As a small business owner you often need to wear multiple hats. One of those hats might be that of the bookkeeper or accountant, or even both (because, the two are separate, remember when we talked about that?). Or you might be free from having to wear that hat by hiring a professional accountant to come over every months to look over your books.
Well, no matter how you are keeping your books and finances in order (and, trust me, you will want to do that, even be a little “obsessed” with it), these 10 small business accounting tips will make your life as a business owner a lot easier.
1. Always Follow up on Invoices
Because if you don’t, who will? Certainly not the customer you’ve sent that invoice to. If you leave it to them, they’ll probably “forget” all about it. Sending an invoice, doesn’t mean that you’ll actually receive payment for it. That’s why you need to follow up on your invoices.
If you are working with paper invoices that could pose a problem when following up. Fortunately, the solution is very easy. Start using an online or cloud-based accounting software which will help you automate this process.
2. Get Everyone to Use the Same Account Numbers
It’s all about consistency here. If you allow every department to use their own account numbers and code invoices as they please, you’ll sooner run out of stress medication than they will of account numbers.
By getting everyone to use the same account numbers you will rapidly increase the entire accounting process and reduce paperwork significantly.
3. Don’t Forget to Track EVERY Expense
Just because it might be “just a few bucks”, it doesn’t mean you can ignore an expense. Whether it’s $2 or $200 or $2000, you need to track, label and categorize every, and I mean EVERY expense you have. Because those things add up faster than you can say Jack Robinson.
But wait a second. Wouldn’t all those receipts be too much paperwork? Not if you use your business credit card, which will also let you earn cash back and rewards (when applicable) on your spend. Neat.
4. Make Use of Lockbox Processing
Lockbox processing can be a lifesaver if you are receiving large customer payments. What it essentially means is that, instead of getting payments to your business address, they instead go to a PO box from where your bank will process those payments for you and then deposit them into your business account.
Not having to manually process every payment will save you a lot of time.
5. Use Separate Coding for Ongoing Projects
If you have ongoing projects, you should think about setting up separate line items. Why? Because if you enter the project cost into your general ledger at a later date it will only lead to processing one invoice twice. You don’t want to do that.
Instead, by setting up separate coding for your ongoing projects, you get clean and easy-to-read reports.
6. Hire a Professional
Look, I understand. You’ve just started your SMB and you think you might be able to save some money by doing your own bookkeeping and accounting. Perhaps you even have a knack for it.
But here’s the thing. You are not a professional accountant or a bookkeeper and very soon your hubris is going to make you pay badly. To avoid this, hire a professional to keep an eye on your books and you in return, you can deal with other stuff. Which are probably going to be more interesting.
7. Use an Accounting Software
There are plenty of reasons why you should consider using an accounting software app like Xero for instance. This will allow you to automate your entire accounting process, plus you can use the full suite of their professional tools and features and that’s not something you can get with your in-house system.
8 Look Better Into Credit Screening
You’ll often be in a situation where you will have to accept credit from a customer. The question is, who should you accept credit from? Certainly not from a customer with bad credit.
You need to perform a credit check before accepting it from a customer. Otherwise, you are running into a risk of not getting paid. The least you can do is screen those customers with a software like Credit Karma and ask for a deposit.
9. Consider Labor Costs and How You Reimburse Employees
One of the biggest (if not the biggest) expenses you’ll have will be paying your employees. Of course, you want this to be fair, which is why you need to keep tabs on any perks, overtime work and benefits you want to offer them in order to avoid either underpaying them and overpaying them.
One big problem here is that, when asking for reimbursement for travel and other expenses they accrue, employees will often send you messy receipts, which may even contain a bunch of errors. Instead, get them to use an automated electronic entry system when scanning their receipts.
10. Don’t Forget to Separate Your Business and Personal Expenses
You know what they say, “separate your love life from your business life”. The same logic applies to your expenses. I hope I don’t have to tell you this, but your grocery expenses do not belong in your business general ledger. Keep these two separate with a high fence.
There you have it. 10 small business accounting tips you should follow as a business owner. If you find only one of these useful, I’ll consider my mission a success.
We’d like to hear from you in the comments below and don’t forget to sign up your email to try Purchase Order Plus for free and make creating, approving and sending purchase orders on any device easier and faster.
Last week we talked about procure to pay (P2P). We explained why it is important and useful for accounts professionals to adopt procure to pay systems and how this can help them run their businesses more effectively. We also touched a little on procure to pay cycle and said it consists of the following 14 steps:
- Identifying the requirement
- Authorizing the purchase order
- Approving the purchase order
- Identifying and vetting the suppliers
- Taking quotes from suppliers
- Negotiating terms with suppliers
- Selecting a supplier
- Confirming a purchase order
- Sending a shipment notice
- Receiving and inspecting the received goods
- Recording an invoice
- 3-Way match
- Paying the supplier for the goods they have delivered.
In this post, we will explain each of these 14 procure to pay cycle steps and what they mean.
Identifying the Requirement
Before a purchase can be made, there has to be a need or requirement for supplies, material or parts needed for the continuation of a business operation. This requirement can be identified by a worker directly on site, who notifies his immediate superior, who then creates and submits a purchase request to the manager.
Authorizing the Purchase Request
There are several factors that can affect and derail the authorization of a purchase request. For instance, it might need a higher level of authorization and be required to be sent to a senior level executive for approval or revision. Also, the purchase request might clash with the company’s or the department’s budget limit and this can cause it to be rejected or returned for revision.
Approving the Purchase Request
However, if all obstacles have been successfully surmounted and it has received an approval from the procurement officer, the request can then proceed to the the next step. In larger organizations this may be an inventory controller. He will look if the company already made similar requests earlier. Once the inventory controller is finished, the purchase request is sent to the procurement department. Keep in mind that in smaller organizations, these two may be the same person.
The next step in the procure to purchase cycle is the procurement itself. There are two ways this step can go.
a) If there were other requests like this one, then the company creates a Call-Off with an existing supplier the company has a contract with.
b) If there are no similar requests, then the buyer looks for a new supplier.
Identifying and Vetting the Suppliers
There are several ways for a company to find a supplier for the materials it requires. This includes referrals, search databases, Internet search, etc. The buyer needs to carefully consider his options and select a few potential suppliers. The next step is to send each of them a request for proposal (RFP) or a quote.
Taking Quotes from Suppliers
Once the buyer sends out RFPs to potential suppliers, they need to prepare quotes and send them back to him. The buyer then needs to review them. This person will make the changes and send the quote back to the supplier and tell him if he agrees or not.
Negotiating Terms with Suppliers
If the buyer has approved the RFP and quote from the supplier, the two can proceed to negotiate the terms. This will include: payment terms, delivery terms, freight fees, insurance fees, quantity discount, quality and more.
Selecting a Supplier
Once the buyer has concluded negotiations with the potential suppliers and identified one he will do business with, he will award that supplier a contract and send him a purchase order (PO) for the items.
Confirming the Purchase Order
After the supplier receives the purchase order, he needs to send a confirmation to the buyer. The buyer then keeps this confirmation for future reference in his records. Earlier this was done on paper, with both the buyer and the supplier having several copies (for each department involved), but today all of this can be done via specialized software or email.
Sending a Shipment Notice
Following the confirmation of the PO, the supplier needs to send a shipment notice to the buyer, notifying them that the goods are on their way. This notice will typically include the shipment date, delivery location address, PO number, description of goods (number of packages, their weight…) and the name of the transporter, among other things.
Receiving and Inspecting the Goods
Once the buyer has received the goods, he will have to inspect it thoroughly to see if it matches the terms agreed with the vendor. At this stage, the buyer needs to check the condition and quantity of the items. The delivery staff will also compare the PO number to the one from the request and confirm the receipt.
Recording an Invoice
If the buyer has acknowledged that he has received the goods and has no complaints (he didn’t send anything back), the supplier will send him an invoice for payment. The invoice will contain the payment date, how much the buyer is to pay, PO number and other payment terms.
The purchase order, invoice and any delivery documents need to go through revision and checking by the accounts payable department of the company to see if everything matches.
Paying the Supplier
This is the final step in the procure to pay cycle. If everything is okay and the invoice matches the purchase order and the delivery documents, the buyer issues a payment to the supplier according the the payment terms they’ve agreed upon.
And that is how the procure to pay cycle works! All 14 steps of the P2P cycle explained.
What do you think about the procure to pay cycle? Are you using it? Let us know in the comments below the post and don’t forget to sign up for early access to Purchase Order Plus and join our launch list today!
A few pictures from the recent road trip I took to Whanganui to work with the development team. We are proud to be working with Appmani, a division of NZ Computing Solutions to create POP. Beta testing is about to start to ensure we are ready for the public launch early next year. Watch this space!
If you think that purchase orders are not for your company or have some other misconception about them, here are the biggest 5 purchase order myths you need to stop believing in right now.
1. “Our Current System Works, We Don’t Need to Change it”
You don’t have to wait until the roof collapses on your head to start fixing it. By then, it will already be too late to do anything. The same goes with your purchasing process. The way your company does things may work now, but when was the last time you really analyzed if it is efficient. Have you considered if there was a better way to do things?
Furthermore, your current system might work well for a small company, but once you start expanding your business, it will start being more an obstacle than an asset. So start thinking about implementing purchase orders now, even if you don’t need them, before it is too late.
2. “We Don’t Need Purchase Orders”
This is one of my personal favorite purchase order myths. Some companies see purchase orders as an unnecessary step and think they can do without them. Just because your company is small or doesn’t order a lot, doesn’t translate to “you don’t need purchase orders”.
A purchase order is a legally-binding document that protects you in case any problems in purchasing arise. So next time the supplier fails to deliver the goods, you’ll be more than happy that you have that paper trail with you.
3. It’s the Same as Invoice
No. Purchase orders are definitely NOT the same as an invoice. Yes, they have a few things in common and share some same or similar features, but so do chickens and geese. Both are feathery and lay eggs. But you wouldn’t mix one for the other, would you?
A purchase order is created by the buyer and indicates his orders. On the other hand, an invoice is created by the seller and tells you about payment terms. So, no, they are definitely not the same thing. Think of a PO as a Contract of Sale and of an invoice as an Confirmation of Sale. One is use to order goods and the other is a reminder for the buyer to pay for the ordered goods.
4. Only the Purchasing Department Needs Them Anyway
Another quite common misconception about purchase orders is that they are only really useful to the company’s purchasing department. This is simply not true. Without them, you would have a much tougher job keeping track of your spending and knowing where your money is going. But with purchase orders, you can more easily identify critical spending areas and reduce the unnecessary ones.
5. They are Way too Complicated
This may have been the case in the past, when everything was done on paper, but hopefully your company is way past that point by now. These days you can create purchase orders online. Accounting software like Xero can allow you to keep the essential information, like your company name and information and the vendore’s name and information and just change the items you are ordering, their amount or some other detail.
Did we manage to bust the biggest purchase order myths for you? Dou think there are some other misconceptions about purchase orders we should have covered here? Let us know about them in the comments below.
We are about to launch Purchase Order Plus. Sign up for our email list to be among the first to know when it’s ready. Also, if you think you know what could make POP better, let us know in our survey.