Nail Your Small Business Accounting

Small business accounting is like staying healthy. Everyone knows the importance but few enjoy it. Although important, usually only a crisis makes it urgent. Staying reasonably healthy only requires that you understand (and follow) a few basic principles. For example, excess sugar and processed foods are bad for your health. Walking 10,000 steps per day and elevating your heart rate for 20 minutes, 2-3 times per week is a good exercise plan.


Likewise, you only need to know a few basic principles to maintain a good accounting system.

At a minimum, you need to understand the accounting roles needing to be filled and then assign people to fill those roles. You may not even need to hire anyone. Think of your accounting team as a collection of roles that need to be filled and not necessarily a collection of people.

Your accounting may be so simple that you fill the roles to start with. You may have another team member who can handle a few extra duties. You may hire a part-time bookkeeper for a few hours per month. It doesn’t matter how. What matters is that these roles get filled from the beginning (before a crisis).

Getting your accounting done doesn’t have to be complicated or expensive. You just have to know what to do.

The followings are accounting roles that need to be filled in most businesses:

Chief Financial Officer (CFO). Don’t be intimidated by this title. It takes a fairly large company to need a full-time CFO, and it may be a while before you formally give this title to anyone. The title simply describes a role that needs to be filled.

Someone needs to oversee the accounting. Someone needs to make sure the accounting roles are filled effectively. Someone needs to make sure the books stay clean. Someone needs to make sure the data provided by the books is both accurate and interpreted correctly. Someone needs to use the numbers to advise other leaders on decisions. Someone needs to make sure you are complaint with tax, labor, and other laws.

In the beginning, this role may be filled by you as the business owner, ideally with help from a CPA or contract CFO. Someone needs to make sure the rest of the accounting function is operating effectively.

I’ve written other posts about why a startup needs a CFO and what your CFO should do for you.

Bookkeeper. This function makes sure the books are accurate at least monthly. The bookkeeper should follow a month-end checklist to make sure all transactions get into the accounting software and the bank accounts are reconciled. Depending on the nature of the business, they may handle other transactions such as fixed asset purchase/disposal/depreciation, inventory adjustments, loan and investment schedules, etc.

Once the books are accurate for the month, they can run financial statements and other reports helpful to management.

Accounts Receivable. This function is responsible for the process from customer order to customer payment. This role is simple in a retail store with only point of sale transactions. However, in many businesses customers get billed for products or services and then pay on agreed terms. Someone needs to make sure customers get billed accurately and pay on time. They also need to make sure payments get entered in accounting software so customer accounts remain accurate.

You won’t be in business long if you don’t pay attention to this role. Customers will be frustrated by inaccurate billing and statements. Failing to invoice a customer means lost revenue. Cash flow will suffer if customers don’t pay on time.

Accounts Payable. This function is responsible for the process from making a purchase to paying for that purchase (the mirror of Accounts Receivable). This usually involves receiving bills, verifying they are legitimate, entering them into accounting software, and making sure payments are on time and accurately entered. Even point of sale purchases require the receipt to be tracked and the transaction to be categorized accurately in the books.

HR/Payroll. The function handles hiring and compensating employees. It makes sure new employee paperwork is complete. It makes sure working conditions and practices comply with labor laws. It makes sure employees are paid accurately and on time. It administers employee benefits. Perhaps most importantly, it makes sure payroll tax is remitted accurately and on time.

This function can be completely outsourced to a professional employer organization (PEO). At a minimum, every company should outsource payroll. An abundance of service providers make payroll extremely cheap and easy. You shouldn’t spend more than a $100 and a few minutes per month on payroll if you have a small team. Company like Zen Payroll and Intuit do everything from calculating taxes to direct depositing pay into employee bank accounts to submitting payroll taxes.

Putting it all together

If these roles' workload doesn’t justify new full-time employees, how do you fill them?

I’m biased because this is the work I specialize in, but I recommend hiring a contract CFO to help you set up accounting systems and plug your existing team into the necessary roles. The future headaches you’ll avoid is well worth the hourly rate you’ll pay for an experienced CFO. It shouldn’t take very many hours.

For example, many businesses already have some kind of administrative assistant. A CFO can set up a system simple enough to be run by someone not training in accounting. The admin can handle 99% of the work, and the CFO can be available as needed to answer questions and handle the more complicated transactions. A contract CFO combined with low-cost administrative staff can inexpensively handle the accounting for most small businesses.

That said, there is no one-size-fits-all approach to accounting. Business owners must first recognize that a good accounting system is important, and then they must understand the roles that need to be filled. From there they can build a team to make it happen.

Question: What tips do you have for running small business accounting?