A business’s bookkeeping system that tracks the money coming in versus the money going out is arguable the most critical aspect of business management.
Aside from every business owner’s inherent desire to stay in business, there are two other key reasons to set up a good bookkeeping system:
- It’s legally required.
- Bookkeeping records are an excellent business management tool.
Of course, staying out of jail is a good thing. And a good basic accounting system will provide useful financial information that will enable you to run your business proactively rather than reactively when it comes to important financial decisions
How do you choose a good accounting system?
While many businesses still operate using a manual bookkeeping system (cheque book and receipts), it’s generally not a good idea to use this type of system.
It’s far more efficient to go with an automated system, and there are now many bookkeeping software packages on the market that won’t break your wallet.
Financially complex businesses, such as a manufacturing concern, can buy industry-specific software, but there are also many generic programmes available that would suffice for most businesses.
A good accounting system meets three criteria
- Firstly, it’s accurate: the numbers must be right. Automation will help ensure accuracy, but it won’t guarantee it. Bookkeeping numbers should be checked and rechecked to maintain accuracy.
- Secondly, it’s relevant. The system provides information that’s required and needed. The law requires that certain pieces of financial information be tracked for tax reporting purposes. Obviously, these items (which comprise a basic income statement and balance sheet) must be measured and tracked. However, it’s equally important to include information that you’ll need to run your business successfully.
- Thirdly, a good accounting system is user-friendly. It shouldn’t require an expert to operate and interpret. Most of the Windows-based bookkeeping software packages on the market today are pretty user-friendly. They include tutorials and help screens that walk you through the programmes. Find one with which you are comfortable, even if it doesn’t have some of the bells and whistles of more complicated programmes
What is the function of an accountant?
Accountants help you keep an eye on major costs as early as the start-up stage, a time when you’re probably preoccupied with counting every paper clip and postage stamp. When you’re looking at the details, accountants help you keep your eye on the big picture.
Even after the start-up stage, many business owners may not have any idea how well they’re doing financially until the end of the year, when they file their tax returns. Meanwhile, they equate their cash flow with profits, which is wrong. Every cent counts for business owners, so if you don’t know where you stand on a monthly basis, you may find you’re not around at the end of the year.
No other business relationship has such potential to pay off. Nowadays, accountants are more than just bean counters. A good accountant can be your company’s financial partner for life – with intimate knowledge of everything from how you’re going to finance your next forklift to how you’re going to fund your daughter’s university education.
While many people think of accountants strictly as tax preparers, in reality, good accountants have a wide knowledge base that can be an invaluable asset to a business. A general accounting practice covers four basic areas of expertise:
- Business advisory services
- Accounting and record-keeping
- Tax advice
- Auditing
These four disciplines often overlap. For instance, if your accountant is helping you prepare the financial statements you need for a loan and he or she gives you some insights into how certain estimates could be recalculated to get a more favourable review, the accountant is crossing the line from auditing into business advisory services.
And perhaps, after preparing your midyear financial statements, he or she might suggest how your performance year-to-date will influence your year-end tax liability.
Roles of an accountant
What role should accountants play in providing business advisory services?
This is where accountants can really earn their keep. Since the accountant is knowledgeable about your business environment, your tax situation and your financial statements, it makes sense to ask him or her to pull all the pieces together and help you come up with a business plan and personal financial plan you can really achieve.
Accountants can offer advice on everything from insurance (do you really need business interruption insurance, or would it be cheaper to lease a second site?) to expansion (how will additional capacity affect operating costs?)
What role should accountants play in accounting and record keeping?
Accounting and record-keeping are perhaps the most basic accounting disciplines. However, most business owners keep their own books and records instead of having their accountant do it.
The reason is simple: If these records are examined by lenders or SARS, the business owner is responsible for their accuracy; therefore, it makes more sense for the owner to maintain them
Where accountants can offer help is in initially setting up bookkeeping and accounting systems and showing the business owner how to use them. A good system allows you to evaluate your profitability at any given point in time and modify prices accordingly. It also lets you track expenses to see if any particular areas are getting out of hand.It allows you to establish and track a budget, spot trends in sales and expenses, and reduce accounting fees required to produce financial statements and tax returns.
What role should accountants play in providing tax advice?
Tax help from accountants comes in two forms: tax compliance and tax planning. Planning refers to reducing your overall tax burden; compliance refers to obeying the tax laws.
What role should accountants play in auditing?
Auditing services are required for many different purposes, most commonly by banks as a condition of a loan. There are many levels of auditing, ranging from simply preparing financial statements from figures that the entrepreneur supplies all the way up to an actual audit, where the accountant or other third party gives assurance that a company’s financial information is accurate.
Hiring an accountant
Ask about fees upfront
Before engaging an accountant, ask about fees upfront. Most accounting firms charge by the hour, and these fees can range considerably. However, there are some accountants who work on a monthly retainer. Figure out what services you’re likely to need and which option will be more cost-effective for you.
Get quotes
Get a range of quotes from different accountants. Also, try to get an estimate of the total annual charges based on the services you’ve discussed. Don’t base your decision solely on cost, however; an accountant who charges more by the hour is likely to be more experienced and thus able to work faster than a novice who charges less.
References are a must
Don’t hire anyone without getting references, particularly from clients in the same industry as you. A good accountant should be happy to provide you with references. Call each of the references they supply and ask how satisfied the client was with the accountant’s services, fees and availability.
Agree on terms and conditions
After you’ve made your choice, spell out the terms of the agreement in a so-called “engagement letter” that details the returns and statements to be prepared and the fees to be charged. This ensures you and your accountant have the same expectations and helps prevent misunderstandings and hard fee.
What is accrual accounting?
The term “accrual” refers to any individual entry recording revenue or expense in the absence of a cash transaction
Two basic methods
Most businesses typically use one of two basic accounting methods in their bookkeeping systems: cash basis or accrual basis. While most businesses use the accrual basis, the most appropriate method for your company depends on your sales volume, whether or not you sell on credit and your business structure.
Cash method
The cash method is the most simple in that the books are kept based on the actual flow of cash in and out of the business. Income is recorded when it’s received, and expenses are reported when they’re actually paid.
The cash method is used by many sole proprietors and businesses with no inventory. From a tax standpoint, it is sometimes advantageous for a new business to use the cash method of accounting. That way, recording income can be put off until the next tax year, while expenses are counted right away.
Accrual method
With the accrual method, income and expenses are recorded as they occur, regardless of whether or not cash has actually changed hands. An excellent example is a sale on credit. The sale is entered into the books when the invoice is generated rather than when the cash is collected.
Likewise, an expense occurs when materials are ordered or when a workday has been logged in by an employee, not when the cheque is actually written. The downside of this method is that you pay income taxes on revenue before you’ve actually received it.
Should you use the cash or accrual method in your business? The accrual method is required if your business’s annual sales exceed a certain amount of money and your venture is structured as a corporation. In addition, businesses with inventory must also use the accrual method.
It’s also highly recommended for any business that sells on credit as it more accurately matches income and expenses during a given time period. The cash method may be appropriate for a small, cash-based business or a small service company. You should consult your accountant when deciding on an accounting method.