There are good accounting best practices and there are some poor ones. When it comes to your small business’ money situation, don’t neglect the warning signs for the path to negative cash flow. Utilize these accounting best practices to improve your accounting knowledge and abilities, and to keep your bookkeeping on the right track for the long haul.
1. Establish your accounting method—and stick with it
There are two accounting methods, each can be advantageous depending on the nature of your business. Not only is it important to know what these two methods are, but it’s even more crucial to stick with it.
- Accrual Method: this method consists of recording transactions on the books as soon as the transaction is made. Likewise, expenses are recognized and recorded when consumed or when an invoice is received. When using this method, revenues and invoices don’t have to be paid before recording them in your books.
- Cash Method: on the flip side, the cash method is the simplest form of accounting. In this case, you record revenue when cash is received. Likewise, you record expenses when bills are paid.
Kashoo is run on accrual-based accounting as it is beneficial to cash flow analysis, credit building, and even expense deductions. If you are currently using a cash-based method when considering your accounting, here’s how you can make the switch.
2. Be financially informed
It doesn’t matter if you have an accountant managing your in-house accounting, or you’re doing it yourself. Either way, one of the key accounting best practices is to know how to read financial reports. Learning how to read and understand financial reports can provide deeper insights into your business’ financial position at any given time. This, in turn, will help you make better business decisions. Some financial reports you need to know are:
- Cash Flow Statement: summarizes your cash flow (both inward and outward) as a result of your company’s operating, investing, and financing activities.
- Balance Sheet: this document highlights the total assets, liabilities, and capital of your company, at a particular period. It’s usually drawn up on a quarterly and annual basis.
- Profit & Loss or Income Statement: this document shows the revenues generated and expenses incurred during a particular period.
3. Track EVERYTHING
Initially, tracking at the start of your business seems like an easy task. But as your business grows, you’ll need much more than just a simple spreadsheet. Complex, difficult and never-ending numbers will fill these spreadsheets. Sooner or later, you’ll realize that much more accurate and automated accounting software is needed to keep all income and expenses organized. Kashoo allows you to become well-versed in accounting best practices, such as tracking, understanding the accrual method, and reading reports, in no time. Simply fill in the details you would have included on your spreadsheet such as:
- Supplier/biller’s name
- Account number
- Expense type
- Date invoice was received
- Amount owed
Don’t forget to take a photo of all your receipts for upload onto Kashoo’s software. That way, our system can properly track and manage your business’ cash flow—organizing important documents that the Canada Revenue Agency (CRA) may request for.
4. Maintain your records for accuracy
Maintaining accurate, up-to-date records is a critical accounting best practice—especially for your tax return and decision making for lenders or investors to decide whether they should invest in your business.
The CRA recommends that you keep tax records and all supplemental documents for a minimum of six years.
5. Limit accounts receivable as part of accounting best practices
There’s no better feeling than closing a deal or signing a brand new client. But don’t get caught up in the glamour. A sale isn’t really income until money is exchanged. Most companies have the right policies in place, says Deloitte. However, not all business enforce those policies effectively and in some cases, some companies don’t adopt the right processes at all. The consequences of not monitoring accounts receivable are high. As part of accounting best practices, limit your accounts receivable to ensure that you are not borrowing money if you don’t have to (and because your customers are late to pay).
Carrying overdue accounts receivable carries heavy costs. According to Deloitte, “rather than having free capital to invest in growth opportunities, increase shareholder payouts, buy new equipment or introduce new products, your money is tied up on your balance sheet.”
Instead, some strategies to reduce problems with accounts receivables include, setting clear and consistent credit policies, taking delivery upon payment of your services, and requesting a payment portion upfront.
6. Conduct monthly (or weekly) accounting reviews
Making time for monthly reviews is the final key to setting a strong foundation in your small business accounting—and definitely a best practice. Monthly accounting reviews are sufficient when running your own small business, but the more frequent you review your small business accounting tasks, the less difficult they become in the long run.
Most small business owners dread the idea of managing their own bookkeeping and accounting. But if you follow these accounting best practices, you can be sure that you’re on the right track to proper organization and management of your finances and preventing audits!
Ready to jump-start your accounting management? Try Kashoo for free for 14 days.