Business Management Articles
Want a Healthy Business? Start with a Healthy Accounting System
Today’s accounting software may be impressive, but it’s not omnipotent.
With a wide range of sophisticated accounting packages available, too many business owners tend to focus on sales and delegate financial management to an accounting package.
Business owners, however, need to understand the numbers behind the sales. When you implement and monitor a comprehensive accounting system (of which software is just one component) you are able to identify, measure, record – and understand – the financial health of your business.
An effective accounting system provides a business owner with access to accurate, timely information. You can calculate sales and expenses; minimize taxes payable; monitor cash flow, inventory and profits; and flag any emerging financial problems.
Although each accounting system is as individual as the business it supports, every good system shares three characteristics. First, it should be simple: both easy to use and to understand; otherwise you won’t use it, or understand it. Second, it should be timely. You need to be able to produce financial reports that are as current as possible. And third, you should have a flexible system so that as your business evolves, your accounting system can address your changing information needs.
Following are the components that form the basis of an effective accounting system.
Set up a reliable bookkeeping system
A reliable bookkeeping system ensures that all business transactions – from sales, to invoice payments, to employee payroll – are accurately recorded. You can then use this information to pay government remittances and tax returns, prepare financial statements and monitor the financial health of your enterprise.
Bookkeeping records every financial transaction in the chart of accounts, which comprises the basic elements of the balance sheet and income statement: assets, liabilities, equity, income and expenses.
The structure of a chart of accounts varies according to the characteristics of a business, such as:
- industry;
- legal structure (sole proprietor, partnership, corporation);
- government remittance requirements;
- type of accounting method (cash or accrual);
- whether you sell products and/or services;
- inventory requirements;
- need to track individual programs or departments;
- single or multiple locations;
- payroll requirements.
An accountant experienced with your type of business can help you set up a chart of accounts and, if needed, recommend a qualified bookkeeper who can record transactions and generate timely financial reports.
Purchase the right accounting software
Selecting the right accounting software for your business will ultimately save you time and money, reduce opportunities for errors, and generate valuable information for decision making.
Finding and implementing the right package requires assessing your accounting needs, such as:
- What financial information do you need to operate your business?
- Who will use the accounting software?
- Do you have payroll?
- Do you have to track inventory?
- Does your business have special characteristics (such as conducting e-commerce, selling in multiple jurisdictions, etc) that your software must address
- With what other software your business uses must the accounting package integrate?
- What software does your bank support?
- What software does your accounting firm support?
- What taxes must the software support?
- Is the package flexible and can it be readily upgraded?
Consulting with your accountant can make this process easier and faster. Before making a final purchase, take the accounting package for a test drive. Most programs have trial versions; take advantage of this by determining how comfortable the package feels to you and any employees who will be using it.
Regularly review financial reports
In order for your business to be successful, you need to make the best decisions possible at the best possible time. This requires generating, and reviewing, financial reports on a timely basis.
Some accounting packages produce basic financial reports; others offer more sophisticated options, including financial statements, budgets and even key financial ratios. As well, certain accounting packages have graphical reporting capabilities that make it easier for users to interpret financial information, which is presented in formats such pie charts or line charts.
Depending upon the type and size of your business, as well as your information needs, your accounting system can be designed to generate reports as frequently as you wish. Some software packages even have "event triggered reporting" capabilities. This means that you can establish parameters and the system alerts you when they are exceeded. So for example, you might establish parameters for cash on hand or gross margin or inventory and, if these fall below pre-determined thresholds, you receive an alert. This reporting feature enables you to act on financial problems before they become too serious to resolve. An experienced accountant can help you established the appropriate thresholds and advise you on the best course of action should the red flags fly.
The future of your business, however, ultimately rests with you. To be successful, you need to understand the system you implement and actively monitor the financial status of your enterprise. With the right accounting system in place, you have the necessary tools to create a thriving enterprise.
