Chapter 9: Accounting systems
It is vital that you manage your accounting properly. However, it is not necessary to spend a fortune doing it. You can combine an affordable payroll service with a part-time bookkeeper and you’re set.
Now you’re ready to spend your time where it needs to be – growing the business and caring for your customers.
What is business accounting?
Accounting is simply a way of tracking, monitoring and managing every financial transaction or event. It’s the “pulse” of your business.
In short, it gives you control over your business. At any time, you’ll have a handle on:
- Receivables – the money that is coming into and owed to the business
- Liabilities – the money you owe that is going out of the business
Each month, you should produce a minimum of two documents:
- Profit and loss statement
- Balance sheet
Tip from an Expert
“If you’re going to set up an accounting system for the first time then cough up a few bucks and involve a CPA. He or she will advise you on the necessary accounts. This way you can be sure that it’s done the right way and the system will grow with your company. Remember – do what you do best and bring in experts to do what they do best.”
–Gene Marks, CPA and Business Owner
Profit and Loss (P&L) statement
Usually the P&L is accrual-based. That is, each monthly P&L statement reflects what you sold not what you actually received. This is a more accurate reflection of your activity. It smooths out the variability of when your customers may actually pay you. This simple month-end statement shows the revenues you have sold in the previous month and the expenses you have incurred. The difference gives you a profit or loss for that month.
Here, you get a picture of your company’s financial state. You include:
- Assets – cash you hold plus receivables due to the business
- Liabilities – what you owe, including loan repayments and bills to pay
- Equity – your net assets minus your net liabilities
Monitor cash flow
A third factor to consider is cash flow and that tells you WHEN money is coming in or going out of the business.
- Receivables – if you take cash for a sale, it’s there. If you invoice clients, you could wait 30, 60 or 90 days to receive payment.
- Liabilities – you need to know when future loan repayments or bills for supplies are due. Your suppliers may give 30 days’ credit or more.
The cash flow statement is different from your monthly profit and loss statement. It gives a clear and real picture of the health of your business.
You could have an apparently good business on paper, but that’s meaningless if there’s no money flowing into the bank. If you are selling a great deal to one client and they are late with their payments, your P&L may look good but your Cash Flow statement may not. This is a key monitor of your company’s viability.
Easing cash flow with factoring
One way to improve cash flow is to factor your invoices. Factoring is simply a type of loan, which is backed by outstanding invoices as collateral. For example, your bank or a commercial lending company may recognize that you have $250,000 of receivables. They might agree to give you a loan of up to a certain percentage – say 80% or $200,000 – of your total receivables. The lender may take responsibility for collecting on these invoices. They will give you a line of credit up to this amount as long as it does not exceed the 80%. In return for this loan they will receive a fee, similar to interest on a standard bank loan. However, be sure that you understand what your actual costs will be as Factoring fees can be high.
They may prefer collecting from quality business customers where the numbers of accounts are smaller and invoice values higher than sales to consumers.
Check the terms and conditions carefully and ask a lawyer for advice if you have any questions.
Take account of tax liability
As we explained in the chapter on legal issues, tax liabilities can fall either on the individual or the company, depending on your structure.
Check with the IRS and your accountant on your status and tax reporting requirements.
Set up a chart of accounts
The easiest way to record and track your transactions is to set up a chart of accounts:
- Create a spreadsheet or use an online service or software package such as Quickbooks. We strongly recommend going the software route. They have a ‘cloud-based’ service where you can pay an affordable monthly fee.
- Allocate separate transactions to their corresponding category of income or expense. Facebook ads are recorded to “Marketing’, your mobile bill to ‘Telecom’ and so on.
- Input transactions on a daily or weekly basis.
For income, show the different revenue streams for products, services and other revenue sources so that you can compare sales in each category.
For expenses, include items like rent, wages and taxes, marketing, insurance and professional services.
How to manage payroll
Payroll can be one of the more demanding areas to track and manage because of the variables for each employee and the requirements for reporting tax liabilities.
For each employee, you need to deduct all appropriate employer and employee taxes. Depending on your company size and other considerations, you will need to then remit these amounts to the federal government as well as your state agency. In some cases, you may have to report to multiple states.
Payroll can be time-consuming and distract you from running the business. Again, here we strongly recommend that you engage the services of a Payroll provider like Paychex. They will deposit the wages directly into your employees’ bank accounts, make all necessary remittances to the government and handle all reporting.
TIP – If you do two or more payrolls a month, you could reduce costs by running payroll monthly or alternate weeks. But, if you have employees who depend on a weekly paycheck, it may not be practical.
Did you know?
J.P. Morgan, after graduating from school, got his first Wall Street job as a junior accountant. Five years later he founded his own company.
-Colorado Society of CPAs
Use a cloud-based software package
To simplify your accounting tasks, get hold of a Software as a Service (SaaS) accounting system like QuickBooks. They are affordable, easy to use and give you all the facilities for recording, reporting and analyzing your transactions.
Hire a part-time bookkeeper
You could also free up your time by hiring a part-time bookkeeper a couple of hours a week to take care of your regular accounts. The bookkeeper can use your SaaS system to enter data, run reports and work with payroll providers and other external organizations.
Don’t use a chartered public accountant for the day-to-day work. They cost more than bookkeepers – save their services for year-end accounts, tax returns or when you need advice.
Make accurate revenue projections
It’s clear you need to record all these transactions but what are you going to do with the information. By understanding and analyzing the figures, you can get a clear picture of how your business is doing.
We discussed revenue projections earlier in this guide. Make sure you have accurate, realistic figures for the upcoming months, quarters and years.
Set up your key metrics
Revenue projections are just one of the ways you can tell if your business is progressing. Do you know?:
- How many people are visiting your website
- Your average sale value
- The cost of your goods
- How many customers you have each day
- The cost of new customer acquisition
- Your average monthly profit or loss
This information is vital to the health of your business. It helps you make informed decisions so you can lower your costs, increase sales and grow your business.
So, make a list of the metrics that are most important to your business. These are often referred to as Key Performance Indicators (KPIs).
Gross margin is one of the most important measurements. It indicates how much money is left after deducting all related costs to create the sales of your product or service.
If your revenue is $60,000 per month and your cost of goods is $30,000, your gross margin is 50%. That’s a healthy figure. If it drops down to 10 or 20%, you could have problems, because there may not be enough money left for marketing and operations of your business, let alone profits.
Keep an eye on those metrics and compare them with the benchmarks of your industry. Metrics will vary for retail, manufacturing or online businesses.
Measure what’s relevant to your business and track them on a regular basis. Make sure you don’t get consumed by “over tracking”. Instead, create a routine for monthly, quarterly and yearly reporting.
Get a picture of your business with a dashboard
One way to get an all-round picture of your business and to save precious time is to use a dashboard. It’s a useful and visual representation of your business’ key performance indicators.
This type of module can usually be found in the popular accounting software packages. Below is an example of QuickBooks Online Plus Dashboard.