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Friday, February 21, 2014

8 bookkeeping secrets for business owners

By Phil Steel

Small business accounting tips
Proper bookkeeping practices improve business efficiency
Starting your own business is no small endeavor! With the satisfaction of being your own boss however, comes a host of other challenges. The most important of these are being able to survive, sustain and succeed despite competition and market forces. 

According to surveys done on the subject –just half of the businesses survive beyond the initial years. Those that do, do so because they work according to a business plan, budget well, correctly understand their financials, apply appropriate bookkeeping practices and have accurate cash flow projections.

According to a document authored by the Philadelphia Bar Association, the top bookkeeping issues that small business owners face, range from ‘selecting the wrong business formation,’  ‘lack of a sound business accounting system,’ ‘lack of qualified accountants on staff,’ ‘faulty understanding of cash vs. accrual accounting or bookkeeping,’ ‘not being able to maintain proper financial records’ and ‘inability to properly prepare and file tax returns and reports.’

Provided below are some revealing suggestions from the Philadelphia Bar Association, to arrest these issues.

Lesser known bookkeeping secrets that business owners must know:

  • Business formation: When selecting their business formation whether - Sole Proprietor, LLC, LLP, S-Corp, or CCorp- business owners must not base their judgement only on the legal protection each formation offers, but also on the bookkeeping consequences of each.
  • Bookkeeping systems: These are not universal. They vary according to the industry and organization a business operates in. Thus, their selection must be done according to the needs of the particular business.
  • Computerized bookkeeping packages: Before purchasing or subscribing to any popular computerized bookkeeping package, it is essential that business owners, study the requirements of their enterprise thoroughly, research the package carefully, and then buy it only if it matches the requirements of their business.
  • Accounting staff: Business owners are advised to employ only qualified and experienced accounting professionals who have the necessary knowledge of bookkeeping, relevant to their specific business and industry.
  • Industry specific knowledge: When recruiting staff, greater attention needs to be paid to the candidate’s in-depth understanding of the ‘debits and credits’ specific to the business and industry in which the business owner operates; rather than his mathematical aptitude.
  • GAAP compliant method of bookkeeping: It is wiser to follow the accrual method of bookkeeping, as compared to the cash principal, because the former is considered more generally accepted (GAAP). The accrual method of bookkeeping is recognised to be GAAP-compliant. It is also more readily accepted by third-party users of a business’s financial statements, such as banks, investors, and other creditors.
  • Audits and tax preparation: No business owner can risk ignoring proper bookkeeping practices, because  eventually important  documents like bills, cancel checks, and bank statements will be needed for financial statement audits and for tax preparation.
Some enlightening insights provided by Eileen P. Gunn in her blog in Entrepreneur.com. further highlights, how proper bookkeeping practices can lead to entrepreneurial success, in the long term.
  • Appropriate bookkeeping is linked to entrepreneurial success
Eileen P. Gunn believes that following the right bookkeeping practices, enables business owners, to be able to plan for important expenses in the future. “You'll avoid taking money out of the company during the flush periods only to find yourself short in the slower months, when costly projects like upgrading computers or replacing factory components usually happen,” she states. In addition, doing so, also helps entrepreneurs track expenses, record deposits accurately, set aside money for paying taxes and follow up on pending payments and bills that still have to be issued to customers, for whom work has been done, she states.

About the author: This article was written by Phil Steel, an experienced writer on finance, who is a keen follower of the latest trends in the sphere of bookkeeping.

Image license: SmartPhotoStock