When starting or growing a business, it can be easy for entrepreneurs and small business owners to get by with a basic accounting process, when all that is needed is to track cash flow and file a tax return.
According to Don Fornes, CEO of accounting software reviewer Software Advice, it’s imperative to take into account long-term aspirations as a business owner and keep accounting practices to that standard - whether following Generally Accepted Accounting Principles (GAAP) or accounting on an accrual basis.
Here are six accounting tips that small business owners should know, especially if planning to conduct a financial audit:
- Start right. Decide how financials will be tracked in the long-term and establish that process from the start. Communicate this plan with your accountant and have them track accordingly.
- Fix your fixed assets. Make sure all components of fixed assets are accounted for. This includes depreciation, taxes, services and/or components that were required to put the asset into use. In the spirit of sharing, Software Advice created an Excel spreadsheet that can be downloaded here, to properly take into account for asset depreciation.
- Account and report at the same time. Keep accrual accounting and financial reporting on the same timeline. If finances are reported monthly, then conduct accrual accounting monthly. This will provide flexibility if seeking to report on shorter accounting periods and will avoid hours spent on reversals/corrections later.
- Keep a digital record. It’s worthwhile to keep a digital record of everything so when the time comes, a document can be called on instantly. For example, be sure to digitally file bank statements because older statements can be unavailable online and copies may be difficult to obtain.
- Correctly categorize expenses. Most companies tend to have a personal detailed system when it comes to categorizing expenses. But keep in mind that if an audit is ever conducted, those expenses will need to be rolled-up into broader categories such as sales and marketing, research and development, and general and administrative. Keep track of the broader category each line item will potentially fall under to avoid a difficult time allocating items later on.
- Close your books each month. Reconciling records each month ensures that expenses don’t fall through the cracks and makes it easier to catch any discrepancies. Being this diligent and hands-on will make sure things don’t get lost in the shuffle.
Whether just starting a business, or about to conduct a financial audit - getting these accounting methods in place is not only a good business practice, but will save a lot of time and effort down the road.