How to Create your Own Accounting System for a Successful Business
Was getting to grips with your accounts and financial KPI’s top of your New Year’s Resolutions List?! If it was or wasn’t, January resolutions have long fallen away and now it’s time to realistically think about goals for the year ahead.
If you create your own accounting system, based on best practises that works specifically for your individual business, you will reap the rewards of a successful year and beyond. Knowing your finances will help you make better and more informed decisions for your business.
When creating your own Accounting System, there are two major elements to look at in terms of your cashflow – how you track money going into your business and also money leaving your business.
In the second of this two-part series, I would like to focus on the aspects where money leaves your business specifically in relation to cost of sales, purchases and overheads.
Missed the first part?
In the previous article, part one of this article series, the focus was on analysing money coming into your business and best practises here in terms of sales, breakeven points, internal controls and segregation of duties etc which I would encourage you to revisit.
There are many definitions of purchases in accounting terms. In its simplest form, purchases are goods bought for resale during a given time and they form part of the cost of sales in your profit and loss statement. Purchases can be services, raw materials or finished goods depending on your business. It’s important to have good strong internal controls for tracking all your purchases and I wanted to highlight some of these in more detail below.
1. Do you have procedures in place to ensure all Purchase Orders are approved?
All businesses, no matter how small, ought to have procedures in place for POs or Purchase Orders. As your business grows, this is even more important. Only approved purchase invoices can be paid and this will help your business manage cash flow and track cost of sales effectively.
2. Do you check the delivery note against the purchase order?
This can be particularly relevant for fast moving goods companies. Human error does happen and some deliveries fall short of what was asked for. You need a process in place to make sure every delivery is physically or electronically checked and counted and that it matches with what was ordered. You’d be surprised at how many times this doesn’t happen and consequently the business can lose stock or not receive a credit note.
3. Do you check the purchase invoice with the delivery note and the purchase order?
Another minor check that can cost a business. Everything must be checked and systemised accounts software is ideal here in that it electronically matches the delivery to the invoice and will automatically show any differences which you can then query further with the supplier.
4. Do you have a payment policy and credit terms agreed for your suppliers?
If you don’t, create this now, regardless of the size of your business and the number of suppliers. This is important for both cashflow and over reliance on one supplier. If you are paying your suppliers when they send in an invoice, but not receiving payment for your own invoice until after 30 days, then you are potentially opening yourself to cash flow issues. It’s important to monitor your creditor’s payment days and not let this mount up.
Be careful also if you are relying on a small number of key suppliers for certain stock, and something out of your control happens, then you have the potential of not being able to produce your product. Ensure you have a backup or contingency plan in place should this ever arise.
5. Do you review the market regularly?
It’s a simple strategy and one we work closely with our clients on regularly. No matter your industry, prices go up and down, demand changes. You should be fully aware of market changes and trends in your sector so that you can negotiate better deals with your suppliers. Creating a marketing strategy is very useful as well as setting financial targets and KPI’s for growth.
Payroll can be one of the biggest expenses for a company. Without employees, how do you scale and grow your business? Yet the real cost of employees can be 1.25 to 1.4 times the base salary of an employee which also need to be considered as part of your overheads.
1. Do you assess the need for extra staff?
Before hiring new staff, do you sit down and assess the need for new staff? Oftentimes, there appears to be a need for new staff, however, sitting down and understanding the process at work, it may indicate that a new system is needed rather than going out and hiring new staff. By having an efficient system in place, you can effectively budget your staff hours and look at productivity levels.
Analysing the need and creating a detailed spec of job requirements will enable you to assess job tasks, roles, full time staff requirements, part time staff needed etc leading to a better picture of who and what you need.
2. Do you review the HR market regularly?
It’s a simple strategy. If you have identified a need for new staff, review the human resources market well. Analyse not only salary expectations but also other factors what will come into play when hiring someone – flexibility in hours, interesting projects, company culture etc.
3. Do you have a process in place to show evidence of time worked?
This isn’t applicable in all businesses, but you should have a system in place, which shows when employees worked and what they worked on. While it doesn’t have to be a clock in/clock out system, there are apps and tools which allow you and your employees record work that is done. This is a very useful way of monitoring productivity in your business.
4. That all Payroll processing is correctly calculated and paid over promptly?
This is often our biggest issue when we take on payroll from new clients. The regulations have changed so much recently with PAYE modernisation and they continue to change with every budget and so it is key to stay on top of payroll processing and ensure your employees are paid accurately. This includes being fully aware of all leave entitlements etc.
5. Do you have a process in place to keep staff engaged?
Hiring staff is one of the most expensive items on your profit and loss, not only in real monetary terms but in the resource hours researching the market, reading CVs and doing interviews not to mention paying HR recruitment fees. So once you get a new staff member and they are working well, it’s important to keep them engaged, motivated and developing in your business.
Do you have an on-boarding process to embed someone into your culture? Do you do regular reviews to ensure your staff are developing? Do you encourage team building between staff members?
6. Do you have a process which enables prompt removal of inefficient staff?
Nobody likes to admit that they have hired the wrong person but it happens more regularly than you think. If this is the case, you need to provide ways to improve the new hire’s efficiency or provide ways to remove them from the organisation. It sounds harsh but inefficient staff costs your business money, time and resources.
Creating an Accounting System involves more than just money in and out, but involves knowing your finances, the actual numbers enables you to make more informed decisions, such as reducing your spend, increasing and growing your sales, expansion and growth targets for the future etc. It’s important that you set your goals and strategic plan for the growth of your business, assess regularly, with ongoing monitoring of progress made. In this way you can assess any possible roadblocks along the way and deal with them adequately there and then.
If you’d like to discuss anything in this article, please get in touch. We can help you create your Own Accounting System for Success that gives you peace of mind, compliance and a clear direction for your business.
AG Associates is an accounting practice that specialises in affordable accounting and payroll solutions for the SME business owner. As part of our accounts process, we provide you with an instant snap shot of how your business is doing right now.
For further information please contact Angela at Unit 11, Eastgate Way, Little Island, Cork. 021 4824723 or firstname.lastname@example.org