How to Create your Own Accounting System for a Successful Business
Accounts for most SME business owners can be seen as a chore. While accounting is an essential business function, there are other more interesting jobs and tasks to do than manage the books.
However, as any tradesman will tell you – measure twice, cut once. It’s important to measure everything before you take an action. If you can’t measure something, then you can’t take an action that you know will benefit your business.
This is why I would like to encourage you to create a real-time Accounting System, one that suits your individual business needs and provides you with a clear snapshot of how your business is actually performing. A system that ensures your bookkeeping records are up to date so that you have full visibility on your financials.
In the first of a two-part series, we introduce key elements which ought to be included in Your Accounting System process.
Getting Started
You already have much of the information needed to create your Accounting System, but it’s pulling it together in such a way that suits you. It’s important that you talk to your accountant as there is ‘no one size fits all Accounting System’. We’d be happy to help you create one.
In Part One of this article series, I would like to focus on the aspects of Cashflow that is the very lifeblood of your business.
Cashflow
Cashflow is key. It’s one of the main reason’s businesses can go out of businesses, in fact 82% of start-up businesses go out of business because of cashflow.
I’d like you to consider the following when creating a Cashflow system within your Accounting processes.
1. What is your breakeven point?
That’s the amount that you need to make before you put the key in the door. It is the point at which your total revenue equals total costs or expenses. At this point, there is no profit or loss. This is a figure you need to know, and naturally depending on your business, take seasonal variations into account.
2. What’s your stock level?
It’s important to manage stock. Too much stock can tie up cash along with the increased risk that the slow-moving stock becomes obsolete. On the other hand, there needs to be enough stock to meet demand and not turn away sales.
Consider getting purchase discounts from bulk buying of certain fast-moving stock. Then a good way to move on slow moving stock is to apply your own discounts for these items. This will keep your stock moving and bring in cash. Also please ensure that you have safety stock levels system in place including minimum reorder levels.
3. When do you pay your creditors?
If your credit terms are 30 days, pay on the 30th day. Unless there is an incentive to pay early, then don’t. The chances are you may have a late paying debtor so if you pay early to your creditor and your debtor pays late, then you have a cash flow issue. Pay according to your credit terms.
Sales
Building a sales system into your Accounting System is key. It’s often said that a sale isn’t a sale until the money is in your account. Ensure you have clear benchmarks in terms of your sales turnover and growth also, what is your market share size and what are your targets for growth? Monitor your targets regularly to assess if they are being achieved and if not, what actions can be taken as part of your sales strategy and marketing to address this.
1. Do you run a credit check on new clients before you take them on?
You’d be amazed at the amount of people who don’t. Similarly you’d be amazed at the amount of people who you think are credit worthy who have a history of not paying suppliers. As part of best practise, I would recommend to request two trade credit references from any new client and also to set in place clear credit terms and limits from the get go.
2. What’s your process of raising invoices?
Ideally you should raise an invoice the minute the job is complete or the product delivered. Your client is happiest with you at this time. As time moves on, the value of the completed work may be forgotten. Issue invoices quickly as soon as the work is done.
3. Do you follow up on outstanding invoices?
I once spoke with a business owner who said that they do not pay on receipt of invoice. They pay when they get a statement or a call from the supplier asking for payment. I certainly don’t recommend that, but it does highlight the need to have a follow up procedure in place. Have a clear process in place for this as part of your debtors management.
4. Do you issue credit notes?
Not all businesses issue credit notes but there are times when it’s needed. Often times it’s good to give a credit note rather than a refund of cash. It must, however, be part of your terms and conditions.
5. Do you know how long it takes for a business to pay you?
This is a Key Performance Indicator that I speak to my clients about regularly. Remember you are not a bank. You are a business owner who needs cash in and this KPI can be monitored and reviewed as part of reducing your debtors days in your business. You can also implement an electronic payment processes so that payments can be facilitated very easily as part of issuing invoices.
Segregation of Duties
I wanted to highlight the importance of management of systems in your business. There are a few things that you will never really see in an accounting book, one of which I wanted to draw your attention to here – segregation of duties.
There are more cases of fraud in small to medium sized businesses than you will ever know. Some of it is published in the media when it goes to court but many businesses avoid negative press. One way to avoid fraud is the Principle of Segregation of Duties in the financial system.
As part of your internal controls checks and balances are important and they are there for a reason. Who signs for deliveries? Who opens the post? Who balances the client accounts? Who authorises payments? It’s vital to ensure that you have a clear system, audit trail and signatory process in place to safeguard your business.
If you’re the owner, and you do all these tasks, know that in the future as your business grows, it won’t be you doing all these jobs. If you build in roles and segregation of duties now, even if it’s your name assigned to each role, it allows you to scale up with confidence and minimise the risk of fraud in your business.
In Part 2 of Create your Own Accounting System for Success, we will go through direct and indirect costs in terms of variable and fixed in your business.
If you’d like to discuss anything in this article, please get in touch.
AG Associates is an accounting practice that specialises in affordable accounting, advisory, taxation and payroll solutions for the SME business owner.
For further information please contact Angela at Unit 11, Eastgate Way, Little Island, Cork. 021 4824723 or angela@agassociates.ie
