There are a handful of guidelines with respect to setting up an accounting system correctly that are widely accepted. Consider these:
- Set up a reliable accounting system such as QuickBooks and tie the system to your bank accounts, and as many systems as you use. Automation is your friend. If you are using QuickBooks, label each transaction using QuickBooks’ chart of accounts feature so that they come in automatically labeled. This will save time and headaches.
- When setting up a business accounting system, ensure that it uses the double-entry technique and that all financial transactions are being tracked by the accounting system.
- Be in a position to keep your accounting records on accrual basis. The commitment to make the adjustments necessary may seem time-consuming and difficult but it will provide a more accurate picture of monthly and yearly business performance. Cash basis can and will distort your understanding of your business and its performance.
- Build financial models that forecast business growth in terms of income and expenditure expectations. All costs should be based on financial forecasts alongside actual income.
- All your forecast and financial models should be tied to the actual cash flow statements and the balance sheet., and be updated regularly. This should give you a preview of the yearly financial standings.
One of the most common problem situations I see in businesses is managers and owners becoming too busy and involved in growth that they don’t stop to evaluate the accounting of their business, so they have no idea they’re about to run out of cash. The above items will make the information available to identify the impending crisis. However, the crisis can only be avoided if the problem is identified beforehand, and the appropriate action is taken to raise additional capital through debt or equity.