The risk of neglecting your business accounts
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In my interactions with clients, I often come across small business owners who are facing numerous challenges. They are focused on marketing their business, attracting customers, and honing their expertise.
Invoicing and tax tend to take a back seat, as the business owner’s immediate priority is to generate revenue. While this is understandable, neglecting accounting can lead to a domino effect of escalating problems. A small error in the first month can compound and grow into a significant issue in subsequent months. Gone unnoticed, such errors can jeopardise the success of your business.
Streamlining your accounting processes
To mitigate the issues that can be created by neglecting your business accounting, here are some practical tips for streamlining your accounting processes.
Embrace Integration
A common stumbling block for many business owners is they don’t integrate accounting into daily business processes. Rather than treating it as a monthly or annual task, accounting should be incorporated into your daily operations, just as you do with product development and marketing.
While many entrepreneurs complain they simply don’t time for this, the key is to make integration easy to do. Cloud-based accounting applications like Xero can simplify the process, saving you valuable time while ensuring accurate records.
Grasp the Basics
Once you have the necessary data, you need to understand the fundamentals.
Familiarise yourself with essential documents such as profit and loss statements, balance sheets, and cash flow statements. Understand their purpose and know the difference between cash flow and profit. (This topic deserves an entire article of its own but in the meantime, you can refer to a blog I wrote previously that explains the distinction between cash flow and profit.)
Undertake Forecasting
Surprisingly, many businessowners neglect to do any form of forecasting. Often citing lack of time as an excuse, they ignore this essential exercise.
Forecasting provides a comprehensive view of your business as a whole, forcing you to consider aspects you may have overlooked. By accurately predicting cash flow fluctuations, you can make informed decisions regarding marketing and product development. Without reliable numbers, rational decision-making based on facts becomes challenging, if not impossible.
Separate Business and Personal Finances
This practice is vital not only from an accounting perspective but also for your psychological well-being. Mixing personal and business finances can lead to unwise spending decisions and consequently stress.
Imagine you only have one bank account for both business and personal funds. You notice you have a healthy balance, so you decide to treat yourself to a new toy, which you feel is well-deserved after all your hard work. Fast forward a week, and a business expense comes in that needs to be paid. Unfortunately, due to your recent non-business-related purchase, you are unable to cover this cost.
The moral of the story is to separate your business and personal finances, live within your means, and understand and manage your cash flow.
Manage Your Credit Terms
Many entrepreneurs fall into the trap of thinking their business is thriving, only to discover they lack the necessary cash flow to cover their expenses. Remember, making a sale doesn't necessarily mean making money.
As a general rule, aim to receive payments as early as possible, even before goods are delivered if feasible. On the other hand, delay paying invoices as long as possible (unless significant early payment discounts are offered). You can use difference between incoming advance payments and delayed outgoing funds to focus other things, like business growth and advertising.
Seek Professional Assistance
If accounting isn't your area of expertise, engage a professional to help you. Hiring a bookkeeper to maintain proper records, and an accountant to provide guidance and tax advice, is well worth it. The cost is generally reasonable, and the value you get just from completing your GST returns on time is well worth it.
Additionally, relying on experts minimises the risk of incurring penalties with IRD due to unfamiliarity with accounting and tax-related regulations. Ignorance is not a valid excuse in the eyes of the IRD.
Summary
To succeed, you need to integrate all facets of your business operations into your daily routines, including accounting.
It’s unrealistic to expect to be able to handle every aspect of your business on your own, so seek assistance from appropriately qualified professionals who are experts in the areas you are not. This is especially important when it comes to accounting, as getting the right advice and establishing sound processes from the outset can make all the difference to the success of your business.
If you’d like to discuss any of the topics raised in this article, please contact us at GRA – we’d be very pleased to help you: phone +64 9 522 7955, [email protected] or via our online form.
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Gilligan Rowe and Associates is a chartered accounting firm specialising in property, asset planning, legal structures, taxation and compliance.
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