Effective accounting practices are the cornerstone of any successful business. Without proper financial management, a company risks facing cash flow issues, tax problems, and overall financial instability. For business owners, developing good accounting habits is crucial to ensure the long-term viability and growth of their enterprises. Here are five must-need accounting habits that every business owner should embrace:
1. Organized Bookkeeping:
Maintaining organized and accurate financial records is the foundation of a successful business. Every business needs to keep track of all financial transactions, including sales, expenses, payroll and relevant taxes collected and paid. This can be achieved by leveraging a cloud accounting software like Quickbooks Online and hiring a professional bookkeeper to maintain your books on a monthly or periodic basis. Keeping well-organized and up-to-date financial records allows a business owner understand their company’s financial health, analyze trends and make better informed business decisions.
2. Regularly Reconcile Accounts:
Reconciliation is the process of matching your financial records with bank statements, credit card statements, and other financial documents. Regularly reconciling your accounts helps identify errors, discrepancies, or potential fraud. It ensures that your financial statements accurately reflect the company's financial position, making it easier to detect and address any issues promptly. This process should be done monthly and within 30 days after month-end. It’s advised to have your bookkeeper perform this task as they are most likely able to detect errors, ensure no floating transactions persist and properly advise you of any discrepancies.
3. Budgeting and Forecasting:
Creating a budget and forecasting future financials are crucial for business planning and decision-making. A well-thought-out budget helps you allocate resources effectively, control expenses, and set achievable financial goals. Regularly comparing your actual financial performance against your budget allows you to spot deviations and take corrective measures as needed. It’s recommended to prepare a budget on an annual basis (1 or 2 months before the end of the year-end) and compare your budget to actual numbers on a monthly or quarterly basis. Quickbooks Online has a built-in budgeting feature that also makes comparing budgeted figures to actual figures very easy.
4. Separate Personal and Business Finances:
One common mistake made by many business owners, especially in small businesses or startups, is mingling personal and business finances. This can lead to a tangled mess, making it difficult to track business expenses accurately and impacting tax filings. Establish separate bank accounts and credit cards for your business and avoid using business funds for personal expenses. This separation simplifies accounting and ensures you can better gauge your business's financial performance.
5. Stay Informed About Taxation:
Tax regulations can be complex, especially in Canada, as always subject to change. As a business owner, it's essential to stay informed about tax laws that apply to your business. This includes understanding your tax obligations, deductions, credits, and filing deadlines. Failure to comply with tax regulations can lead to significant penalties and fines, so it's best to work with a tax professional or accountant who can guide you through the process.
Bonus Habit: Regularly Review Financial Reports:
In addition to the five essential accounting habits mentioned above, regularly reviewing your financial reports is crucial. Financial statements like the balance sheet, income statement, and cash flow statement provide valuable insights into your company's financial performance. Regular reviews can help you identify strengths and weaknesses in your business, allowing you to make informed strategic decisions.
In conclusion, adopting these five must-need accounting habits will set the groundwork for financial success for your business. By staying organized, reconciling accounts, budgeting wisely, separating personal and business finances, and staying informed about taxes, you'll be better equipped to manage your business's financial health and steer it towards growth and prosperity. Remember, if you're unsure about certain aspects of accounting or taxation, seeking guidance from a professional accountant can make a significant difference in your business's financial stability.