Successful business owners don’t keep doing the same things that initially made them successful. If they did, thriving 30-year-old businesses would still rely on snail mail and telephones on desks instead of email and smartphones.
Likewise, growing businesses that fail to adopt new accounting procedures soon encounter barriers to progress.
Early basics. Most businesses begin small, with basic accounting systems, and over time switch to more sophisticated approaches.
As a small operation, you can simply list your daily expenditures and income in the same way as merchants did in the 14th century. Sometimes you may forget how to classify certain types of purchases. No problem. Your accountant can straighten out these details later.
Even if you forget to track a few petty cash transactions, such as not recording the toner cartridge you picked up on the way to work, you don’t worry because these are only small amounts.
Accrual basis. However, once your business begins growing, accounting for everything is a little more challenging. Money goes in and out much faster, and new ways of moving money arise.
You now have a number of employees who handle sales orders, merchandise receipts and office purchases.
At this point, you need to know what’s happening and when. Instead of recording transactions when cash changes hands, you now need to account for events as they occur. To do this, you’ll need to develop an accrual accounting system.
Throw out the cash accounting method; only accrual basis tells you about customer orders not yet delivered and bills you owe but haven’t yet paid.
The benefits. Accrual accounting permits a bookkeeper to accurately match expenses with revenues. You can manage inventory easily, instantly knowing what items you’re holding for certain customers and the cost of unsold merchandise.
Wages are matched with the level of sales activity. This allows you to gauge when you need to add staff or promote employees and give them new tasks.
Many businesses that start small stumble and fall after reaching a size that necessitates accrual accounting. They ignore the complications caused by an increasing number of customers and expenditures.
Also, as more employees are given access to petty cash, new security measures are required. Your accounting process serves this purpose by periodically comparing receipts to cash. Expenses are dutifully recorded, and the cash reserve is replenished on a timely basis.
Final measures. Small-business owners often pay personal expenses with company funds and vice versa. This is a bad habit at any stage of development but absolutely must cease when your operation grows.
For one thing, it’s forbidden if your business is a corporation. Never pay personal expenses from the business account; move personal money into the business bank account if you need an infusion of capital to pay company expenditures.
A growing business that lacks mechanisms to verify and balance its accounts will gradually collapse. Profitable pricing and expense control are impossible. Money disappears without a trace.
Avoid these mistakes by adopting a sound accounting system to manage business growth.