Accountants for small businesses are professionals who focus on aiding smaller enterprises to not only sustain themselves in difficult economic climates, but to also to grow and evolve. Many new business owners are unaware of how important it can be to apply strict and relevant financial practices to their business from the outset. Many times, inexperienced owners are worried about finding and servicing clientele or manufacturing products rather than building a solid financial base that adheres to good accounting principles.
At SureBooks we are proud to be an accountancy firm focused on working and supporting smaller businesses within South Africa. Our accountants for small businesses are specifically trained to help you and your business build a solid financial basis that will help sustain your business even in the toughest of economic environments – an ever present obstacle in a developing country like South Africa. We differentiate ourselves from our competition by not only providing excellent accounting services, but also by educating entrepreneurs on industry standard financial practices and good accounting principles.
In this article we want to focus our attention specifically on accounting principles that are particularly important to smaller businesses. These are all principles that our SureBooks accountants are sure to apply to your situation, which can help give your business the competitive advantage it needs. So, if you would like to learn more about great financial management, don’t hesitate to call or visit our website, where we will be happy to provide you with the accounting assistance you need.
Principle 1: Consistency
The first and most important thing accountants for small businesses will look to apply to your enterprise when taking you on as a client is the consistency principle. This is a fundamental guideline that, in its most simple definition, states that one should look to always apply the same accounting practices from one time period to another (whether that be from month to month, per annum, or every quarter) . That means that once you have a good system set up that you do not look to change it.
There are several important reasons as to why accountants urge businesses to retain similar practices. Firstly, it makes it possible for financial statements to be compared from one time period to another, it also helps make it easier for you and any investors or loan officers to comprehend your businesses financial health. Furthermore, by sticking to the same accounting procedures you are also able to build reliability in the information that your statements and other financial documents can provide the business, as you can start to build up trends and other patterns that could help spot weaknesses or strengths in your business’s operations.
It is true that, although consistency is important, the very nature of owning and operating a business comes with many surprises to which you may need to adapt your current financial operations. In these scenarios accountants for small businesses should also teach you that when looking to make changes to your accounting procedures, you should still follow a consistent procedure for changes. This includes a formal justification for why you believe these changes or necessary that should be filed with the rest of your companies’ essential financial documents. These changes should also be disclosed to all relevant parties, including loaners, investors, and third party accountants.
Benefits Of Consistency
There are many benefits that come with applying the consistency principle, however three of the most important include:
Trend Analysis: As mentioned above, by being consistent in your accounting and financial practices, you are able to build reliability in your financial statements, which in turn can be used to build trends to help guide your businesses future financial choices.
Financial Stability: By applying the same consistent practices every day, you are also able to build stability in your enterprise’s finances – as you will not only be able to minimise sudden financial shifts but also be aware of any looming threats to your businesses operations before they happen.
Credibility: Most importantly, you are able to build credibility in your business, as having consistent procedures help to make your business a more viable option to future investors or beneficial external third parties.
Principle 2: Accrual
Whereas the first principle of consistency and its benefits were easy to understand even if you are not well versed in finances, the principle of accrual may seem like something that only accountants for small businesses would understand. However, if you hire a SureBooks accountant, you can rest assured that the principle is being applied to your own business’s finances.
Accrual Vs Cash Accounting
When it comes to recording both revenue and expenditure streams for your business there are two ways you can choose to go. The cash system (or cash accounting) is a simpler system of recording your income and expenses, it is also easier to understand. Basically, you only record transactions whether money comes in or goes out when the actual cash is received or paid.
In contrast to this we have the accrual system, which is the industry standard practised by most accountants for small businesses. In this system, rather than only record a transaction when money is actually changing hands, you record income and expenditure as they are incurred or earned. You record these amounts whether you have received the money or are still waiting for it. It is common practice under the accrual system though, to make a note of whether the actual cash has been received or not, and the transaction can be updated at a later date to account for the actual changing of money.
The reason accountants for small businesses, and other accountants for larger companies use the accrual system rather than the cash system is also simple. The accrual system is more accurate in the long run as it provides your business with a better representation of your company’s actual financial position.
The Benefits Of The Accrual Principle
Now that we understand the difference between accrual and cash recording, we can look at the benefits of the accrual system and why it is preferred by accountants.
Accurate Financial Picture: Firstly, as already explained above by recording when the transaction happened rather than when the company receives or spends the money, you are able to gain a more accurate understanding of your financial position. For example, if a transaction happened in June and the money only arrived in July, your accountant would still record it for June – under the accrual principle – as this would show accurately that the business you did actually happened in June and not July.
Improved Financial Management: By being more aware of what time period your business actually conducted the business rather than when the money came in, you are able to better pinpoint time periods when business activity increases and decreases. By being able to see these trends you are able to better plan for the next year. Therefore, the accrual system can be linked to overall better decision making. This is especially true for businesses who operate or supply specific seasonal based events like Christmas, Halloween, Easter or Valentines.
Improved Credibility: As you will see throughout the discussion of these accounting principles, the main purposes of accountants for small businesses applying them is to provide your business with better financial credibility. The financial statements produced under the accrual system are considered more reliable by most financial institutions including Tax Services, Banks And Investor houses. Therefore, by utilising these systems, you are more likely to get more opportunities from these financial institutions when using the accrual system.
Principle 3: Going Concern
You may think you have read this wrong and that maybe we misspelt growing concerns rather than going concerns. But rest assured that the principle of going concern is an important one that all SureBooks accountants for small businesses are aware of. Going concern is also sometimes referred to as the assumption of continuity, and in simple terms is a principal assumption that your business will continue indefinitely (in other words an assumption that your business will not cease to function).
The Importance Of Going Concern
This may seem like a given assumption to make as no business owner wants their business to fail – and in terms of accounting, it is a rather important distinction to make as it actually impacts several key accounting practices. These include:
Financial Reporting: When one assumes that the business will continue on indefinitely, your accountants for small businesses will prepare your financial statements to reflect that assumption. Although the going concern principle can be reflected in financial reports in several ways, the most prominent reflection is seen in the reporting of assets. This is because the principle leads to the expectation that you will continue to use the assets available to you indefinitely. Thus, the value of the asset is continually recorded while they are still being used, rather than recording the liquid (or market value) of that asset once off.
Risk Disclosure: Sometimes the reality of the business world forces businesses to shut down for numerous reasons. Here there is also an important application of the going concern principle. When it becomes impossible to maintain the assumption that the company will continue to run indefinitely, because of financial constraints or because of legal challenges, it becomes essential to highlight the doubts of continuation in your financial documents. This transparency is not only critical for investors but also for accountants and for legal bodies who need to be informed about the health of your business.
Here again, we see that when accountants for small businesses apply the going concern principle to your business, you are receiving benefits. Not only does it improve the credibility and reliability of your businesses financial reporting, but it also helps provide you as the business owner with an accurate financial picture of your business.
Not only are you able to more accurately evaluate your assets (which can be important to future investors) but it also protects your company from legal liability as the inaccurate reporting of assets can be seen as a form of tax evasion.
SureBooks And Accounting Principles
In this article we only had enough time to look at three of the accounting principles that are essential to implement into any company’s financial structure; it must be noted that there are a host of others. These include principles like matching, materiality, conservatism and the entity principle to name a few. These may sound complex in name, but when hiring a SureBooks accountant you know that all these principles are being ingrained into the financial culture of your small business.
If you are interested in learning more about the other principles at work in modern day accounting, or you simply need help with your company’s finances then don’t hesitate to call SureBooks and let us see how our accountants for small businesses can help you out today!
