How to Setup an Accounting System for Small Business

For a small business or sole proprietor, accounting has two basic components: (1) data collection and organization, and (2) data analysis and decision-making. The first often falls under the heading "bookkeeping," and the second falls under the traditional definition of "accounting." However, for a small business with a tight budget, few personnel and not much time, an accounting system should tie both together seamlessly and efficiently. Here are some ideas on setting up an effective accounting system for your business.

Maintaining the books is the most important part of your accounting system. It is one of the most valuable activities in business in general. It is also required by law in some places.

The raw information comes from a variety of sources: bank statements, contracts with vendors, invoices, receipts, bills, credit card statements, internal memos and even word-of-mouth communication within the company. The bookkeeping system must incorporate all of this raw data to create usable information.

For most businesses, the information in your books will fall under one of five categories*:

1. Revenue and money you receive

2. Expenses and money you pay

3. Accounts Receivable--money others owe to you

4. Accounts Payable--money you owe to others

5. Assets--including tangible and intangible property

Your company may have much more of one type than another. For instance, a service company will likely have few tangible assets, but may have a significant amount of receivables and payables.

*Note: These terms may differ in formal accounting methods. For instance, "Accounts Receivable" is often considered a component of "Assets." But for a business just creating its accounting system, this is the easiest way to think of it.

There are a number of programs available for bookkeeping that you might find useful. Some are more complicated than others, and some more comprehensive than others. Many include accounting-related features, which can make your life a lot easier. Personally, I have even had success using Microsoft Excel for various bookkeeping activities. Excel is a highly versatile program that is familiar to many.

Whichever option you use, your bookkeeping system should be easy, and should get the job done. You should not need to spend a lot of money on this. If one program is too expensive, a simpler option can be just as good.

Your bookkeeping system is only useful if it is updated regularly with the latest information. It will help to create a schedule for updating the books. Depending on the volume and frequency of transactions in your business, updating the books at the end of each day, each week or each month will be necessary. The important thing here is consistency over time. Bookkeeping should be easy, convenient and fit into your schedule. Bookkeeping work should not take up more of your time than running your business.

Now for the fun part: actually using the data to learn about your business and make decisions! The purpose of all this is to get a better idea of what is going on in your business. I have worked with clients who, before my creation of a decent accounting system, were in the dark on a lot of important areas.

Analyzing your business by the numbers enables you to uncover trends and patterns that are otherwise invisible. You can begin to make forecasts and projections. For instance, if you notice seasonal variations in your revenue or costs, you can determine months or even years ahead how to construct your budget. You will be able to see the biggest drivers of your costs and sales. Do some products and services pay for themselves? Are others losing you money? Would switching vendors have an impact on profit?

These and countless other insights will be revealed by a regular analysis of your bookkeeping data. Just as with bookkeeping itself, you should study the data on a regular basis. Again, sticking to a reasonable schedule that supports your main business activities (instead of taking over them) is key.