Accounting plays a critical role in determining the efficiency and productivity of a business. Without the right tools and approach, managing the day-to-day accounting can easily consume someone. Moreover, inaccurate or time-consuming financial practices can cause serious problems, leaving leaders unable to predict or manage cash flow.
That's why effective accounting methods are key to healthy small businesses – enabling leaders to adapt to their current situation, plan for the future, and save precious time and money along the way.
Choose the right accounting method
Accounting is a necessary evil in business. You can't avoid it, but you can make sure to use the most efficient methods to save time and money.
Instead of selecting cash or accrual accounting, the best financial accounting strategy for small businesses is to use both through a hybrid. Use cash basis accounting method for business transactions and filing tax returns. It is most appropriate if you have less than $25 million in gross revenue from the past three tax years.
On the other hand, you can use an accrual basis for presenting financial statements for management purposes. Using a hybrid method allows you to maximize the benefits and minimize the drawbacks of cash and accrual accounting. It presents the following advantages:
This method only records transactions that are actually paid or received, so it doesn't include any future liabilities or obligations.
- It saves time by presenting organized cash flow statements, which helps to file matching tax returns.
- It helps small businesses save money by reducing compounded tax payments.
- It presents an organized income and expenses report, which helps small businesses engage in appropriate business transactions, saving time and money.
With this method, all transactions are recorded regardless of when they're paid or received—it includes both current assets and liabilities as well as all expenses incurred during the period (even if they haven't been paid yet).
- Helps track monthly profitability, which helps managers implement appropriate financial decisions while saving time and money.
- Best for businesses that deal with large amounts of inventory or have complex operations (or both).
No matter the size of your business, conducting an audit is essential as it objectively evaluates the business's financial statement by examining operations, transactions and risk. Small businesses should conduct audits to optimize their financial operations, or they may be forced to do so by their state or federal regulators. Here's what to consider:
- Internal audit - use existing managerial tools to assess the organization's performance by evaluating financial statements, internal control, compliance, and IT and environmental operations. It helps small businesses identify and resolve lousy accounting practices.
- External audit - similar to above, but performed by an objective expert, this is a review an organization's financial statements and internal controls. They present accurate financial statements and tax returns which help you obtain funding and save money by reducing unnecessary tax payments.
- IRS audit - IRS tax audits are thorough reviews of an organization's financials to ensure compliance with tax laws. Clean, clear and accurate books can help avoid unnecessary tax penalties for non-compliance.
Practice lean accounting
A top priority for small businesses is to minimize costs and maximize profits. Lean accounting evaluates the production process to identify and eliminate waste to reduce production costs and save money. Its primary focus is to improve the quality and value attained by the customer while enhancing operational efficiency.
Related reading: Why profit doesn't equate to cash flow
Harness online accounting software
Accounting software is a great tool for virtually any business. Investing in appropriate accounting software can streamline accounting operations, including:
- Organizing and tracking business expenses, including expenditures and income, which saves time.
- Facilitate financial transactions such as automated invoicing, which improves cash flow.
- Improves accounting efficiency and accuracy using organized spreadsheets and cloud-based storage for accounting data.
- Save money as you may not need to hire professional accountants.
- Provide real data on financial performance through records of financial transactions such as expenses and inventory.
Consider hiring an accounting professional
Hiring an accountant or controller, even just a few hours per month, can make a huge difference. A professional accountant will keep your financial records organized and updated, and they're usually better able than you to know about potential fee waivers or additional tax deductions for you to claim.
With a little planning, organization, and help from technology, you'll be able to find more time in your business day.