Every business owner should understand that in today’s world an accounting system is a critical necessity to succeed.
I wear two hats – one as an accountant and the other as a small business owner – and I know it’s paramount to have not only a good accounting system but one that’s going to work for you and your particular business.
There are some very obvious reasons for this – running the financial transactions of the business is the main one – and some that you may not have considered.
These broadly fall into two major categories – Regulatory Compliance and Valuable Business Information. Let’s take a look at each:
The Australian Taxation Office (ATO) requires by law that a business must keep records and be able to:
- Explain all transactions
- Be in writing (Electronic or paper)
- Be in English or in a form that can easily be converted
- Be kept for five years
Further to this point, the ATO allows a business to keep business transaction records electronically or on paper. Whilst these two options are functionally the same, keeping electronic records will make many tasks much simpler. Some of the benefits include:
- Produce invoices and statements
- Reports for GST and income tax purposes
- Lodgement of information online with Government offices
- Automatic reconciliation of accounts due to bank feeds
- Searching of historical data at your fingertips
- Backup of data in case of disasters such as fire, theft, flood, etc
The above can be labelled ‘compliance’. This is the stuff you, your bookkeeper and/or your accountant must do to satisfy the legal requirements of the Government. If the ATO ever wants to audit your business, it’s worth your while having these financial affairs working like a well-oiled machine otherwise the costs could blow out enormously.
VALUABLE BUSINESS INFORMATION
Compliance is what most small business owners think of when they consider their accounting system but we need to turn that thinking around if you are going to take your business to the next level.
Fundamentally, every business needs reliable information so that the owners can make informed decisions. No matter if it’s information relating to a business’s product, the staff they are hiring, or the performance of the business – all decisions should be made based on good information at hand. And financial information is one of the most important kinds.
So, let’s look at the accounting system in light of its information capability. At the business’s core, the business owner must know what the costs and the income are. Then dig a little deeper and look at the other information a good accounting system makes available:
- What percentage of income comes from each customer?
- What has the growth (or decline) been for the last ‘x’ months?
- Cash inflows and outflows – is there sufficient cash to meet debt and other repayments? Do we need an additional cash facility?
- Stock – how long does it sit on the shelf? Do you have enough for existing demand? When does it need to be reordered?
- Customers – how long are they taking to pay you? Are there bad debts that need chasing?
- Suppliers – who do we owe money to? When’s it due?
- Payroll – Who’s leave liability is blowing out?
- Productivity of staff – Where are the billable hours being wasted?
- Net asset position – do we have the capacity to borrow?
These are just to name a few but an accounting system can give you an awful lot of information. My experience is that some business owners have the feeling it’s ‘too HARD, I don’t UNDERSTAND’ when thinking finances.
Whilst some might find financial management challenging, it’s like a lot of things when you run a business, you have to spend some time out of your comfort zone if you want to succeed. When you own and run a business you need to make many decisions – you choose whether to make informed decisions or fly by the seat of your pants. But remember, you don’t want to end up a part of that horrible statistic of about 40% of small businesses that fail in their first four years.
Just to be clear, I’m not saying that you as the business owner need to know every intricacy of the accounting system but what you do need is financial information that’s maintained in such a way that valuable data can quickly be extracted when you need it and presented in a user-friendly format. In doing so, you can either learn to interpret the data or utilise the services of a good accountant/ business coach who can help you in understanding the data as well as the impact of every decision you make.
There are numerous accounting packages available in Australia, and they change all the time. Whether you’re choosing your first, or considering upgrading, how do you choose the right one?
The marketing of accounting software in Australia is quite slick and what appeals to you at first glance might not be right for your business. You need to make an ‘informed decision’ that looks carefully at each of the options on the market and matches the various features against your particular needs.
My business Wichwon, has spent the past four years building a comparison tool that helps you arrive at that informed decision. It matches the latest accounting package features to your business. Best of all it’s a free service.