- You'll need to decide who will handle your accounting needs.
- You will choose either the accrual or the cash accounting method.
- You need to choose the right accounting software for your needs.
Apart from the people who work there, a business's systems act as its backbone. With the right accounting system, you'll have a commercial entity that will thrive and withstand most of the storms that come its way.
Most entrepreneurs look forward to setting up management control systems. This includes having certain monitoring tools and financial planning modules in place so business owners have a pulse on the business.
Because having accurate company information handy (in an organized manner) is crucial to correct decision-making, it makes sense to set them up as soon as possible. This especially holds true of accounting systems, because it is important to be in the know of the financial health of your company.
1. Use what you know
It makes sense to keep all business-related documents such as bank statements, invoices, bills, receipts, tax papers, as well as legal and governmental documents concerning your company, safe. Engage the services of a tax advisor – they can advise you about the documents that you need to permanently keep on file and which documents you can dispose of after a certain time frame.
2. File your documents
It is important to have a filing system in place, with a separate file for each kind of financial document. These files can be stored either physically and/or virtually. Have a file for all documents that require action, and once finished, shift them to their individual files.
3. Decide your accounting needs
Depending on the intricacies of your business's financials and your own comfort level, decide who will handle your accounting needs. You could do so yourself, hire help, or outsource the entire gamut of accounting activities to a third party (i.e., a company or individuals who specialize in small business accounting).
4. Hire a professional
If you're thinking about hiring professional help, you could appoint either a part-time or a full-time bookkeeper. A bookkeeper's services are best suited for startups, which do not plan to expand rapidly. A bookkeeper can help you set up strong record-keeping systems, handle financial transactions and produce financial statements.
If you're running a growing entity with a complex business structure, it prudent to hire an accountant. Affording an accountant may be difficult for a small business or sole proprietorship. You could, however, prepare the books yourself or engage the services of a bookkeeper and use the accountant's services for year-end tax planning.
Make sure you hire your accountant or bookkeeper carefully. They need to be skilled and trustworthy, because they will help drive your business's financial growth.
5. Pick your accounting method
A majority of startups use the cash method for accounting. It involves recording the income when it is received (either as cash, credit card charges or check) and the expense when they are actually paid.
The accrual method of accounting is perfect for larger companies and involves counting income when a sale is made (regardless of whether you've actually received the money for it), and expenses are counted when you actually receive the goods or service (instead of paying for it immediately).
Ask your tax advisor to help you decide which method suits your business the best.
6. Open a business bank account
Open a business account with online capabilities to track your cash flow and to streamline your accounting procedures. Further, your bank account should seamlessly sync with your accounting software.
7. Record the transactions
You know you have a reliable accounting system in place when you're able to provide your customers with receipts for each transaction. Your system should help you reconcile your accounts using your monthly bank and credit card statements.
Having a robust accounting system in place right from the early stages of the business helps you build a strong foundation for your venture whether you've just started out or are looking to expand.
Choosing an accounting system
Business accounting software is a basic necessity for many small businesses. Choosing the right accounting system can help you keep track of profits, inventory and create invoices.
It's important to consider not only your current needs but anticipated growth. It takes time and money to implement an accounting system, so be sure that the one you choose can meet your needs now and for the foreseeable future. Most accounting software systems have different tiers, which allows you to upgrade it as your business needs change.
Zoho Books: Simple and affordable
Zoho Books is online-based, so you can access it from any browser. It's very reasonably priced and offers many of the features a small business needs. Features include accounts receivable, accounts payable, inventory and invoicing. It also has a client portal to allow you to easily follow up with customers on quotes and payments.
FreshBooks: Best invoicing software
FreshBooks provides a suite of invoicing tools. You can accept credit and debit card payments, set automatic recurring invoices, and schedule automatic payment reminders. Plans are based on how many customers you have. This makes it a great choice for small and medium-sized businesses.
QuickBooks: Best overall
QuickBooks has all the basic features and includes tracking projects as well as inventory.
What makes QuickBooks special is that it also allows for customization. There are hundreds of apps that can integrate with QuickBooks to customize the software to your unique business needs. QuickBooks Online is also updated monthly, and its blog keeps users informed of changes and bug fixes.
The basic plan includes basic reports, tracking inventory, income, expenses and sales tax. Higher-tier plans include tracking projects, managing inventory and creating purchase orders. [Read our review of QuickBooks for more information.]