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Over my career, I’ve prepared monthly accounts for companies well over 200 times. The one common thread with this task each time is that it’s repetitive, some might even call it boring. I’d prefer to spend my time getting involved with activities that add value.

No matter how big or small your business is, there’s always room for improvement, particularly when it comes to your accounting processes. They’re like a house – they need a solid foundation, otherwise cracks will appear soon and these can be difficult to repair after years of neglect.

In my experience, there are ten things that you should do when establishing an accounting function for your SMB.

1. Develop good practices early

It’s far simpler to start with something that is fit for purpose and maintain it regularly rather than play catch up later on. Keep your transaction processing up to date on a daily basis. That is, all cash at bank transactions should be reflected in the general ledger and your bank account should be reconciled before close of business the following business day.

 

 

 

 

2. Realise that basic accounting isn’t that hard

While it may seem daunting, understanding basic accounting doesn’t have to be complicated. Most SMBs adopt cash accounting for income tax purposes. This means that you record transactions on the date the supplier was paid or you received cash from a customer rather than the date goods or services were provided.

It’s as simple as cash in, cash out. If you’re still not sure, take some time to understand the basic principles of cash accounting – it will make your life much easier, I promise you.

 

 

3. Get a good cloud accounting system

There are many good accounting systems for SMBs on the market today. As long as you have access to a decent internet connection, I’d suggest choosing a cloud based system. There are many to choose from, you can find some good ones here.

Many also have a huge range of apps and add-ins that can help you boost your back office productivity further.

While it’s tempting to rely on Google to DIY, it’s a good idea to speak to a cloud accounting specialist to help you choose the right system for you. Choosing poorly, or worse, setting up the system incorrectly, can create an unnecessary rod for your own back that can linger for many years to come.

4. If you don’t know, ask

When it comes to accounting, the only silly questions are the ones you don’t ask. These days there are many sources of information, especially on the internet. Beware of “fake news” or “sales pitches” dressed up as facts. Wherever possible, seek out or verify information with reputable sources.

Small business networking events are also a good way to learn about accounting and ask others in a similar position how they have dealt with something. Most people are happy to tell you about their experience free of charge, and you may broaden your network as well.

There are also many advisors or consultants with a vast depth of knowledge who will gladly assist for a fee. While you may be reluctant to pay someone, often investing in good advice from a trusted source will save you time and money in the long run.

5. Customise a chart of accounts to your business needs

Don’t be worried if you don’t know what a chart of accounts (COA) is – this article will help you. Essentially the COA sets the foundations for your accounts.

Many SMB accounting systems provide a proforma COA based on the industry you are in. While it’s often a good starting point, I’d recommend making sure that your COA is tailored to your organisational structure. This will ensure that you can report results for each area of responsibility rather than just looking at the company as a whole, although your tax accountant will want to see that as well.

Always use account numbers (most cloud accounting systems allow this). When determining your account numbers, ensure you leave enough room for new accounts and departments for when your business grows.

It’s also important to think about what information you may need as your business grows. While your tax accountant will already have a list of their requirements, you may need different information to manage your business.

6. Create a month end reporting calendar and stick to it

If you’ve got this far, you’re probably starting to understand why many see accounting as a boring profession. Everything is regimented, but it needs to be to maximise the efficiency of your back office function and reduce the amount of time and effort you spend on mundane tasks like processing transactions.

Creating a calendar for your critical dates – every week, month, quarter, and year – is part of this. Creating the dates is one thing, keeping them is another. If you have a bookkeeper their performance should be measured against this – it’s that important.

Keep track of these dates by setting up a simple Excel or Google Sheets spreadsheet listing all key bookkeeping and accounting tasks and their due dates. Add an extra column for the actual date each task was achieved throughout the financial year. While it will take a bit of thought and effort to do this the first time, it should become relatively painless.

7. Ensure everything is correctly and consistently classified

Even though most SMB accounting systems largely automate how your revenue and expenses are classified, they can make mistakes when coding invoices. Perhaps you’ve purchased multiple goods or services from the same supplier that appear as different line items on the same invoice. Your bookkeeper will need to exercise some judgement when coding each of these line items, and ensure that they’re coded the same way next time.

This issue can become a problem if you have a lengthy or complex COA. That’s why it’s a good idea to limit the number of expense accounts in the COA. It may not always be possible to get it exactly right, so sometimes an expense just needs to go somewhere that is close enough.

I try to simplify bookkeeping as much as possible. If you’re not sure ask your accountant and then apply it that way consistently going forward. It’s better to be consistently wrong than inconsistently right. In other words once you’ve made your choice on where to code an expense do the same thing next time that expense arises.

This simple principle is vital to interpreting the financial information reported from your accounting system.

8. Your SMB accounting system is the one source of truth

Your accounting system must be the one and only source of your SMB’s accounting reality. All accounting transactions must be reflected in the general ledger, no exceptions.

There are so many apps and add-ins available, which means there’s no need to consider satellite systems or paper reports. Financial reports can be easily generated using the inbuilt report writers or customisable reporting apps.

By entering as much information about each transaction into the general ledger, you can also save having to go back to the source docs (although online filing functionality makes this a less arduous task these days). Also automate data capture wherever possible to reduce transaction processing time and costs.

If you add your budgets into your SMB accounting system you can also cut down your reporting time further.

9. Customise monthly accounting reports

Most cloud accounting systems come with a reasonable library of financial reports straight out of the box. As your business grows or becomes more complex you’ll probably need to create custom financial reports to meet your business needs. Often this can be done from within the cloud accounting system, however for advanced reporting and forecasting you can use an integrated app like Spotlight or Fathom.

 

 

 

10. Focus on cash collections

Selling and building customer relationships is key to all successful businesses and salespeople are good at nurturing these. I’ve had the good fortune of working with many excellent sales people whose skills I have held in high regard. But I always reminded them it wasn’t a sale in my eyes until the cash was in the bank.

Without getting bogged down in the importance of credit assessments and payment terms, it is vital that all SMBs never lose sight of the importance of chasing overdue debts.

Be proactive and call customers before due dates to confirm when payment is going to be received. Be flexible and understanding if you are asked for a few days grace. They key is not to allow your customers to develop bad habits. Some bigger businesses will dictate their payment terms and there’s not much you can do about this if you want to keep their custom, but ensure they never string you out beyond these.

You can keep track of overdue invoices through weekly reporting and questioning what is being done to collect the amounts. Failure to focus on cash collections will greatly increase the likelihood of the failure of your SMB.

By following these 10 tips you can set up a healthy accounting system for your small business that will see you well into the future. Remember, SMB accounting doesn’t have to be difficult, and if you’re not sure about anything always ask someone.

If you don’t know where to start with your SMB accounting function, or need some help working out how to bring it into line, just give me a call.

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    Have you been wondering if your business would benefit from a Virtual or Part-Time CFO?
    If you are still unsure about the benefits of a Part-Time CFO for your small to medium business please read this.
    Find the right Virtual or Part-Time CFO for your business by completing my free checklist.  Please enter your email address below to receive my free checklist.  If you experience any difficulties in downloading the free checklist please email me at brett@parttimecfobrisbane.com.au.
    I respect your privacy and never release your information to third parties.  For more information please refer to my Privacy Policy.
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