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10 tips to help with SME accounting

25 March 2020 by National Bank
Accounting for Small Business

You have to take care of business if you want to stay in business for a long time. That’s why tightly managing your SME’s accounting is key to its success. If you’re a beginner, follow our advice to come out on top.

Even if doing the accounting for your small business isn’t your cup of tea, you must ensure that your SME accounting is managed soundly. In doing so, you’ll maximize your chances of success and your project’s longevity. It will also be easier for you to get financing.

“Accounting means following up on your business’s cash inflows and outflows. It also means being able to register your commercial activities so you can analyze your company’s financial performance,” says Simon Lapointe, director of business and analytics intelligence, commercial and chartered professional accountant (CPA) at the National Bank.

1. Follow the law

You need to do more than just bookkeeping to be compliant with the law. Most importantly, you must adopt good accounting practices, because submitting an income tax return is mandatory in Canada.  

This tax return will depend on the legal status of the business you created. “When a business is incorporated, it means it’s a legal person, so the company is considered to be a person in the eyes of the law and it is required to produce its own income tax return,” says Simon Lapointe. “If it’s a sole proprietorship or a registered business, the owner adds their business-related income and expenses to their personal income tax return, because they’re responsible for everything the company does.”

You also need to produce, at the very least, a balance sheet and an income statement (also called a profit-and-loss statement) to submit with your income tax return. Find a trustworthy accountant who specializes in SME accounting to avoid future stress.

2. Consider taking an accounting course

You could also take an accounting course or a small business accounting class. “It’s a good thing to do and some bookkeeping programs offer online courses that are pretty straightforward,” Simon Lapointe explains. Online learning platforms can also help you perfect your skills.

In particular, you could learn the difference between debit and credit. Debit includes assets (petty cash, accounts receivable, etc.) and expenses (payroll, etc.), while credit includes liabilities (bank loans, accounts payable, etc.) and income (sales, etc.). As for your accounting entries, the debits and credits must be equal. This may seem complicated at the beginning, but with practice, you’ll master the basics, and be able to do the entries for your business.

3. Be organized and keep track of your expenses

To do your small business accounting properly, you have to note down, detail, and file away your accounts receivable and payable, expense receipts, and purchase orders. “Keeping your receipts in a shoebox and handing it over to your accountant isn’t the most efficient method. Today, you can number your invoices and documents or take photos of them for archiving purposes,” Simon Lapointe points out. Why put off filing your paperwork when you can do it day-to-day?

4. Be meticulous in your bookkeeping

Bookkeeping refers to the overall recording process consisting of noting down transactions, categorizing them, and reconciling your accounts. “Generally bookkeepers register transactions, and their services cost less than an accountant in charge of finalizing financial statements and income tax returns. The cloud platform Operio also offers a turnkey service that includes bookkeeping and producing financial statements,” adds Simon Lapointe.

At the outset, you’ll have to determine whether you’re doing cash or accrual accounting. “Cash accounting is the basic type: there are no accounts payable or receivable. When money comes in, it’s income; when it goes out, it’s an expense. Registered companies or sole proprietorships that aren’t too complex can do cash accounting. But as soon as a business gets more complex, you’ll need to do accrual accounting to keep track of accounts payable and receivable,” Simon Lapointe points out.

5. Optimize your precious time

You can choose to do your own bookkeeping and accounting in Excel or with an accounting program made for small businesses. But time is money when you’re an entrepreneur, so you could choose to outsource this work to experts. “The benefit is that you’ll have more time to manage the rest of your business. The downside? It’s more expensive than doing it yourself. If you have the time and the know-how, the best thing may be to take care of your own accounting. If you would rather spend your time on other tasks and pay someone else to do your entries, that’s what you should do,” Simon Lapointe recommends.

6. Bill your clients regularly

Everyone knows that setting up something like the well-known “2/10 Net 30” policy (2% discount if the invoice is paid within 10 days, or pay in full in 30 days) helps minimize payment delays. “In a bakery, money comes in as quickly as it goes out. You buy flour, you pay an employee to make the bread, your inventory of baguettes gets sold within a day, and your products are paid for the same day. But in an architecture firm, you could have a contract with staggered payments. It could be 30, 60 or 90 days until you’re paid for your professional services,” explains Simon Lapointe. Stay sharp, lest you lose track of collecting accounts receivable.

7. Pay your suppliers on time, but not too early

By paying your suppliers within the required amount of time, but not before, you ensure that you’re optimizing your cash. It may seem counter-intuitive, especially if you tend to pay your bills as soon as you receive them just to get it over with, but it’s more strategic this way because you’ll be able to reconcile your cash inflow with account payments.

8. Set up a payroll system

“Managing payroll yourself can be complex. You can outsource it to a third party like Nethris,” Simon Lapointe points out. You could also try to reconcile payroll for your employees (cash outflow) with payments for your accounts payable (cash inflow). You could find yourself with more liquidity and better working capital.

9. Stay up-to-date with your performance

It’s important to produce performance reports. “These reports depend on the size of your company,” Simon Lapointe explains. Regardless, it’s a good idea to verify your business’s performance on a biweekly, monthly, or quarterly basis. This will allow you to make better decisions and keep you from operating your company at a loss with excessive debts or a negative working capital.

It’s also important to calculate the cost price. “You’ll see what your production costs are and whether you’re charging people enough for what you’re selling them. Review your products’ profit margins every quarter to improve your profits. If you sell several products, you’ll see where you’re making money and where you aren’t,” indicates the expert.

It’s especially important to follow up on your list of accounts payable and receivable on a bimonthly or monthly basis, and to “analyze your inventory to see if there’s inactive stock in your company,” he adds.

10. Get some help for more complex matters

One fine (or not so fine!) day, tax season will come around. “It’s best to seek out a tax professional even if the income and expenses of your sole proprietorship are included in your personal tax return,” Simon Lapointe advises.

Entrust your tax return to a professional to ensure that your reports are in order. They will know to ask for all the tax credits for entrepreneurs and businesses that you’re eligible for, and you’ll avoid running into tax issues in the future. There are also many support organizations for entrepreneurs that can give you information on the various tax credits available.

Finally, Simon Lapointe believes that other accounting tips like opening a bank account for businesses to “separate the business’s money from your personal money and make the accounting easier afterwards” and “setting up a budget so you can compare your actual sales and expenses with what you planned for” will give you the skills to do the accounting for your small business and watch it grow.

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