As a small business owner, accounting is probably not your favorite chore. And yet, it has to be done. Since good book keeping practices can improve your bottom line and make life much easier, follow these three tips for small business accounting:
Understand your financial statements. Money comes in and money goes out, but accounting is about more than just finding the bottom line. If you don’t understand where your money is going, you could run into a big problem in the future. Analyze the amount of time it takes you to collect on outstanding receivables. If this time is greater than your credit terms, you could run into a cash flow problem in the future. You may need to improve your collections procedure.
Use this formula to find your average collections period: (Accounts + Notes Receivable)/(Annual Net Credit Sales/365)
Invoice early and often. Sending out invoices isn’t necessarily the most fun part of running a small business, and it often doesn’t seem like the most pressing or urgent chore. However, you could run into serious cash flow problems if you don’t promptly receive the money you’re due, so send out invoices on a regular and frequent schedule.
Of course, sending an invoice doesn’t mean you will immediately receive payment. Dedicate a certain amount of time each week to making phone calls or reissuing invoices to late payers. Above all else, remember to be firm and consistent with your payment terms. If you let one account slide, before you know it many more will be overdue, and you’ll start to see a major dent in your balance sheet.
Separate business and personal accounts. You should be doing this anyway, in order to avoid trouble with the IRS. Aside from that, keeping your business and personal accounts separate streamlines your accounting processes. You’ll save countless hours picking through account statements at tax time, and it will be easier to spot your business expense deductions. Keeping separate accounts also prevents you from blurring the line between business and personal spending, which can be devastating to the bottom line of your small business.