Setting up a small business accounting system is a vital part of starting your business. Having the core financial elements in place means you’re building the company on the most solid of accounting foundations – and that’s important for your continued success.
Accounting isn’t always easy but once you’re comfortable with the basics, you can dive into the deeper financial management of the business. That means tracking your numbers, streamlining spending and getting in control of your cashflow management strategies.
Part 2 of our small business accounting 101 looks at managing your finances effectively.
1. Expense tracking
Tracking what you’re spending as a business is good accounting practise. When you know what you’re spending, you have more control over where that money is going – giving you the information needed to get proactive about reducing those costs and boosting profits.
To control expenses effectively:
Tailor your Chart of Accounts – your Chart of Accounts is the list of codes used in your accounting. By creating codes for every expense, you can easily track your expenditure.
Keep bookkeeping up to date – by keeping your bookkeeping timely, you have the best possible real-time overview of your expenses and running costs.
Use real-time reporting – real-time information gives you a totally current view of your finances, so you can see the impact of expenses on your cashflow and working capital.
2. Managing cashflow
The importance of cashflow management really can’t be underestimated. Cash is king, so staying in control of your cash inflows (income) and your cash outflows (expenditure) is crucial for driving the financial success of the business.
To manage cashflow effectively in your business:
Get to know your cashflow statement – your accounting platform can produce a cashflow statement that shows you all the cash inflows and outflows within the business.
Listen to the experts – expert cashflow tips help you to maintain the perfect balance between income and expenditure, so you achieve the ideal positive cashflow position.
Aim for intelligent cashflow – cashflow forecasting apps, like Fluidly, provide smart tools for predicting and managing your cashflow status, and keeping you in control.
3. Processing payments and getting paid
The easier you make it to get paid, the faster your customers can pay you. And creating the most efficient payment set-up is central to this. As a modern digital business, you can choose from online card payments, Direct Debit and payment gateways such as PayPal etc.
Offer the best payment options – think about how your customers pay you, and offer the simplest and most hassle-free way for you to get paid.
Link payments to your bank account – many accounting platforms offer live bank feeds, so you can easily match incoming payments to your invoices.
Check your aged debtors – running an aged debtor report shows you who hasn’t paid, so you can quickly chase up late-payers and get that money in through the door.
4. Small business invoicing
Efficient invoicing is a key feature of your streamlined finance set-up. But, historically, invoicing used to be a time-consuming task, with invoice templates to populate, hard copies to print and envelopes to be addressed. The good news is that invoicing has evolved in the digital age!
These days, online invoicing takes all the heavy lifting out of the process, allowing you to quickly raise an electronic invoice and email it direct to your client’s accounts payable team.
To create a streamlined invoicing process:
Keep the process digital – most accounting platforms now include online invoicing as standard. So keep your invoicing online to maximise the benefits and added value.
Get the details right – invoicing mistakes can be a challenge, so ensure you’re sending each bill to the right contact, for the right amount and with the right payment terms.
Automate your invoice chasing – chasing late invoices takes time, so use the benefits of automated credit control apps to automatically chase up late-payers.
5. Managing a payroll run
Once the business grows to a certain size, you’ll need to take on employees. And that means setting up a payroll system to pay your weekly or monthly salaries to staff.
Having a payroll software system that’s integrated with your accounting platform has a number of advantages, and the leading cloud accounting providers all offer payroll functionality – either as standard, paid for on a ‘per employee basis’ or bought as an additional add-on module.
To get the best from your payroll:
Keep your records up to date – ensure you’re updating the time worked, hourly rates or monthly salary bands, so the payroll run is working from the right data.
Review each payroll run – allow time to review the payroll run and update any changes since the previous week/month – minimising the chance of errors.
Send electronic payslips – be sustainable and send online, cloud-based payslips, rather than wasting time and money printing out hard copies.
6. Key metrics and calculating gross margins
The key to financial success is being in full control of your numbers. When you’re tracking the right metrics, you understand your performance and can see where the real threats and opportunities lie – and that’s fundamental to leading the business in the right direction
Key metrics to track include:
Cost Per Acquisition (CPA) – your CPA is worked out by dividing your total marketing costs by the number of new clients you’ve attracted. If the CPA number is too high, there’s a need to review both your marketing spend and strategy.
Customer Lifetime Value (CLV) – your CLV is calculated by looking at the total net profit that each customer brings in over the lifetime of the relationship. Tracking this allows you to see which clients are profitable, and which are just dragging you down.
Gross margin – ultimately, your business has got to turn a profit to succeed. Your gross margin = total sales revenue minus the cost of goods sold, divided by the total sales revenue, expressed as a percentage. The bigger the percentage, the better you’re doing.
Stay in control of the numbers
With a clear overview of your financial health, and a tight grip on cashflow, debtors and gross margins, you set the conditions for the future stability and success of your company.
As we outlined in Part 1 of our Small Business Accounting 101, setting up the right core accounting foundations is business-critical. And with a proactive approach to managing your numbers, you’ll continue to increase profits and invest in the next stage of your growth.
The Fluidly blog has lots more tips for getting the best from your company’s finances.