Anyone who has run a business knows that there is a seemingly endless stream of details that must be dealt with on a daily basis. But while some of these tasks may occasionally fall by the wayside or be put off for another day, setting up a reliable accounting system is one that should not be ignored or delayed. Having a well thought out accounting system is essential to the success of any business.
Without the right accounting system in place, you can miss out not only on the peace of mind afforded by well-organized finances, but also on the invaluable opportunity to learn from your numbers. With the right accounting and tracking system, you can use your financial data to drive your operational performance and will likely find yourself with opportunities to succeed like you never thought possible.
There have been tomes written about accounting and we do not expect this blog post to replace the wealth of information that is already available. Rather, our aim is to lay out some of the most important groundwork to keeping your business in sound financial shape. One important element of a solid accounting system is the practice of consistent job costing. By carefully tracking the actual costs of completing any one job, you can determine which jobs are making money and which are not. This data makes it easier to decide which jobs make the most financial sense to pursue. By analyzing the trends and patterns of your job costs, you can clearly visualize which jobs are the best fit for your company’s mission and go after those projects.
Another important consideration when it comes to assessing your company’s accounting methods is whether or not they adhere to Generally Accepted Accounting Principles, or GAAP. These rules, which are employed widely by the majority of public and privately held companies, are specifically designed to help businesses make sound financial decisions. GAAP accounting is derived from traditional methods and includes the key principles of regularity, sincerity, permanence, and continuity. Take a look at the table below for a brief explanation of these principles.
|Regularity||The system must conform to the rules and regulations of the company|
|Sincerity||All accounting representatives must perform their duties in good faith and report their findings accurately and honestly|
|Permanence||The accounting system in place should be considered permanent so that future transactions can be accurately compared to past reports|
|Continuity||The accounting system operates under the assumption that the business will continue indefinitely. This principle does not apply only when liquidation is certain|
Adhering to GAAP not only makes any financial audits go much more smoothly, but allows your business to make better financial decisions every step of the way.
Another consideration when setting up your system is whether to abide by the rules of cash accounting or those of accrual accounting. With cash accounting, your expenditures and earnings are recorded when the cash comes in or leaves your bank account. This means that if you make a purchase on credit, the expense is not recorded until the actual cash leaves your account to pay for that purchase. Likewise, you may complete a project one month and not receive payment until the next month. Those earnings will not be recorded until the payment is actually made. Conversely, accrual accounting counts expenses and earnings as soon as the transaction happens. That is, as soon as the job is completed or the product is purchased.
A small business with annual sales less than $5 million can choose between either cash or accrual accounting. This choice should be made strategically but in many ways is ultimately up to the preference of the business owner or manager. The accrual method of accounting can show you sales and expenditures more accurately, which is an aid to making timely decisions. Using the cash accounting method means you will know how much cash you have, but you may not have a truly accurate picture of how your business is performing from month to month since a sudden influx of payments (or lack thereof) can give you the wrong impression.
Finally, it is essential that you pay close attention to the raw data going into the accounting system. At Coltivar Group we like to refer to the principle of “Garbage In Garbage Out.” This idea recognizes that if the information being entered into the accounting system is inaccurate or untimely, it will be of little benefit to those who rely on such data to make decisions. Financial accounting should be used to drive operations. It should be precise enough so managers can make timely decisions to cut costs, pursue different opportunities, or dive into different markets. Even the most perfect accounting system will be useless without the right numbers going into it, so be conscientious.
If you find yourself a bit overwhelmed by accounting data, terminology, and suggestions, you are not alone. The fact of the matter is that most small business owners are not accountants by trade. However, Coltivar Group knows how integral a useful accounting system is to your business and that is why we are here to help. Our accounting experts can help you adjust your current accounting system to fit your needs better, or even help you to build it from the ground up. With years of experience across many industries, we can make sure that you have the data and the systems to make smart financial choices throughout the life of your business.