An accounting strategy is an approach to evaluating financial data. It goes beyond simple maths and looks at the meaning beyond the figures. Choosing an appropriate accounting strategy for small business gives entrepreneurs key insights into the factors that could hold them back or drive them forward.
The importance of small business accounting
There are three main reasons why using the right accounting strategy for small businesses can literally make the difference between success and failure. They are:
The need for reliable (i.e. consistent and accurate) financial data
The need for professional expertise beyond the capability of most entrepreneurs
The need for businesses to understand the facts behind the numbers
Each of these reasons generally has some degree of importance to all businesses. However, the level of importance each reason has depends a lot on the business's growth stage.
In the early days of a business, there will be little data to analyse. It is, however, vital that it is consistent and accurate.
As the business grows, more data will be gathered and entrepreneurs will want to make the most of it. However, many business decisions will still have to be taken despite very limited data. This means an accountant’s professional expertise and experience can be invaluable.
Once a business reaches maturity, it will usually have enough data for meaningful analysis. At this point, small business accounting typically becomes fused with business development. It becomes less about the numbers and more about what drives them.
Accounting for growth
In the early days of a business, entrepreneurs typically have to balance investing in their success with managing tight budgets. The most pragmatic approach here is generally to do as much as you can yourself but get extra help when it makes a difference.
Realistically, that would usually mean taking charge of your everyday financial organisation and record-keeping. None of this is difficult. It’s essentially a matter of organisation. Ideally, you would have a bookkeeper check the books once a month to identify errors quickly. You would also check in with an accountant once a quarter.
If money is really tight, then you might want to stretch this out somewhat. Potentially, you could see a bookkeeper once a quarter and an accountant once or twice a year. This does, however, run the risk of mistakes being amplified over time.
Developing an accounting action plan
Once your business gets more firmly established, you need to think more seriously about the connection between business and accounting. Your data history probably isn’t robust enough yet to be fully relied on.
You’re likely still to be taking a lot of decisions based on general principles combined with experience and judgement. You are, however, getting to the point where your data will have real significance.
Part of the reason your data is becoming more significant is that there will be more of it. That means you will probably hone your organisation strategies. For example, this could be the time you invest in proper accounting software, rather than just using spreadsheets for transactions and folders for receipts. Ideally, you’ll increase your use of a professional bookkeeper and an accountant.
Small business accounting and business strategy
Once your business is established, you can leverage small business accounting to develop it to its maximum potential. For example, if you used debt to grow your business, then you might want to focus on accelerating income. This could allow you to pay back the loan(s) quickly and hence reduce your interest payments.
You might also want to improve your current operations and/or business relationships. In other words, you might want to put down your roots as a precursor to branching out. When you are ready to expand and/or diversify, you may then want to look at how best to harness your profits to fund this. You might also want to consider other sources of business capital.
Whatever your priorities are, using the right accounting strategy for small businesses can play a vital role in making them realities.