Small businesses are vital to the economy because they create jobs and add to the tax base. Unfortunately, many small businesses end up failing because they overlook the importance of managing their time and finances effectively. The good news is that accounting can be easier than you think.
Given how difficult the entrepreneurial journey is, entrepreneurs can easily become overwhelmed with all of the tasks they have to juggle and let their finances fall to the wayside. But managing your money effectively is crucial so you can be better equipped to face the challenges that come with owning a business.
Overall, accounting can make or break a business. Here are 3 accounting tips for entrepreneurs to help their business thrive and not just survive:
Tip #1 – Pay attention to your cash flow and build cash reserves
Cash flow is crucial because poor cash flow is one of the top reasons why small businesses fail.
By knowing what your cash flow looks like for both the short and long term, you can plan ahead and grow your business more quickly and confidently.
Simply put, cash flow is the measure of cash coming into a company, minus the measure of cash going out. A positive cash-flow is exactly how it sounds: more money is coming in than needed to pay for expenses, which can be used for business growth. A negative cash-flow means that more money is going out than coming in, which can lead to problems like unexpected expenses or financial instability.
Why cash is so important to a business
Ultimately, cash flow is an important aspect to business finance. Don’t underestimate how much cash your business might need for paying expenses such as staff salaries, suppliers, utilities, advertising costs, inventory, etc. Cash flow is the lifeblood of any business because it impacts how much capital your company has on hand or can borrow.
Cash flow vs sales
Additionally, it’s important for a business owner to understand that cash flow is different from or sales. The problem with just looking at the sales is that many businesses don’t receive payment instantly after processing a sale. While they may have to wait months for a payment from a client, businesses still have expenses to cover. This could lead to some serious cash flow problems.
Consider these additional cash flow tips
Now that we’ve covered why cash flow is important, let’s look at some strategies you can implement so that you are better equipped to manage your cash flow:
- Administer a regular cash flow analysis: A cash flow statement helps you know where your business stands. No need to use spreadsheets either, accounting software is a viable tool that generates a cash flow statement and can reconcile accounts. Accounting software can also alert you when there’s a sudden change (e.g. drop in your cash flow).
- Cut unnecessary expenses: First, identify all of your business expenses, then list which ones are crucial and see which ones can either be eliminated or downgraded (e.g. moving to a smaller office or going remote altogether). A common mistake that business owners make is assuming all expenses are of equal importance.
- Make it easier for customers to pay: Preferably, you want a customer to be able to pay you as quickly and efficiently as possible. Consider accounting or invoicing software that includes a ‘Pay Now’ button so customers are one click away from making a payment. Payment plans are another option to make it easier for customers.
- Cash flow forecasting: Once you have a good idea where you stand and you’ve implemented these other strategies, it’s time to see what’s in store for your future. That’s where a cash flow forecast comes in, by giving you a clear picture of what your future finances will look like and helping you plan ahead of time.
Tip #2 – Organise your finances with accounting software
According to a recent report by Codat, more than 3 million small-to-medium enterprises (SMEs) in the UK don’t use accounting software. The report estimates that “50% of businesses in the UK have adopted accounting software and the remainder use a combination of Excel spreadsheets and manual records.”
This is a surprising stat given all of the benefits for using accounting software, especially for small businesses. Cloud-based accounting is accessible from anywhere at any time, which means you can collaborate with an unlimited number of users in real-time.
Most notably, accounting software saves you time with automated bank feeds, digital copies (no more searching for paper files), and automatic data import/export.
Top tips on choosing the right accounting software
Here’s what to look for when choosing your accounting software:
- Consider your business dynamics: Before you start searching for the right accounting software, consider the size of your business, the industry you operate in, and the amount and frequency of transactions.
- Assess your business and accounting needs: When it comes to your business, you’ll want to assess your financial “competency” because a common mistake for entrepreneurs is assuming that accounting software will do everything for them. Once you have this knowledge, you’ll be able to know what to look for in a solution.
- Research the software available: There’s a plethora of accounting software available, so it’s important to understand what they offer. Some are fairly easy to use and require little accounting knowledge, others have in-depth reporting and lots of automated features (e.g. smart matching technology). Do your research, ask around and make sure you know what you need.
Tip #3 – Delegate to work on the business instead of in it
This is a question all small businesses wrestle with: when is the right time to delegate. For example, in the case of accounting duties it has advantages and disadvantages, so the key is recognizing the signs that it’s time to delegate.
Depending on the amount of transactions you have, those of you who are just starting out might find accounting software sufficient for your immediate needs. Software has changed the game when it comes to automating a lot of what used to require a dedicated bookkeeper.
The right time to delegate
That being said, a lean startup might not have the overhead to hire an accountant or an outside expert to manage more particular tasks. This is where having a handle on your cash flow is key: know what kind of expertise you can afford.
Don’t underestimate the value that the right small business accountant can bring to your venture. They are more than extensions of accounting software. A good accountant can make suggestions to avoid headaches, streamline your business, and even improve your overall business plan.
Why delegating accounting is a smart choice
Finally, outsourcing your accounting ensures fewer headaches during tax time. Businesses need to register for VAT if they bring in more than £85,000 in revenue in a 12-month rolling period.
As the UK’s tax system evolves and goes fully digital, an accountant will help you keep abreast of changing requirements. Even if you don’t have to register for VAT, accountants can assist you with much more than just filing and receiving your tax return.
Best Tips to choose the right accounting help
If you’ve decided it’s time to delegate, keep these important factors in mind:
- Pay attention to qualifications: Anyone can go into business as an accountant. Chartered accountants, on the other hand, have an internationally-recognized professional designation and, therefore, bring you peace of mind.
- Consider what services you need: Most accounting firms offer a variety of services, from simple payroll management, to balancing all your books and giving you bookkeeping tips. You might not need or want all of them.
- Create a good working relationship: Remember that you are paying your accountant for their advice. Be open with them about your business goals, and be receptive to their feedback about your finances.
Whether you’re the type of entrepreneur who loves digging into the numbers or you’re more of the “big ideas” person, managing your finances doesn’t have to be hard. It comes down to cash flow, reliable software, and delegating to the experts.
If you need advice on how cloud accounting can work for your business, you can request a free consultation right here. Implementing these 3 tips will make your business more resilient, efficient, and adaptable.