Shagun Malhotra, founder of accounting technology solution SkyStem and a former Fortune 100 auditor.
Malhotra advises business owners and accounting professionals to be aware of common pitfalls when reconciling, such as: Examples include a lack of standardized financial documents, not keeping all documents in the same place, and spending too much time on status reports instead of generating real reconciliation insights.
4. Invest in training to stay ahead of the industry
Okay, so you’re not a business leader deep in the books. You may even think of yourself as a “numbers phobic.” You are not alone, as some of the most successful business people in the world have neither formal accounting training nor “real” financial training.
But you can bet that sooner or later these successful leaders will invest in basic accounting training for themselves and their leadership teams. As a leader, you know that you can’t analyze something effectively if you don’t have a general understanding of it. This applies to almost every aspect of business you can imagine.
To be clear, basic training is fine for non-accounting employees, but more is needed for your core finance team. If you have qualified professionals whose licenses require ongoing continuing education courses, offer to cover the costs as a fringe benefit. Your competitors are already doing it or will do it soon.
5. Regularly review business performance to plan for the future
The four tips we’ve discussed so far are all related to improving data collection, management, and analysis. Ultimately, however, accounting is about the future. It’s about knowing the financial status of your company so that you can set the course for further development.
In other words, you need to know how to use the information generated by your accounting processes to evaluate your company’s performance and create realistic plans for the next quarter, next year, and next five-year period. (If you forecast that far, that’s not the case for many companies, and that’s okay.)
This is more of a management challenge than an accounting challenge. It requires you to value your finance team’s input and involve them more closely in your business planning process, rather than walling them off in a dedicated number-crunching room. And things look different depending on the industry and company size.
However, this must be done regularly, at least once a year and preferably once a quarter. If you let too much time pass without paying close attention to your company’s financial performance, the problems could eventually become too big to ignore.
Taking that away
Let’s take a moment to go over these five simple accounting tips and tricks.
First, we have clear, consistent small business accounting procedures. This is the foundation of a strong business accounting game and crucial to whatever comes next.
Next up is using technology to improve your accounting processes and reduce your internal workload. The more you can outsource to your technology solution while maintaining accuracy, the better.
Then comes regular reconciliation. This “fail-proof” your accounting and could save you from a costly mistake in the future.
We then devote ourselves to training, not just your core accounting team. Everyone you employ should understand the basics of business accounting.
Don’t forget to regularly review your company’s financial performance. Otherwise, you could lose sight of short-term goals despite having a well-oiled accounting machine in the background. Or you may not notice when your longer-term course goes off track.
Now that we’ve completed our crash course in sensible business accounting practices, let’s conclude with a thought experiment.
Imagine for a moment where your company would be tomorrow if you could wave a magic wand and implement these practices today.
How much time could you and your leadership team get back? And how much more money would you have in your business accounts? How much better would your company’s financial position be? And how confident would you be in the company’s ability to weather the uncertain times ahead?
Only you know the answers to these questions. But we would be surprised if your answers weren’t entirely positive, perhaps even overwhelming.
What’s stopping you? Why not take the first step toward a more secure business future and modernize your accounting practices today? There is no magic wand that will make this happen immediately, but the sooner you start, the sooner you will see actual results.
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