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Essential Bookkeeping Truths to Make the Most Out of your Accounting Software

Many entrepreneurs are realizing the value of using accounting software-as-a-service vendors.

But just having access to software is no substitute for understanding financial management fundamentals. The more you know about the principles of financial management for small businesses, the more benefit you’ll get out of the software.

To help deepen your understanding, here are seven principles of bookkeeping that apply to small businesses in all industries.

  1. Spot the leaks.

Many businesses are losing money – and the owners can’t figure out why. One of the purposes of financial accounting is to help you understand which aspects of your business are profitable – and which ones are hemorrhaging money.

Review the cost of a service or product and compare that cost to the revenue it generates. Account for depreciation and wear and tear on equipment and inventory depletion. In foodservice, account for waste and spoilage.

Understanding the profit margins of your business is critical if you want to build a company that survives over the long haul. Too many business owners focus on the revenue a product or service generates without carefully examining all the costs associated with it. Your accounting software should help you analyze these costs to ensure you are making the right decisions for your business.

  1.  Account for the cost of goods.

Cost of goods is an accounting concept many business owners struggle with when entering their data into their bookkeeping software. Prices can vary according to a lot of factors, including vendor discounts, seasonality, quality differentials and others.

Make sure you are entering the right cost of goods data into your system to ensure you’re not missing out on possible tax savings.

  1. Claim your deductions.

Nobody wants to pay more tax than they need to. Too many business owners fail to claim their eligible write-offs, leaving money on the table. You should understand which expenses and investments are deductible against income in the current year, and which have to be spread out over time using capital cost allowance rules.

Some entrepreneurs fail to claim capital cost allowance, which saves on their tax bill in the short-term, preserving vital cash flow to keep the company running. Also, know when to claim deductions immediately and which ones are better deferred to a more profitable year. Your CAPEX (capital expenditure) plan can help guide you, as well as your accounting professional, who can help you identify and track these CCA opportunities and expense timing strategies, to help reduce your overall tax liability and increase profits.

  1. Don’t commingle funds!

Separating your business and personal accounts from the moment you start your business is crucial. Keep all expenses separate. Document any loans from your personal savings to your business. This applies to credit cards accounts, too: Charge all business expenses on a company credit card instead of a personal charge card.

  1. Set up a system.

Paperwork management is an essential component of effective accounting. Develop a system that tracks all business paperwork (receipts, mileage reports, etc.). The better your paperwork filing system, the more accurate your bookkeeping will be when tax time arrives. Throwing all your business receipts in a shoebox is not a system.

  1. Pick an accounting method – and stick to it!

Generally, small businesses in Canada can choose either the cash method or the accrual method.  Your accounting professional can help you decide which method is the most suitable for your business.

Whichever one you use, be consistent and use the same method in all aspects of your business. Switching back and forth between cash-based and accrual accounting can be a real headache come tax time – and may land you in hot water with revenue officials.

  1. Outsource non-core accounting functions.

Not every business needs to have an in-house bookkeeper on staff. Thanks to the availability of small business accounting and software-as-a-service packages (SaaS), many business owners can easily manage basic day-to-day bookkeeping tasks.

Don’t let the fear of accounting stop you from completing your own basic bookkeeping functions. You can outsource tasks you don’t understand, and ask for detailed reports on outsourced work. This helps you improve your accounting knowledge while keeping your finger on the pulse of your company’s financial health. It also frees you up to focus on your own core competencies: Serving your customers.

The more informed you are regarding your company’s bookkeeping, the better prepared you’ll be to use your business’ accounting software to your advantage. A knowledgeable business owner is one who is able to capitalize on opportunities and make the most of their tax filings each year. SaaS accounting software makes it easy to understand the intricacies of your business. Understand these bookkeeping basics and you’ll appreciate your business accounting software even more.