Here's a pop quiz: why did you start your business?
A. You saw an opportunity to start a successful company and make money.
B. You wanted more freedom and flexibility with your schedule.
C. You like dealing with small business accounting headaches.
Would anyone really choose option C? It's not likely, but even so many small business owners spend significant time dealing with accounting headaches in the course of running a business. The problem is that most small business owners don't have accounting degrees. Without formal training, any basic task can quickly turn into a major headache. Below are some of the most common challenges with simple ideas on how to deal with them.
Keeping Track of How Much Money Clients Owe
Invoices are sent to customers as an official request for payment. During the course of the month a small business could send out dozens or even hundreds of invoices to multiple customers. Some customers pay on time, others pay late, and still others pay partial balances. At the end of the month it can be a nightmare to sort out exactly who owes how much. Some small business owners put off for months reconciling their billing, which translates into money that either never arrives, or arrives late. To ensure timely and accurate payment, your business should prepare an Accounts Receivables Ledger. This is organized by customer and keeps track of the invoices sent to and payments received from each one. Start with a simple spreadsheet and move on to more sophisticated solutions as your company grows.
Matching Revenues and Expenses
Companies that use the accrual method of accounting instead of the cash method must adhere to the matching principle. This requires that revenues and the expenses incurred to generate them be recorded during the same time period. It doesn't matter when the cash to pay the expenses is actually disbursed. Accurately matching revenues and expenses can be tricky especially in large sales or service contracts. To avoid confusion and a lack of consistency, have written policies in place that state exactly how each expense is linked to revenues and how the allocation should be calculated. If there is any doubt as to how an expense be allocated, you should err on the side of caution and record the entire amount in the current period.
Storing and organizing receipts
The IRS requires that small businesses keep tax-related records like receipts for anywhere from 2 years to forever depending on the circumstances. In just a few years this could create thousands of pages of records that need to be properly stored and classified. A better solution would be to scan all records as they arrive and keep the electronic copies in the cloud in folders organized by date and type.
Using accounting records in a way that helps grow the business
Accounting isn't just about keeping tracking of what happened in the past. It can be a powerful tool for identifying opportunities for growth. It's easy to miss those opportunities when staring at hundreds of numbers. Instead, just answer three questions:
A. Which is your most profitable product or service, measured by gross margin?
B. Which product or service has experienced the greatest increase in sales over the past 12 months?
C. Which is your least profitable product or service?
With answers in hand, prepare a plan to sell more of "A" to existing and new customers; try to add higher margin services to "B"; and consider moving resources from "C" to deploy them into "A" and "B."
Finding the right tools to help with accounting duties
If you still use spreadsheets, it's time to consider an upgrade to more effective tools for small business accounting. These offer several benefits: the accounting equations are programmed correctly, which helps eliminate the risk of manual error; many tasks are handled automatically, saving you time; all of your data is securely stored offsite, protecting it in case of a fire or flood; and you can generate reports instantly to help you make more informed decisions.