Unless you’re an accountant or enjoy working with numbers, you probably find keeping your accounting up to date either extremely boring or highly stressful. Like many business owners, you most likely keep a lot of your financial information floating around in your head. Who owes you money, who you need to pay, and what your expected cash flow is.
While this can get you by and may seem to work, having a system in place and keeping your accounting organized can alleviate the stress of bills seemingly popping up out of nowhere and financial goals never seeming to get accomplished. It can also keep you on top of required items and in the good books with the Canada Revenue Agency.
We’ve put together some tips for essential accounting practices. How many do you currently have in place?
1. Track Your Expenses: Tracking expenses is often not considered a fun job, but it is necessary. There are a lot of nuances when tracking expenses, but here are some pointers to keep you ahead of the game:
- Separate business from personal: Whether you are a sole proprietor or an incorporated business, the best way to keep your business expenses and cashflows in order is to put all business revenues and expenses through a business bank account and/or credit card. If you do happen to make business purchases from personal funds, which is necessary from time to time, ask your accountant how these should be recorded in your accounting software.
Track and allocate expenses to jobs: Depending on the type of business you’re in, it may be important to track disbursements to a particular client or job in order to bill it or to keep tabs on job profitability. Track meetings in your calendar so it’s easier to match expenses with these meetings. This will help in the event that you are audited and need to provide this information.
Log your mileage and meals: When travelling to a job site or to meet a client for lunch, look up the distance in Google Maps and log it into an Excel sheet or into your accounting software. This will help your accountant calculate your allowable vehicle expenses at tax time, and having a detailed log will keep you in the CRA’s good books in the event of an audit. For meal expenses, write a short note on the receipt indicating who you were with and the purpose of the meeting.
2. Record Deposits Correctly: Throughout the year you will have a lot of deposits made to your account and it’s important to categorize these correctly. Is the deposit a loan or a transfer from your personal account? A common mistake is to record these deposits as revenue, when in reality they are liabilities (loans or shareholder loans). Your accountant will help you sort these out at tax time, but it’s important to record them correctly in your accounting software so you know that your sales aren’t inflated.
3. Forecast Major Expenses: Sometimes it can be a bit difficult to have a realistic overview of your upcoming expenses. Is there equipment that you know you need to purchase in the next year or two? Will you need to bring on new employees? Are you looking to upgrade to a larger space? Knowing and having a vision of where your business will be in the next year or two can help to project major expenses that may arise. If you don’t keep track, on the other hand, there are a couple of pitfalls that small businesses can find themselves in if they aren’t paying attention to their cashflow.
Capital expenditures: Things can be humming along smoothly when suddenly you have to replace an expensive piece of equipment or upgrade your capacity to help take your business to the next level. For capital expenditures, plan out what you need to purchase over the next 12-24 months and figure out how you intend to pay for those items. Will they be paid in cash? Leased or financed? Your accountant can help you make the decision by analyzing what has the best tax advantage or makes the most business sense based on your cash needs.
Uncollectible accounts: Every business that grants credit to its customers opens itself up to credit risk. When you are expecting that cashflow to come in, but the customer is slow to pay or fails to pay entirely, this can have a significant impact on your ability to pay suppliers, employees, and day-to-day operating expenses. It’s good to keep a cash reserve to cover these unexpected losses and to properly assess new customers before granting them credit.
Tax bill: You may be sitting on a what feels like a large sum of money at year end, but don’t forget that if you had a strong year, you may be in for a large tax bill. This is a good position to be in, but just ensure you don’t deplete your bank account for a nice bonus or a new car before you figure out how much you have to pay in taxes. Remember, the small business tax rate for corporations that are carrying on an active business is 15%, so keep that in mind if you have an idea of what your net income is. After your first profitable year, the CRA will require you to make installments to ensure you don’t get into a position where you get behind on your taxes.
4. Timely billing and collection: Having clients and customers pay their invoices late hurts your cash flow. Therefore, it’s important to have processes in place in the event that an invoice is not paid on time. It can help to assign a staff member to manage this or set up an invoicing software that sends out a copy of the invoice and an account statement automatically after a set amount of time. Remember that overdue invoices, whether they are 30, 60 or 90 days overdue are essentially interest-free loans that can tie up money when you really need it.
5. Choose the right software: Most modern accounting software is very user friendly and takes advantage of current technology by linking together your desktop, phone and tablet. There are several easy to use cloud accounting applications from Quickbooks, Freshbooks, Xero, and Wave, to name just a few. There are also desktop versions of Quickbooks and Sage 50 (Simply accounting) that are more than adequate for 99% of small businesses out there. The right software will allow you to issue invoices, collect payments (most now have credit card integration), track your payables, issue payroll, and pay your HST. All of the above have trial versions, so we always recommend trying before you buy to ensure the program will cover off all of your needs.
6. Know your deadlines: HST, Payroll source deductions, and income taxes all have differing deadlines, thresholds for remitting, and installment schedules. Failure to remit or file on time can result in significant penalties and interest on balances due. So, talk to your accountant to ensure that you are properly informed.
Implementing these six accounting practices can save you a lot of time and maybe even some money in the future by ensuring that you’ve set yourself up for accounting success. Still have more questions? Contact us here or give us a call at the office, 705-910-6611.