The key to keeping your business in the black is to have good accounting and bookkeeping practices from the very outset and this article looks at some of the best ways for a small to medium business to stay organised and out of debt.
Have sufficient capital
Many small businesses go under in the first year because they do not take sufficient capital into the business at the start. They take out loans, with the intention of paying them with profits, but if profits do not come immediately, as is often the case, they find themselves with no cash flow and lenders demanding repayment. You need to have enough money to cover running expenses and your own living expenses for the first to three years at least, or until such time as you can realistically expect to start making a decent profit.
Have a business plan
It is important to have business plan, no matter how small your business may be. A business plan consists of a:
- Break-even analysis, which involves working out all your costs and determining how much product or service you need to sell each month and at what price in order to make a profit.
- Profit-and-loss forecast, which is determining how long it will take you to make a profit.
- Cash flow projection, which is estimating and planning for likely future surpluses and shortages in your cash flow over the next 12 months.
Decide on an accounting system
The accounting system you adopt will depend on the size and nature of your business and its expected future growth rate. While you may be able to get away with an Excel spreadsheet or a set of ledgers while your business is very small, you will still need to factor in whether you plan to grow rapidly, in which case you will need an accounting package that can accommodate that growth. With so many cloud-based finance options now available, many businesses are opting for these over expensive software packages, as they allow you to only use and pay for the features that you need.
Pay your bills early
Rather than holding off paying your bills until the last minute in order to earn a few extra dollars in interest on your money, pay your bills early and earn a much more valuable reputation among your suppliers and trading partners. This practice can also earn you discounts with certain suppliers and can help you to negotiate better credit terms with them in the future.
Put it in writing
Oral agreements aren’t worth the paper they’re not written on. Put everything in writing, from staff employment conditions and contracts of service to purchase orders and leasing and storage agreements. This will save you a lot of time, money and headaches further down the track when someone disputes an agreement or reneges on payment.
Don’t mix business and pleasure
Always keep your business and personal finances separate. Set up separate bank accounts and if you take money from the business, make sure there is a clear record of the transaction. This rule also applies to borrowing for the business. Try not to ever use your own assets as collateral for loans, because if your business fails, you will lose those assets to your creditors.
Have an accounts receivable policy
You are going to receive late payments and bad debts, whether you like it or not, so draft an accounts receivable policy to deal with this. Include your trading terms and conditions in all documentation and in any contracts you enter into and if payments are overdue, have a process for dealing with it. This could include penalties for late payment, writing letters of demand and engaging a debt collection agency for those debts you are not able to collect yourself.
Keep accurate records
Making a note of expenses as and when they occur can make tax time a lot easier and ensure you get any deductions that you are entitled to. As well as tracking expenses, you should also plot major expenses you are likely to incur in the next few years, such as computer, plant or equipment upgrades, and set money aside for them whenever you have a surplus during the year. You should also adopt this practice for your taxes, so that if you end up owing the tax man, you already have the rough amount put aside to cover it.
Outsource when necessary
No one can be an expert at everything. If accounting or bookkeeping is not your strong point, don’t risk messing it up or spending all your time trying to work it out, when you should be focusing on your business. While an outside accountant can cost you some money, their services will pay for themselves over time, by helping you to avoid costly errors and to take advantage of savings and efficiencies that you might not have been aware of yourself.
Keeping your accounts in good order is the best way to make sure your business gets up and running in the first place and then is able to ride out the financial ups and downs it will inevitably face along the way.
Being organised and methodical in your record keeping, taking advantage of the latest technology and seeking help whenever you need it are all excellent ways to ensure that you build and maintain a sound financial base on which to grow your business into the future.