Proper management of a business’s finances, and having someone dedicated to that process, is a crucial part of success for small businesses and startups alike.
According to Frost & Sullivan’s research, 78% of entrepeneurs in APAC consider their business a success so far. So how can those just starting out make it into this winning group? Following accounting best practices and hiring or outsourcing a person dedicated to this function can prevent the cash flow issues that are to blame for many business failures. These best practices can also uncover insights that lead to small business growth.
Top 15 Small Business and Startup Accounting Tips
Every small business needs to follow basic accounting processes to ensure strong financial management practices. These include:
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Separate business and personal expenses. One of the first steps a small business should take is opening a business bank account, which it can do after obtaining its Australian Business Number (ABN), New Zealand Business Number (NZBN), Philippine Business Number (PHBN), Hong Kong Business Registration Number (BRN), or Singapore’s Unique Entity Number (UEN). Business bank accounts offerseveral advantages over personal ones, including:
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Making it easier to track and substantiate business expenses to take advantage of tax deductions.
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Offering personal liability protection by keeping business funds separate from personal funds.
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Providing the option of a line of credit that the company can use to cover cash gaps.
Businesses should open a transaction account, savings account, credit card account and merchant services account, which allows the company to accept credit and debit card transactions from customers.
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Get bookkeeping software (and a bookkeeper). Bookkeeping is the organised process of tracking all income and expenses. It’s a critical component of financial management that ensures business owners have the information they need to make sound business decisions. Accounting is not among the skill set of many small business owners, so hiring a person dedicated to the task or for smaller businesses, outsourcing the function, is often a wise investment.
Accounting software automates bookkeeping processes that are time-consuming and error-prone if completed manually, and makes it easier to find information to complete financial statements. Small businesses are finding a lot of success with cloud-based accounting software and expenditure on cloud in APAC is growing faster than any other region, expected to double by 2023. Although most businesses start with basic accounting software, as they grow and become more complex, they may need to invest in an enterprise resource planning (ERP) system. Once a company has an ERP system, it can add modules for other business functions, with everything tied to a single database.
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Develop a budget. One of the first steps in creating a business plan is coming up with revenue projections and a list of anticipated expenditures, and then comparing that budget to actual expenses and revenue. In a recent study into JAPAC entrepreneurs, 40% of those whose businesses were unsuccessful cited a lack of business planning as a top contributor to business failure. Planning well means setting your small business up for success.
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Keep accurate business records. Recordkeeping is one of the most important responsibilities for a small business owner. Accounting software can automate much of the record keeping process and digitally store financial records. That makes it easy to document the amount, time, place and business purpose of a transaction when you claim expenses as tax deductions. Requirements across APAC vary; Singapore requires you to hold onto financial records for 5 years, while it’s 10 years in the Philippines. Follow your country’s specifications for record-keeping and consult an accountant for best practice. However, a few worth calling out for small businesses and startups include:
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Gross receipts are the income you receive from your business, and records include: Cash register tapes, deposit information (cash and credit sales), receipt books and invoices.
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Expenses are the costs you incur to operate your business, and records include: cancelled checks or other documents reflecting proof of payment/electronic funds transferred, cash register tape receipts, account statements, credit card receipts and statements and invoices.
Receipt scanners make it simple to digitise receipts and invoices for easy tracking by automatically mapping the contents to defined fields in the accounting software. Accounting software may either offer its own mobile app or support a third-party app that enables an employee or business owner to scan receipts with their smartphone camera. These apps use optical character recognition (OCR) technology to translate text into machine-readable code.
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Fixed assets need to be recorded to compute the annual depreciation and their gain or loss when you sell them. Asset documents include purchase and sales invoices; real estate closing statements; cancelled checks or other documents that identify payee, amount and proof of payment/electronic funds transferred; credit card receipts and statements and invoices. Costs related to the purchase of limited life intangible assets are amortised. Other asset categories, such as current or indefinite-life intangible, are neither depreciated nor amortised.
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Choose an accounting method. Every small business and startup must pick a set of rules for determining when to report income and expenses — accrual or cash accounting. This provides a consistent accounting method for tax purposes. Many large or publicly listed companies require accrual accounting, which records the sales when a product ships or a service is delivered. In a retail setting, a sale is recognised at the time of purchase, and in other industries revenue may not be recorded for several weeks or even months after the sale. It requires double-entry bookkeeping. Since accrual accounting takes a long-term view of the business, it generally provides a better picture of a company’s financial health. Smaller businesses and sole proprietors may prefer cash basis accounting, as it can be more straightforward and easier to manage as revenue is recorded once payment is received. Similarly, expenses are deducted when the money actually comes out of the company’s account.
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Keep the books up to date. Without keeping the books current, owners and employees don’t have a clear picture of the company’s financial state. Automating receipt and invoice capture is one way to ensure the books are always up to date. Another important step is to link bank accounts with your accounting software. Businesses can download credit card and bank statements and manually import them as CSV(Excel), but some accounting systems offer a plug-in that will pull information from your bank account and automatically retrieve daily bank transactions and statement files. The business can define the matching rules in their system to reconcile the statements, which makes the reconciliation process much easier. Some accounting software offers a direct integration to banks, so the business owner can manage and complete all banking tasks in the accounting system without also logging into their bank account portal.
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Optimise AP terms and invoicing. To hold on to cash longer, take advantage of credit terms from key suppliers. Pay bills on a schedule that maximises your cash flow, and when possible, pay early with vendors that offer a discount for doing so. To ensure steady cash flow, do everything possible to encourage on-time payment from customers. That could include offering discounts for early payment, running credit checks on potential customers before doing business with them and, when necessary, revoking credit terms. Accounting software that can automate invoicing processes by automatically sending out bills and follow-up reminders could also help prevent outstanding invoices from piling up.
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Separate accounting functions. Public companies must follow regulations that require controls to ensure segregation of duties. Small businesses are more likely to have a single person handling many accounting functions, but this creates an environment that introduces risk of accounting fraud. Owners can minimise this risk by putting some simple controls in place. One effective control is to ensure the same person who approves the invoices doesn’t also pay them and reconcile bank statements.
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Keep an eye on certain high-cost expenses. Labour costs are the largest expense for most small businesses, and inventory is often another. To reduce labour expenses, many small businesses choose to outsource work to freelancers and consultants that bill on an hourly or project basis. This can work out to be cheaper if the contractors require less than 38 hours/week to complete the work, and can usually be scaled up or down as needed. Time-tracking software can help leaders understand how much certain tasks are costing the business, enabling the business to better budget and find ways to control these expenses. Companies can lower inventory costs by tracking inventory carrying costs, inventory turnover ratio, amount lost to obsolete inventory and other key metrics. Regulations about engaging independent contractors and consultancies vary from market to market, so be sure to check with your legal advisor to ensure all contract are compliant with local industrial relations laws.
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Plan for major investments. By consistently tracking expenses and revenue, the business can identify the best time for large investments and establish the credit it may need to cover the cost. Business credit cards can help an organisation establish a credit history so it has a better chance at qualifying for financing (and optimal financing terms), including lines of credit and loans, when it needs more capital. Additionally, credit cards offer perks for the business such as business rewards or travel rewards.
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Carefully monitor tax preparation. In Australia, businesses that pay GST are required to submit Business Activity Statements (BAS) in line with the respective timings for your business size. This can be either quarter, monthly, or annually based on your annual revenue. BAS helps you report and pay your GST, pay as you go (PAYG) with holdings and other taxes. When you register for an Australian business number (ABN) and GST they will automatically send you a BAS when it is time to lodge, making the process easier!
In Singapore, businesses must submit two corporate tax returns to the IRAS annually — the Estimated Chargeable Income (ECI) and Corporate Income Tax Returns, better known as Form C or Form C-S. Businesses with a turnover that exceeds $1 million must also register for GST that is then collected and paid as output tax. GST returns are typically paid on a quarterly basis. If your turnover is less than $1 million, you can still voluntarily register for it after careful consideration. It’s important to stay on top of these!
In the Philippines, businesses are required to submit cumulative income returns every quarter, as well as a final income tax return at the close of the financial year. A Value-Added Tax (VAT) is also charged at 12% on many goods and services; businesses earning over PHP3,000,000 annually must register for VAT, although those earning less can also register voluntarily. Generally, businesses liable to pay VAT must file monthly and quarterly returns. It’s important to stay on top of these!
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Seek professional tax preparation guidance. The majority of small businesses use an external accountant or tax agent to support with their tax preparation; with the amount of time invested, this comes as no surprise. There are even more benefits here for a sole proprietor, as the cost of hiring someone to prepare your business’s tax return is deductible.
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Ensure inventory data is accurate. To prepare financial statements, the business needs accurate inventory data. It must calculate the cost of goods sold (COGS) for the income statement, and the value of inventory on hand for the balance sheet. Physical inventory is tracked either by manually counting items on a regular basis or pairing counts with an inventory management system that can automatically adjust the numbers as sales happen if it’s integrated with the point-of-sale system and accounting software. Inventory management software not only makes it much easier to track inventory, but the information will be more accurate.
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Use financial statements to evaluate business performance. Logging expenses and income are the basis for generating these three key financial statements. Income statements help the business determine its profit (or lack there of), a balance sheet shows assets, liabilities and shareholders’ equities for a snapshot of its financial position at a certain point in time, and the cash flow statement shows whether the company has enough money flowed into and out of a business in a given period and how much cash remains. When combined with the balance sheet, however, the cash flow statement can show whether a company has sufficient cash to meet its current obligations. All three statements are required by banks and investors to secure financing or funding.
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Generate financial projections. Financial projections help businesses estimate future income and expenses to anticipate if they need financing or should make capital expenditures. Financial forecasts help business leaders estimate cash flow and determine when to change pricing or production plans.
Forecasts provide important financial information to external stake holders when the business seeks a loan or funding, or if the business is the target of an acquisition. A company can also use these forecasts to create pro-forma financial statements, which are projected income statements, balance sheets and cash flow statements. Projections are based on financial modelling techniques and provide the answers to questions that may come from lenders, investors or other business stakeholders. At their basic level, they provide the answer to a question like: if we lend you this money, what will you do with it and how will you pay it back?
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By taking steps to establish strong accounting processes from the beginning, small businesses and startups increase their likelihood of success. Studies show that the more often a small business reviews its financial numbers, the better its financial health, which should ultimately drive long-term success. Although bookkeeping is not the passion of most small business owners, they must frequently review these critical financial metrics to capitalise on opportunities to grow and ensure their company is not on a path to insolvency.
