Note: I began this short series on Starting Your Own Business and I highly recommend looking at the comments it generated. My friends who own their own business gave great advice beyond what I offered!
One of the most important steps for a new business owner is to setup his/her accounting system. Money is the lifeblood of the company, and financial systems provide the only source of reliable indicators for the health of the business. Nothing even comes close. It is also true for personal finances, but companies have significantly larger (and more frequent) transactions and the owner can make critical errors. These might include:
- Thinking that more money means more margin
- Thinking that “tax-deductible expense” means “free money”
- Thinking that “because I sent an invoice, the customer will pay”
The earliest purchase for a new business owner should be the financial accounting system. While QuickBooks is the most common system used by small businesses, there are others just as capable of meeting your needs. When evaluating your system purchase (or SaS), consider these important functions:
- Issue Invoices – the ability to bill your customers and itemize their products and services. Invoices are your only method of determining who owes you money.
- Accounts Receivable – the ability to receive payments from your customers. While some accounting packages include credit card and online transactions, not all are ready to integrate with your bank accounts. Make sure that your bank AND your financial systems work together. Plus, payments received must be reconciled with your open invoices.
- Accounts Payable – the ability to make payments to your employees, vendors, and others. The better financial systems provide check-printing capability to make it easier to track and categorize your expenses.
- Payroll – more than just issuing a paycheck, your system must be able to calculate state and local taxes, as well as withholding any pre-tax payments needed for personal benefits (insurance, etc.) If not, this must come through a payroll management company.
- General Ledger – the system that balances all your income and expenses and and allocates by category. This critical function produces all of your important reports needed to run the business (Income Statement, Balance Sheet, and Statement of Cash Flow).
If you don’t know how to read those reports, that is your homework for the week. No business owner can operate without them. It’s like flying a plane without instruments – you are destined for a crash.
Thanks for listening.