Small accounting businesses can achieve superb growth if they manage to clear all the challenges during the development phase. They need to create a steady ground by following a few basic accounting rules in the initial days.
No doubt, the COVID-19 pandemic has increased the challenges multiple times. However, accounting procedures are not rocket science and can help keep the small business in good health.
1> Operating without an accounting software
In most cases, entrepreneurs presume they are not large enough and can single-handedly manage everything due to their limited number of clients and employees. They fail to realize that even a small mistake in accounts receivable or payable can result in a giant headache and put the company’s future at risk. Thankfully, several accounting software solutions designed to meet business-specific needs of every sector are available in the market. Cloud-based solutions do not cost a fortune.
Accounting software can help the firm in managing taxation, payroll processing, budgeting, and contract management. It also helps in invoicing, tracking sales, and generating financial statements, balance sheets, and, most importantly, cash flow statements.
As these are cloud-based systems, administrators can allow remotely working employees to access the software. The firm can also grant system access to outsourcing partners working from abroad.
2> Absence of monthly financial reports
Most of the small businesses and startups believe that producing financial reports just twice a year can be sufficient enough, unless of course, there’s a need to approach angel investors. Such startups often do not have access to accounting software.
Most firms generate bi-annual or quarterly financial reports. But, analysts suggest that producing a monthly report and making it available in the public domain can prove to be the best approach. Financial backers appreciate businesses that make such additional details about the firm’s health easily accessible. Such reports help financiers in monitoring the company’s commercial activities easily.
The report helps existing and prospective investors in understanding the company’s earnings and spending. Monthly financial statements also highlight issues like delays in account payable or clients who often take too much time to make payment. On the other hand, the absence of the document may create an impression that the startup has developed a negative account balance.
3> Accounts receivable and collection of payments
Many small businesses face financial problems as they fail to implement the right practices for invoicing and collection of payments due to a lack of human resources in most cases.
Automating the invoicing procedure can be the best solution. The accounting team should be able to send invoices to clients as soon as any services or products are rendered. Following this practice can ensure proper cash flow as well as documentation.
Setting up automated email reminders to clients can also help in ensuring payments are made before the due date. Accounts team should keep track of pending invoices and follow up clients who do not acknowledge emails.
Such an approach can help ensure that your firm always gets access to money for covering up expenditure and liabilities without seeking working capital credit from outside.
4> Complications in payroll management
Payroll management is complicated as besides calculating wages, it also involves various aspects like incentives, superannuation, tax liabilities, and calculating login hours, etc. Payroll management becomes even more complicated if the firm has offices in multiple states as they need to adhere to numerous regulations. Non-compliance may lead to legal and financial consequences. Thus, there is no scope for mistakes.
Firms can either hire and create an in-house team under a payroll manager or outsource payroll processing obligations to companies that provide accounting outsourcing services.
5> Cash flow problems due to failure in following professional accounting practices
This is one of the most common challenges faced by small accounting businesses. Enterprise owners often mix their personal and business finances due to a lack of professional approach. Unfortunately, using a single account for personal and business transactions can prove to be disastrous. It can reduce the working capital, resulting in insufficient funds to pay liabilities and various taxes. The account may end up becoming negative due to overdraft usage.
Lastly, personal expenses on a business account statement may cause problems in the long run, especially when prospect financiers go through monthly financial reports. So, using a business account with the company’s directors as signatories is crucial.