Is an Accounting System Really Necessary
Hello All,
I was helping someone set up their accounting on QuickBooks recently and was asked about the purpose of the profit and loss statement and how it was relevant to their business. The question was surprising to me, but I quickly realized that many business owners while understanding that accounting is important often have to figure the why by themselves.
A large number of business owners believe that the primary purpose of an accounting system is to ensure compliance with tax obligations. This is correct, however, a well set up system can be much more than that. It can give you insights into numerous aspects of your business that ultimately ensure its success. Some examples of how it can help:
Determine your bestselling product so that you can redirect your marketing efforts
Identify your best customers allowing you to offer them incentives
Calculate your costs of making your product and find ways to reduce them
Evaluate your expenses and find ways to renegotiate or determine if even necessary
Review your amounts owing from customers (accounts receivable) and follow up promptly to ensure payment
Ensure that you have enough cash flow to meet your short term needs
Review suppliers/vendors and see if you can get better terms/discounts
Compare your gross margins (revenues less direct costs) to others in your industry
Review your inventory, evaluate what is selling well vs what is selling poorly and make better purchasing decisions based on the results.
See your history which can provide data on the trajectory of your sales, expenses and cash generated and also helps to calculate your budget for upcoming years
This is just a small smattering that are not simply about summarizing your financial results for a third party. (See my blog post for an expanded discussion)
Of course, not every business requires an extensive system. If you are a service provider that simply bills a handful of clients once a month, then you might only need reports for tax purposes. Or if you have a side business, it might not be cost effective to invest in an accounting software. However, if there is some complexity in your business or if you think you can benefit from any kind of analysis, setting up a solid accounting system and understanding your financial data can be the difference between success and failure.
Blog Post
My blog posts this week discuss the benefits of having an accounting system and how to decide whether simply using a spreadsheet is sufficient or if you should upgrade
13 Ways an Effective Accounting System Can Improve Business Decisions
An accounting system can be an extremely powerful tool for business owners. When structured with the specific needs of the business in mind, it has the power (through the magic of debits and credits
Should you use accounting software or a spreadsheet to track your small business finances?
Over the years my clients have come to me with their financial data in various formats. I have received shoeboxes of receipts which need to be deciphered and compiled. Some clients have given me their
Finance Stuff:
Why is Facebook Blocking News Links? Facebook is beginning the process of blocking news in Canada as a response to a Canadian law that requires tech companies to compensate publishers. This is a complex issue and will be interesting to see where it goes.
15 Minute Rule For Accomplishing Goals: Interested in accomplishing something but are a master of procrastination? If you can simply muster 15 minutes per day towards a goal (which really isn’t much), it can supposedly go a long way. Also, in my experience once you sit down to do something, you often spend more time than you allocate.
Tax Stuff:
CRA and Tax Court Review Employees who are also Family Members: Hiring of family members can be murky and is frequently an area of audit. My advice is to ensure that you treat family members that you hire more rigorously than you would an employee i.e. have a detailed employment contract and make sure wages paid are reasonable.
How Alternative Minimum Tax (AMT) Can Affect You: AMT is a parallel tax system that affects taxpayers whose taxes are very low compared with their income. There have been changes to rules which all Canadians (especially those with high incomes and one time capital gains) should be aware of.
QuickBooks Tip: Setting Up Sales in Your Chart of Accounts
When determining how to structure your sales in your chart of accounts you have a variety of options:
Set up one sales account that captures all of your sales. This is fine if you only have one or two products or services.
Set up a separate account for each product and/or service. This is probably the most common.
If you receive sales from difference sources, you can set up an account for each. For example if you sell to both final consumers and to retailers/wholesalers.
Sales by geography or currency
Note that you can still have one sales account and set up separate “items” for which you can generate reports in QBO.
Sales by customer is not usually recommended as you can simply generate a report by customer which is entered in the customer field unless you only have a couple of large customers.
Books and Resources:
Coming Soon! Small Business and Your Payroll: If there are any questions that you have about payroll that you want included in the book, please send me an email at ronika@montrealfinancial.ca.
Small Business Tax Facts(Sole Proprietorships/Registered Businesses/Self Employed Workers)
This book helps you take control of your finances by giving you a better understanding of tax (brackets, tax rates, deductions etc), how it applies to your unincorporated small businesses and how to do your own tax return (or at least understand what your accountant does). It also includes a comprehensive breakdown of deductible expenses, by category with special sections on more complex deductions such as home office, vehicle and capital cost allowance.
FastStart Your Corporation(Corporations)
A step by step guide to starting your small business corporation, including what you need to know about incorporation, setting up your accounting and tax considerations.
QuickStart your QuickBooks(Sole Proprietorships and Corporations)
A comprehensive guide that takes you through the many features of QBO and gives you step by step instructions on how to setup and work with QBO day to day. It is ideal for beginners who have never used QBO before and also for those who are currently using it, but have questions or need guidance.
FastStart Your Business (Sole Proprietorships)
A step by step guide for anyone who is planning to start a Canadian business or become self employed (and does not want to incorporate) and wants to know what they need to do or simply has questions.
Small Business and Your Dividends (Corporations)
For incorporated small business owners who want to know more about small business dividends, the differences between salary vs dividends and which is better and step by step instructions on how to file your own dividend declarations (T5s).
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Free Resources
Business 2023 Tax Deadline Calendar
Starting A Corporation Checklist
Start Your Business Checklist
Dividend Declarations Checklist
Small Business Tax Return Checklist
QBO Set Up Checklist.
Small Business Calculators
Previous newsletters
Consultations
I also provide consultation services where I can answer your specific questions relating to your small business and/or finances, provide clarity and give you guidance. Additional details can be found here and here. Note that I no longer provide ongoing accounting or tax preparation services.
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Wishing everyone a tolerably humid weekend!
Ronika