Top Five Accounting Best Practices Your Business Should Follow

By Jack Perkins, founder at CFO Hubwhich provides on-demand CFO, controller, accounting and HR services.

A company’s success hinges upon the mastery of its finances. While practically every business must maintain a tight rein on its assets, liabilities, income and cash flow, these accounting processes are especially vital for small to mid-sized enterprises (SMEs) operating on tighter margins as they scale.

Managed properly, financial accounting allows business leaders to keep a finger on the pulse as they set budgets, monitor the company’s expenses and identify new growth avenues, but accomplishing that is a daunting task without a well-planned, implemented and executed accounting strategy. And although the minutiae of every financial blueprint will look different depending on the business and its place in the industry, there are five universal best practices you should apply.

1. Cover The Basics

Are you a small business owner just getting your bookkeeping started? If so, there are some fundamental do’s and don’ts that you can apply to establish a solid accounting foundation. This includes:

• Select an accounting method. Most businesses will opt for either a cash or accrual accounting method. There are several differences between the two methods, for example, the accrual method logs revenue as the product or service is delivered—not upon payment—providing greater visibility over the business’ financials. In contrast, a cash-basis method only accounts for cash received.

• Track cash flow. To have proper control and clarity over your company and its growth, you must monitor cash flow constantly. All expense outflows and earning inflows should be recorded, categorized and labeled.

• Separate personal expenses from the business. Some businesses in the early stages make the mistake of intermingling personal and company finances. Doing so makes it difficult to properly judge the company’s financial health and could imperil your limited liability. Keeping the two separate improves cash flow tracking, tax filing and financial forecasting.

2. Utilize Accounting Software

Early in a business’s lifecycle, you may be inclined to limit bookkeeping costs by using physical ledgers or basic digital tools like Excel. Don’t do this. Avoid the temptation. Of all the places a business should look to create cost savings, this isn’t one of them.

But what if my books are really simple right now?” Even so, adopting accounting software early on will help prepare you for a time when things are not quite so straightforward. Always accurate and up to date, simplify tax filing, accelerate your month’s close and—most importantly—provide you with powerful analytical tools capable of generating actionable insights.

For just a handful of dollars a month, few investments, if any, will provide such a significant ROI. While there are dozens of accounting software to choose from, the top introductory options include QuickBooks, Xero and Gusto. Later on, as your company scales, you can upgrade to even more capable enterprise-level suites, such as NetSuite or Sage Intacct.

3. Master The Three Financial Statements

The importance of maintaining accurate financial records and then regularly reviewing them goes far beyond simple tax preparation. It sets you up for long-term financial health and success. And even if you don’t yet have to abide by GAAP, adhering to these principles early on will prepare you for success when the time does come to perform financial reporting and modeling.

That brings us to financial statements, which aggregate your financial data into actionable intelligence. As Inc. notes: “They stand as one of the more essential components of business information, and as the principal method of communicating financial information about an entity to outside parties.”

Specifically, there are three financial statements business leaders must master:

• Balance Sheet: This provides a snapshot of the business’s net worth at a given point in time. It measures assets, liabilities and shareholder’s equity.

• Income Statement: Also known as a profit and loss (P&L) statement, this indicates the company’s net income growth or loss over a given period.

• Cash Flow Statement: This measures the inflows and outflows of cash during a set period. It lets you know how much cash you have on hand during that time.

4. Hire Experts

As a company scales, business leaders eventually reach an inflection point where maintaining accurate accounting records becomes too complicated and time-consuming for them to handle, even with the help of accounting software. At that stage, it becomes necessary to bring on an expert whose one and only job is to log, organize and analyze the company’s financial records.

By hiring a professional accountant in-house or enlisting the services of an outsourced accountant, you get access to a knowledgeable professional who can:

• Handle compliance and financial audits

• Prepare financial statements and reports

• Breakdown and analyze the company’s financial health

• Set achievable goals

• Weigh and advise on growth strategies

As the company grows, so too will the accounting department. One accountant becomes two, three and so on. Eventually, you need a financial controller to oversee this team—or even a CFO to guide the business on its financial journey. These are but the healthy steps a growing company must inevitably tread to flourish.

5. Control Your Books

There are countless hurdles and questions along the pathway toward building a prosperous business. Maintaining a tight grip over your accounting processes enables you to prepare, strategize and thus weather any storm that appears on the horizon.

Following the tips above is just the start of what you must do. But it is a good start. The complexity of financial recording, analysis, compliance and reporting will only increase as your company scales. Mastering these best practices now ensures that such factors won’t jeopardize your success down the road.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Leave a Comment