Accounting: an organized way to keep track of exchanges. Sounds simple enough, right? As intuitive as it might seem, precise accounting is crucial to the health of your small business. Accurate accounting provides data that you can use to make wise financial decisions, and if your data is inaccurate, your decisions will likely be inaccurate as well.
Whether you're hiring a full-time accountant for your business or outsourcing your accounting to a CPA firm, you need to make sure your accounting is in the right hands.
Here are five common mistakes for small businesses to avoid.
1. Focusing on the wrong qualifications. There's a lot more to accounting than just crunching numbers. Accountants need to have a deep understanding of your business because, either directly or indirectly, they touch all of its different components. From time to time, accountants have to work closely with your employees to extract information pertinent to their records. An accountant's ability to communicate and cooperate with others can be just as relevant, if not more so, than the lines on their resume or where they got their diploma.
Because there are many different types of accounting, you also have to make sure you hire someone who has the right accounting background and traits. For example, technical accounting requires a certain skill set and personality where one must frequently dive into complex technical guidance. Does your accountant seem impatient or easily frustrated? If so, he or she might not be cut out for the task.
2. Starting the hiring process before figuring out what you need. What are your business' specific accounting needs? Do you need someone to process your accounts payable and sales invoices, do taxes and payroll, or create your budgets and financial statements? Before doing anything else, you should come up with a âshopping listâ of services that you and your business need â and what you might require down the road â and then find an accountant or CPA firm that can handle all of it.
Keep in mind that revenue alone doesn't always determine your business's accounting needs. If you own a high-end art gallery that sells just a few paintings per month, you might be making big money, but that doesn't mean you have the volume of transactions that would require full-time accounting help. On the other hand, if you have an auto repair shop with a lot of purchases and inventory to keep up with every day, you likely will need more comprehensive and frequent service.
3. Hiring a CPA firm that doesn't âgetâ you. Understanding is key in our profession, and open communication with your CPA firm is critical. If you're hiring an external CPA firm, it has to learn what you do before it gets started â even if the firm is just doing your taxes, there are countless things that can go wrong if it doesn't really understand the business. Make sure the firm can walk you through its process and sets clear expectations for both parties.
You should also choose a practice that's eager to work with you and appreciates your business. Keep an eye out for warning signs, like slow response time. If the firm has too many clients, is it capable of giving you the personal attention you need, or will you be overlooked?
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4. Picking an accounting service that doesn't do financial analysis. A good accounting service must be able to review your financial health. Ideally, you should be getting key health indicators on a day-to-day basis (e.g., gross profit margin, net profit, aging accounts receivable, etc.) because the more relevant information you have, the better informed your business decisions will be.
Let's say you have a phone store that's taking a loss on cellphones, but you're making a huge profit on accessories. If you're only reviewing your sales figures as a lump sum, you wouldn't be able to understand which product offerings are performing best with customers. But if that sales information is broken out and provided to you on a product-line basis, you can take a different approach with your customers to increase sales and focus their attention on purchasing accessories rather than cellphones.
5. DIY accounting. Accounting is a specialty profession; there's a reason why people go to college for it. An experienced accountant understands the process and can execute it error-free, which is crucial because errors could have a monetary impact on your business. If you have no experience in accounting, it's better to leave it to the professionals.
While not always the most glamorous task, accounting is an important part of a small business's recipe for success. Do yourself a favor and hire some help, following the best practices outlined above. As a business owner, you shouldn't be spending your time figuring out accounting software and data entry. Instead, you should be focused on what you do best â building your business.