In small business offices around the country sits shoeboxes or file folders full of business receipts, invoices, and accounting data. As the months roll by and the data accumulates, your business is sitting on a growing problem. Learn before it's too late why your accounting system can cost your business and more.
For many start-ups and sole-proprietors, the shoebox or file box was a temporary fix prior to setting up an accounting system. But with procrastination the box can become the nemesis of your small business.
What is an Accounting System?
An accounting system for your business is not as simple as a shoebox or file folder. These items will collect and organize your important business information but you need to look at what the numbers are telling your business. An accounting system will take your business beyond record keeping and provide important financial indictors. An accounting system will have the following parts:
Includes business transactions and operations data.
Data Organization: A method of sorting data by date and transaction type.
Accounting Database: Data entry into a spreadsheet or accounting software program will form the basis of accounting information.
Financial Statements and Reports: Balance sheets, income statements, budgets, and timetables comparisons will aid in running your business.
Analysis: Regular review of main controls to avoid problems and capitalize on opportunities.
If your small business accounting system is focused only on collection and organization until year end than discover why you need to change over to a complete system.
8 Reasons for Accounting System Upgrade
Expense Creep: It starts off innocently as you begin to add more regular expenses to your operations. Without monthly tracking of expenses and costs, you cash flow can quickly dry up.
Overdue Accounts: Ignoring the need for an accounting system can make tracking accounts receivables a guessing game. Don't be in the business of bank lending. Misplacing a 90-day overdue account is costing you money.
Cash Flow Crunch: Every business will experience the highs and lows of cash cycles. To overcome periods of cash shortages or to get needed funding, an accounting system will help you identify who owes you money and places for expense cuts. Create a full financial summary every quarter.
Lack of Data Security: How safe is your shoebox? Is it reinforced steel, fireproof and waterproof against major disasters? Important financial information needs to be stored on a removable disk and on a secured offsite location. Never take a chance assuming it can't happen to you.
Added Costs: Having an accountant or bookkeeper organize and compile your accounting data at year end can be costly. Organize your invoicing, accounts payable, accounts receivable and most important know your cash flow.
Audit Risks: Surviving an IRS audit can be easier if all financial matters of your small business are in order. Providing an auditor with financial statements, organized files, and well tracked transactions will make everything easier for all parties involved.
Bankruptcy: With the majority of businesses failing in the first 5 years, poor financial management remains one of the top reasons for failure. It is your responsibility as a small business owner to maintain and regularly assess your financials. Not putting an accounting system in place early during your startup can mean the end of business. Proper accounting can help you see money losing strategies before it is too late.
Financing Difficulty: Don't bring a shoebox of invoices and receipts to your banker or investor meeting. The professional appearance of your company's books is part of a winning strategy to financing.
The price of business ownership comes with the responsibility of establishing an accounting system. On the plus side you feel more control over your business, less stress, and better profitability.