Many start-up owners report feeling so overwhelmed by the stresses of procuring new business and a line of income for the fledgling company they’ve set up, that the last thing they pay attention to is setting up good finance and accounting practices. Getting to grips with basic good accounting ‘manners’ for your small business from the outset can be the difference between a stable or flourishing business, and a floundering mess. Not knowing exactly what your financial position is at any given point in time could see you make costly financial mistakes and is also a red flag to anyone wanting to do business with you. Luckily, you can be on the path to accounting prudence by implementing a few standard accounting policies. Here are some accounting tips for small businesses.
Separate businesses and personal finances
A cardinal mistake most entrepreneurs make initially is to pay for company expenses out of their personal pocket, and conversely, to allow payments to their company into their personal bank account. This will be a costly mistake come SARS tax submission time as it could compromise any ‘refund’ you may be owed. If you are paying for business expenses, you could also precariously misjudge how much your business is actually bringing in, or needs to bring in to be more profitable. Commingling of funds is also a huge turn-off to any potential partners or investors who want to see proper bookkeeping in place.
Open up a business bank account as soon as possible. If you then end up paying for the odd business expense, ensure that your company refunds it to you by putting in a business claim. Not only is this good accounting practice, it will reinforce the notion of your company as a separate financial stream and move you further and further away from the dangerous practice that is commingling of funds.
Pay yourself a salary
Allied to the above principles of keeping funds separate, is that of paying yourself a salary, versus allowing all income to end up in your personal bank account. The salary you are able to draw may be tiny at first, after you have paid expenses and reinvested income. If everything earned by the company flows into your personal cash stream, you risk overspending and sorely misjudging your profitability.
If you are freelancing you may not be able to draw a set salary and your ‘salary’ could be more like a ‘draw’ to you as the owner at first. The discipline you incur from paying yourself properly and appropriately at the outset, is that you would be better geared for growth and having to pay other employees, too – which leads to our next consideration.
Outsource your payroll as soon as possible
Withholding taxes, deducting UIF, making salary transfers and accruing for leave days can be a bit of a mindfield if you’re new to payroll, and time consuming. For a fraction of the time and much more peace of mind, you could outsource your payroll requirements at a reasonable fee tailored to the needs of your enterprise.
Choose between the accrual or cash basis of accounting upfront for your business
It’s tax season and you want as favourable a refund as possible. However, if you’ve not kept accounts separate, or used muddled accounting processes, you could find yourself owing SARS instead.
When it comes to keeping track of your finances as a start up, you have two business accounting options – the cash or accrual method. Almost two-thirds of businesses use the accrual method, but this does not necessarily mean it is right for you. With accrual, income and expenses are recorded as they are earned, not when the income is actually reflecting in your bank account or the expenses have been paid. It is best for larger businesses, as you risk losing sight of actual cash flow.
When you use the cash basis of accounting, you don’t recognise accounts receivable or payable; it is a straightforward record of money in when it reflects, and money out when it is paid. This method tends to work well if you have a consumer-facing business and make many transactions.
Become familiar with in-house bookkeeping, while outsourcing other bookkeeping functions
Unless you intend to employ a full-time bookkeeper or accountant from the outset, there are business accounting certain tasks that need to be done weekly. These include sending invoices to customers, recording payments that have come in, recording supplier payments that are made or have to be made, recording credit charges and more.
A higher level of skill is required for the following and may be best left to a professional: reconciling accounts, drawing up financial statements and balancing the books. The cost that could follow if this is not done correctly far outweighs the cost of hiring professional accounting services to perform this function. Most accounting firms will work with you to find a fee structure that is mutually agreeable.
Get set for success
At the end of the day, remember that the above is not the sum total of what you should be doing to set your business up for success. The journey becomes infinitely more exciting and less scary if you understand the basics of business accounting, versus merely the product or process aspects of your company. It goes without saying that another good, almost mandatory investment is that of choosing the right accounting software for you. Once again, it is worth the extra investment of consulting an accounting firm not only to help you choose the software that is best suited to your needs, but to have it professionally set up and successfully integrated with your business functions.