Accounting is a vital part of a business. It tells the business what their financial records are and helps them work better. As a business grows bigger and bigger, it becomes more and more necessary to keep track of all incoming and outgoing money. And then while keeping all the accounting records in a paper-based manner becomes a very time-consuming task. Also, it could create many risk errors.
Both small businesses and large businesses, accounting is a must for anyone who wants to run a profitable, successful and viable business. At the most, basic level accounting and bookkeeping are about compliance (ensuring you comply with all government regulations), sanity (you cannot do anything without it) and security…, but don’t let that take away from accounting’s more important function, which is helping you to manage and run your business.
To help you out as How you can manage the accounting activity for your SME business we have prepared a write-up from top to bottom.
Let's get started -
So, to be a successful business, you need to ensure that your accounting decisions are based on the fundamentals of good bookkeeping. Good accounting is not just about entering numbers correctly: it's keeping track of where the money comes from, where it goes to and how much is available for your business.
Before going further in detail about Accounting and Bookkeeping as to How they can benefit your business and How you can implement it, let's understand the fundamental difference between these two terms.
What is Accounting?
Accounting is the process of recording, summarizing, analyzing and interpreting financial information. Accounting enables you to keep track of your business’s financial transactions, which is important for tax preparation, budgeting, decision making, and understanding your business’s health and where it stands financially.
The Accounting financial statements are a precise summary of financial transactions over an accounting period. These statements provide a concise summary of a company's financial position, operations, and cash flows.
What is Bookkeeping?
Bookkeeping is the process of maintaining and recording all your company's financial transactions on a daily basis in the original books of entry of a business. It involves summarising and organising all the company’s financial transactions chronologically in a systematic manner.
Bookkeeping focuses only on the day-to-day financial activities and transactions of a business. Bookkeeping is an important part of your accounting process for several reasons. The books of accounts must be kept up to date because they serve as the foundation for accounting. The accuracy of bookkeeping determines the accuracy of a company's accounting process.
After you've grasped both of these terms, you may be aware that bookkeeping is a component of the accounting process. However, some small business owners may wonder whether they need to use the entire accounting process for their company. So, to answer this question, consider the following.
Why accounting is necessary for both Corporate and SME businesses?
Why is accounting important for SME businesses?
A lot of small business owners don't know why they need to keep track of their finances. But this is one of the most critical areas you should look at when it comes to running your business. The truth is that you can run a business without an accounting department, but you're going to have a more difficult time keeping track of what's happening.
First of all, you should understand that Accounting is a process, not a job. And it's necessary for two main reasons:
- Accounting helps in staying organized and avoiding huge penalties. - The more organized you are with your books, the easier it will be for you to make the best decisions possible when it comes to managing your money.
- Accounting helps in calculating your income and expenses easily. - With accounting processes help, you can know how much cash you have on hand at any given time. And what your company's financial health looks like overall.
It's often time-consuming to go back months or years after the fact to find your receipts, invoices and other bookkeeping documents. And it's easy to get bogged down in spreadsheets and records, but accounting doesn't have to be boring or complicated. Here are some of the things you'll want to track:
- Sales and income - Keep track of the amount of money you make each month, the source (sales, cash flow from operations), how much is owed and by whom and how much Profit you've made.
- Expenses and cash flow - Keep track of expenses, such as payroll and rent, as well as what expenses get a deduction from your revenue (such as taxes).
- Cash balances - You'll need this information if you have any bank accounts. Also, you will want to track it if you are making any other significant purchases without first getting paid by your customers. Further, if you're starting a new credit card account.
- Profit and loss - Take a look at your profit & loss statements for each quarter, and compare them with your sales numbers for that period to see how much profit you're making and how much loss there is for the year.
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Why is accounting important for Corporate businesses?
For corporations, accounting is critical because it tells how much profit or loss they are making at any given point in time. It also provides information on how much money they owe to others or is owed by others.
Corporate businesses have numerous departments – sales, marketing, production, human resources and many others. Each of them has different expense heads, and each generates different types of revenue. Keeping track of all these expenses and incomes would not be possible without accounting.
Here are some reasons why accounting is essential for corporate businesses:
- To keep track of finances - Corporations have a large volume of transactions happening within them every day – purchases from suppliers, payments made to employees, collection from customers, payments made to vendors etc. If a recording of these transaction entries is not taking place. Then it will become impossible for any business to track where its money is coming from and where the organization is spending it.
- Auditing – In order to maintain the most accurate financial records, an audit of all aspects of your business must take place regularly. It includes bank statements, payroll records and stock ledgers. An accountant can help you in identifying areas not getting audited and therefore need further investigation.
- Taxes – Accounting is essential for any business as it involves tax planning and preparation. Any business requires an accountant to prepare their tax returns, calculate taxes owed and file them with the relevant authorities.
- Comply with legal requirements - The law requires that you produce annual accounts for taxation purposes. Thus, accounting assists in meeting these legal requirements.
- Make financial projections - When running a business, you must know where your finances stand and where they will be in the future. It helps plan the business activities to ensure that all expenses are covered by projected income.
- Raise finance - If you want external funds from investors or banks, then they need to see that your company has been managed properly by looking at your accounting records. Also, accounting is the language of business. It is the method by which companies communicate their financial information to shareholders and other interested parties. As a language, it conveys the financial events that have taken place and allow those who understand the language to make decisions based on this information.
- Run the business - Accounting helps companies determine how much inventory they should carry throughout the year, how much they need to spend on advertising each month, and how many employees are necessary for effective operations. It shows whether or not your company holds enough cash to pay its bills without having to take out loans or use credit cards. Also, it provides a guideline to follow when making key decisions, such as whether or not to hire new employees or open a second location.
Common Mistakes Small Businesses should avoid while maintaining their Books of Accounts.
Every business has its day-to-day accounts and keeps track of money coming in, money going out, and money that gets spent. But every organization also needs to keep track of its assets, liabilities, income and expenses. If a business isn't properly accounting for its Assets or Liabilities, it can not know how much it's worth or how much it owes.
Accounting is a team effort. There are three sides to the game. First is the bookkeeper, the second is the accountant, and the third is the manager of the company. So, the bookkeeper knows everything about the day-to-day operations and ensures proper cash flow. An accountant does all the financial reporting. And the manager is responsible for allocating resources to achieve profit goals.
When you're running a small business, it's important to have someone keeping track of all this stuff every day. It's not something you can get away with just because you're small. Not all small businesses are alike and are thus susceptible to the same mistakes. The following tips will help you avoid common accounting errors and thus protect your books of accounts from being compromised.
- Lack of attention to detail: You must ensure that there is sufficient detail in your accounts so that you can make accurate comparisons with previous years' records.
- Poor system of bookkeeping practices: You must implement a systematic approach to recording transactions which will help you to gain a clear picture of the overall financial performance of your business.
- Lack of a formalised system for communicating with the bank: Businesses should not only adopt adequate checks and balances to minimise error. But at the same time, it is also necessary that you should keep communication with your bank open as much as possible so that they can provide you with a detailed report on your business activities regularly.
- Overlooking the need for an audit: An audit by an independent third party is an absolute necessity if you wish to be sure that your books are up to date and accurate. If this is not happening regularly, then it could lead to erroneous entries and thus result in losses that could have been avoided had the proper checks been taken place.
You might have heard about the importance of good accounting practices and that you should pay special attention to them. A skilled CA can help you in learning about the best accounting practices and also help you maintain your books of accounts with proper accounting procedures that will make your job easier.
By following the above tips with good accounting practices, you can manage your organization's whole accounting process easily. Further, a skilled CA can help you learn about the best accounting practices. And also help you maintain your books of accounts with proper accounting procedures that will make your job easier.
Further, to give you all an idea about what it is exactly that your accounting system should include, you can refer to these points –
- Inventory Management – This refers to collecting your inventory data and managing it efficiently. It's essential because it allows you to see how much stock you have in each department at any point in time. You also need this data so that you can take corrective measures if necessary.
- Cash Flow Management – This refers to recording cash received and paid out. The data will help you decide on when to make purchases, which ones are more profitable than others, etc. It also helps in planning for future expenses too.
- Expense Management – This refers to tracking all the costs incurred by the business. So that all such expenses can be accounted for properly.
How SMEs can use Accounting software to maintain their Books of Accounts?
When you are starting up a business or you are a small business owner/manager, keeping track of all your financial information can be quite a challenge. You must be thinking, “Why can’t I just use excel sheets or spreadsheets?”
Well, there is nothing wrong with using these tools, but they have several disadvantages. Here are some major reasons why maintaining books of accounts using excel sheets or spreadsheets is not the right thing to do:
- You end up having scattered data – When using these tools, you will have all your data in one place. It gets difficult to analyze and segregate relevant information when needed.
- Manual entries can lead to errors – Since everything has to be done manually, there is always a possibility that you might enter incorrect data. This may lead to misleading results and helplessness in case of any dispute. You cannot go back and make corrections in the system once it has been saved.
- The data is not reliable - This is one major disadvantage of using spreadsheets or excel sheets. You can’t expect your staff members to maintain the same standards of accuracy and data consistency as a professional accountant. It could lead to a lot of errors in the figures and loss in business due to defective stock records, wrong sales figures or loss in sales or margin.
- Time wasted on data entry- Another major disadvantage of maintaining books manually is the time wasted on data entry. Every time there is a change in your inventory or you receive a purchase invoice, this has to be entered into your books manually. In case you make a mistake while entering these numbers, it will lead to an error in your books which will impact your entire business plan.
So for all these reasons, you should opt for an accounting software solution for your organization.
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Accounting software improves productivity, which saves time and money. It also helps eliminate errors, which can save your business from potential cash flow problems. If you are not using accounting software yet, start looking for options now.
You have different options when choosing accounting software for your SME:
- Cloud Accounting Software - Cloud computing allows you to access your data anywhere and anytime by storing it online instead of on local servers. All you need is a stable internet connection, and you're ready to go! This feature is very helpful for small businesses that have employees working outside the office. It's also great for companies with multiple locations or branches.
- Desktop Accounting Software - In contrast to cloud accounting software, desktop accounting programs are stored on your computer's hard drive (or in a network). Since all data is stored locally, there is no need for the internet. This software is very successful in companies working from one place and have the requirement of high data security. But the disadvantage here is it is only suitable for large enterprises as it requires a huge sum of upfront and maintenance costs to use this software.
- Enterprise Resource Planning software - Enterprise Resource Planning (ERP) software is more than just an accounting tool. The software helps a company to manage its business and automate many back-office functions related to technology, services and human resources. Most ERP systems include an integrated accounting system as well. In addition to financial management, the software can track customer orders, control inventory, manage production scheduling, handle human resources and keep pace with the latest industry regulations. Many companies look for ERP systems with features that can be easily customized and modified to suit their changing business needs. That's why most ERP vendors provide flexible deployment options such as on-premise, cloud-based or hybrid models that can be configured to address specific requirements.
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Is just Accounting Software the only option for SMEs?
Most small businesses start by using accounting software to track their financials. But as they grow, these businesses often find that the same accounting system that served them well, in the beginning, can become a burden. When this happens, it’s time to consider transitioning from accounting software to a full-featured ERP system.
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ERP systems give businesses greater visibility into every aspect of their operations, which allows them to manage their finances more efficiently and cost-effectively.
However, ERP systems are often too unwieldy and expensive for small businesses. Fortunately, there are options available for small businesses when they are expanding and need some assistance apart from financial transactions to inventory management and many other operations processes for a business.
Software like Tally Prime, Marg Accounting software, Vyapaar and many others can help small businesses with their daily operation needs apart from accounting. But if businesses need many features of ERP and Inventory management software they can go for tools like TranZact.
TranZact is a zero-effort digital transformation tool that helps digitize the entire business process right from Inquiry to Sales & Dispatch. It is very suitable for small businesses and manufacturing concerns. And it helps them out with their accounting needs with its feature of Tally integration.
Accounting is the most important aspect of any business, if done properly businesses can achieve great heights and also helps in the Digitalization of the business. Nowadays with the proper use of accounting software and the implementation of good accounting systems, businesses can make their business more productive and efficient. This blog covered all about accounting for SME businesses. In this article, we have discussed everything about accounting, why you should keep proper business records. Also, the advantages of proper accounting and why efficient accounting systems are the best way for SMEs to maintain their financial records.