Efficient accounting can be a major challenge for busy small business owners. Without the right tools and approach, bookkeeping can leave you with no time to run your business. Furthermore, time-consuming or inaccurate accounting practices can cause serious problems, leaving you unable to predict or manage your cash flow.
This is why effective accounting methods are key to enabling small businesses to both adapt to their current situation and plan for the future.
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To tackle this, small businesses can benefit from streamlining and automating their accounting processes. Improving your ability to track costs and expenses enables your company to operate more efficiently, with more accurate predictions for the future and better information to use in your business strategy.
These 6 useful tips will help you streamline your accounting to save your business both time and money:
Automate and incentivise invoicing
Getting clients to pay invoices on time is a challenge for businesses of any size. Almost a third of all invoices sent by businesses in the UK are paid later than the agreed terms.
While larger organisations may be able to absorb this disruption to their income, a late invoice payment can greatly hinder small businesses’ ability to manage cash flow as your income becomes unpredictable.
This problem can be tackled by improving the way you send out invoices and incentivising prompt payment from customers. Use an invoicing app to schedule your invoices to be sent out with enough time for clients to act before the invoice is due.
A text reminder that you have sent out an invoice can also help ensure customers don’t forget to pay or leave it too late. Plus you can also send follow-up SMS messages to gently remind clients about outstanding invoices, and warn them about potential late payment fees or withdrawal of service.
It is important to make it as easy as possible to pay your invoices, ensuring that clients can respond faster even when they are busy. This means using an invoicing system that accepts payment through a range of digital payment methods.
Also consider encouraging clients to pay faster by offering discounts for customers who make early or advance payments.
Utilize accounting apps
Using accounting software not only saves you time and money on accounting costs, but it also helps your business avoid expensive accounting and tax calculation mistakes.
An accounting app makes it easy to record and categorize your income and expenditures by automatically importing transactions from your bank account, improving your ability to track your monthly costs and progress towards profit milestones.
Recording all of this data yourself can create hours of work each month, and something as simple as a typo or missed entry can lead to an expensive error that takes yet more time to fix. Furthermore, it means more of your time spent on tedious work and less spent on growing your business.
Over time this can sap your enthusiasm, especially if you are a new business owner without prior experience managing business finances.
Choose an accounting app that allows you to easily generate reports and profit and loss statements to let you make business plans for the future without the need to spend valuable work hours on manually entering and analysing data.
These are exactly the kind of monotonous tasks that can lead to human error as well as making for a dull workday, especially for small businesses without the resources for a full-time accounting team. On average, 3.6% of US supplier invoices contain mistakes due to human error.
Tracking your business expenses on a daily basis makes it much easier to monitor and predict your costs and monthly spending, helping you avoid any nasty surprises at the end of the month. Tracking your expenses accurately is an important part of knowing the minimum monthly profit you need to make to meet your business goals.
Keeping track of your business expenses is much easier when all of your business costs are paid from a business bank account separate from your personal finances. This is one of the many reasons it is always a good idea to use a separate bank account for your business, even if you are only just starting up.
Besides enabling you to plan ahead and manage your cash flow using a more complete picture of your finances, tracking expenses inconsistently could cause you to overpay tax.
There are three key types of expenses you need to consider:
1. Fixed Costs
Monthly bills such as utilities and software subscriptions are the easiest expense to manage, since they stay the same every month.
2. Variable Expenses
These include employee spending and purchases that can be scaled according to your monthly budget. Tracking these and planning ahead is vital for ensuring a healthy cash flow.
3. One-Time Purchases
You can’t always plan ahead for unexpected expenses such as repairing or upgrading equipment or paying for workers to attend a business course. This is why your expense budget should always allow some room for these purchases.
Without this information, you won’t know how much you can spend and the expenses your business can afford each month. Furthermore, tracking expenses daily ensure you are able to reimburse employees for work-related spending more efficiently.
In addition, keeping track of your expenses throughout the year means you will have much less work to do when tax deadlines come around.
Keep your receipts
It is vital to keep the receipt for any business-related purchases in order to later claim for your business expenses. Do this for even the smallest business purchases, as even if you don’t claim the expense, keeping records of those purchases anyway will help you monitor spending and manage your budget.
It might feel like wasted effort to carefully record every last small purchase, but doing this consistently might help you spot unnecessary expenses and costs that are much higher than they should be.
Remember that if you are working from home, some of your domestic bills such as your Internet connection and phone line can be classed as business expenses. Similarly, if you need to buy office equipment and furniture to work at home, this is also a business expense.
Pay attention to taxes
It is important to do your research into all of the tax rules that apply to your business. This includes making sure your employees are correctly classified for payroll tax.
You will need to set some of your income aside ready for each tax season, so calculating your expected taxes ahead of time will allow you to plan and budget more effectively and avoid having cashflow problems at the end of the tax year.
Even if you are a family or solo operation, it is vital to keep your business expenses completely separate from your personal expenses and funds. If not, this can cause a major headache when it comes to calculating your business expenses for tax, leaving you to spend hours going through bank statements and receipts.
Schedule reminders for when your tax deadlines are due to give yourself plenty of warning, and plan ahead to ensure you can submit everything in time.
By using SMS to schedule their tax reminders, accounting firm Evans & Associates was able to greatly speed up their clients’ tax returns, going from potentially waiting a day or more for a response to an average response time under 20 minutes.
Prioritize labour costs
Labour costs are the biggest cost for most small businesses, absorbing an average of 20% of companies’ total revenue. For some industries, this number can go up to 50%!
As a result, meeting your financial obligations to employees is a top priority. In addition to payroll, employee expenses, insurance premiums, travel costs and other perks all need to be taken into account when considering your monthly labour costs.
When calculating your labour costs, always leave a healthy margin for unexpected expenses in addition to the fixed costs. You can’t always predict every employee expense, or the need to hire or replace staff.
In addition, it is important to track the cost of overtime and extra shifts, as you can use this information to make more accurate predictions of your labour costs in future months.
Small businesses that lack the information to manage their cashflow effectively face unnecessary stress throughout the year and especially in tax season, and can leave your company unable to take advantage of opportunities due to unpredictable income.
Thankfully with the right tools, improving your accounting practices no longer takes huge amounts of time and financial expertise, with accounting software able to provide major optimizations at a minor cost.
Automating your accounting processes reduces your workload and the opportunity for expensive mistakes. It also enables you to more easily track your revenue and costs, leading to more informed business decisions and better information to plan your business strategy.
Making your business’s accounting more efficient is vital to saving time and money, and to put your business in the best position to grow.
Alexa Lemzy is a content manager at TextMagic – SMS marketing service provider. She writes about the ways mobile technologies transform businesses and customer experiences. You can check out her profile on Twitter – @Alexa_Lemzy.