Accounting & Financial
Management Systems  

 

Sound financial management is fundamental for any successful venture. Without accurate financial information you will be unable to assess the health of your business and make the right decisions to ensure it prospers. A good record keeping system will also help you prepare financial statements for potential investors, prepare your tax returns and ensure you and your employees are paid on time.

When establishing your financial management systems, keep the following 'rules of thumb' in mind.

Set Up a Separate Checking Account for Your Business

Establishing a separate account for your business is simple and inexpensive. Having a separate account makes it easier to differentiate personal and business transactions and avoid the temptation to intermingle funds.

When selecting a bank or credit union consider:

  • Account policies and fees such as minimum balance requirements, monthly deposit rules, access to cancelled checks, monthly maintenance fees and overdraft fees
  • Accessibility and convenience including access to ATM machines and after hours depositories
  • Electronic banking services including integration into a computerized accounting software package
  • Access to and quality of customer service

Keep Detailed Records

You want to keep a record of all the financial transactions incurred by your business. For every transaction you will want some sort of documentation such as a sales receipt, cancelled check, invoice or deposit slip. Keep these documents on file so that you can verify the transaction later on if the need arises. The Small Business Administration has prepared aretention schedule to help determine how long to keep what type of records.

Learn the Basics of Business Accounting

The brief summary below is not intended to be comprehensive but rather to familiarize you with some basic concepts. You may find it helpful, if you have not already done so, to take a course in or register for a workshop on small business accounting.

Most businesses use a particular bookkeeping method called 'double-entry accounting' to keep track of the business's accounts -- its assets, liabilities, capital, income, and expenses.

Assets are the things the business owns and are typically divided into two categories -- current assets and fixed assets. Current assets are things with a high liquidity such as cash, accounts receivable and inventory. Fixed assets are more permanent things such land, buildings and business equipment and furnishing.

Liabilities, debts the business owes, likewise tend to fall into two categories -- current liabilities and long-term liabilities. Current liabilities are items due in the short-term such as bills, payroll, and other accounts payable. Long-term liabilities are typically debts that extend beyond a year, such as a loan or mortgage.

Capital, also called owner's equity, represents the owner's shade of the business and includes the investments made by the owner and retained earnings (profit).

Income is the revenue generated by the business through the sale of goods and services, earned interest and rents.

Expenses are the expenditures made by the business. Each expenditure is assigned a particular category such as salaries, supplies, and utilities.

Each financial transaction incurred by the business is first entered into a journal. Journal entries include all the details of the transaction including the date, the payer or payee, the amount, and how it should be classified. Next, each transaction is posted to the general ledger. With a double-entry system, as the name implies, two entries are made for each financial transaction incurred by your business -- one entry as a debit in one account and the other entry as a credit in another account. The general ledger is the place where all these account entries are summarized.

At the end of your fiscal year, the twelve month period your business uses as its accounting year, the totals in each account are tallied and a trial balance is prepared. The trial balance presents each debit and credit as well as the total of debits and credits. These totals should equal one another. If they do not, it indicates a bookkeeping error that should be corrected. You may also find it useful to run monthly or quarterly reconciliations.

After you have reconciled your books, you can prepare the fundamental financial statements for your business: the balance sheet, the profit and loss statement and the statement of cash flow. The balance sheet is a report of your business's financial condition at a given moment in time and includes a summary of assets, liabilities, and capital. Theprofit and loss statement, sometimes called an income statement or P&L, summarizes the revenues and expenses of the business over a period of time in order to determine the gains or losses for that period. A cash flow statement is a projection of future revenue and expenses.

Purchase a Computerized Accounting Software Package

Good financial management for small businesses has been made much simpler with computer assisted accounting programs. Most programs have streamlined the recording of journal entries, posting transactions to the general ledger, preparing trial balance, and compiling financial reports. Many programs also offer additional features including point-of-sale, job costing and invoicing, tracking payroll and employee expenses, check writing, and credit card processing. Some software packages even offer versions tailored to specific industries.

When considering different software packages make sure the one you select is:

  • Compatible with your computer's operating system and hardware
  • Appropriate for your needs.
  • Can download data from your financial institution
  • Provides adequate customer service
  • Familiar to your accountant or bookkeeper

The most consistently top rated software titles include:

Learn to How to Analyze Your Records

Once you have established a sound financial management system and are preparing financial reports, you can start using this information to assess the health of your business and better infrom decisions. Financial performance is often measured by calculating financial ratios, the relationship between two values. The most common types of ratios calculated for small businesses are liquidity ratios, efficiency ratios, and profitability ratios. Knowing these ratios can help you track the performance of your business or compare your performance to other businesses in your industry.

A liquidity ratio is a measure of avaialable funds compared to payment obligations and is used to measure a business's ability to pay off short term debts and operate day-to-day. An efficiency ratio, sometimes called an activity ratio, is a measure of how well the business leverages its assets to create income. Profitability ratios measure the bottom line a business's bottom line performance. The U.S. Small Business Administration's guide, Financial Ratios and Quality Indicators, provides examples of how to calculate some of the most common business ratios.

One use of financial ratios is to compare the performance of your business to others in your industry. Three of the most widely used sources of comparative industry financial ratios are the Robert Morris' Annual Statement Studies, theAlmanac of Business and Industrial Financial Ratios published by Prentiss Hall, and Dun & Bradstreet's Key Business Ratios.

To obtain copies of these publications contact your local library:

Know When to Seek Professional Advice

Establishing and maintaining sound accounting and financial systems can be a daunting task but you need not take it on alone. Indeed, it is advisable to seek professional advice, especially when tax time roles around. The level of support required will vary according to the size and complexity of your venture. For some it may be sufficient to retain a part-time bookkeeper to help balance your books. For others it may be necessary to hire a full-time administrative professional. Still others may need the services of a board certified public accountant (CPA).

When it comes to selecting a professional first take time to think through the needs of your business and make sure those you are interviewing can meet those needs. Be patient, make sure your working styles are compatible, check references, and remember to ask about fees. Good sources for professional references include family members, other businesses, your banker, and local chambers of commerce