How to Set Up a Small Business Accounting System

Many small business owners (myself included) tend to focus on the more glamourous aspects of their business eg. sales, marketing and product/service development.  As a result, accounting often does not get the attention it deserves.  In addition to the perception that an accounting system does not necessarily add value, it can also be a little intimidating.  However, there are numerous benefits to setting up an accounting system and it can actually be fairly straightforward especially if you have some help with setting it up.   A good accounting software tends to handle most of the complexity of accounting as long as the data is compiled and entered accurately.

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Accumulate Financial Documents

• Keep all documents relating to your business including invoices, bills, bank statements, receipts, government documentation and assessments. 

• When in doubt about the relevance of document to your business, hold on to them and ask your accountant (or someone else who can help) at a later date.

• Invest in a stamp that indicates the received date of the documents .

Create Filing System for Documents

• Use file folders and labels to organize financial documents

• Maintain bank statements, customer invoices, vendor bills, government assessments etc. in separate files

• Investing in colour coded file folders can greatly facilitate file retrieval.

• Alternatively, set up a paperless office where files can be retrieved from your computer or the cloud

• File regularly to avoid scrambling at the end of the year

• Maintain separate folders (either physical or on your computer) for outstanding invoices , bills and other documents which require follow up.

Determine Accounting Requirements

• Review volume of transactions and complexity  of business as well as your budget and time constraints.

• Depending on your requirements  either  hire  a bookkeeper (full or part time), do it yourself or outsource to a third party

• Usually a good idea is to have access to a professional accountant  to help out with setup of accounting system,and  ongoing questions as well as financial reporting and analysis and  tax preparation.

Select Accounting Software

• Accounting requirements i.e. whether you hire a bookkeeper or DIY will determine if you need software.

• QuickBooks is good for many small businesses and freelancers.  Speak to an accoutant if unsure

• Free software also available eg. Wave Accounting , although functionality is limited

• If doing it yourself, select software that is user friendly.   Many small business software have free trials.

Enter Financial Transactions into Accounting Software

• It is important to enter transactions on a timely basis including customer invoices, vendor bills, deposits and cheques.

• Reconcile bank statements monthly to track balances and reduce potential errors

• Month end adjustments like depreciation, foreign exchange, accruals etc. help improve accuracy and reliability of financial statements, but can be done by accountant at year end.

Generate and Analyze Reports

• Accounting software will generate reports based on data entered.  Review Accounts Receivable and Aging Reports, accounts payable to vendors, inventory balances etc.

• Financial statements can be generated monthly reflecting Profit and loss of the business as well as Balance Sheet. 

• Analysis of financial statements can help improve sales, reduce expenses and ensure that customer balances are being collected and loan covenants are being met.

Related Articles:

• 19 Features to Look for in a Small Business Accounting Software

• Review of Wave Accounting 

Ronika Khanna is an accounting and finance professional who helps small businesses achieve their financial goals.  She is the author of several books for small businesses and also provides financial consulting services.

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