Small Business Accounting – The key to maintaining your business books!!
Small business accounting can be defined as the accounting systems, methods, processes and/or software, which are used to account for financial transactions of a small-scale business.
The definition of a small business is very difficult to layout. It is also very subjective. In other words, there is no exact parameter or cut-off below which a business can be categorized as small. Usually the size of business is determined by the number of its employees, scale of its operations and most importantly by the value of turnover or sales it generates. In normal scenario, a business unit is categorized as small when it ranks on a lower side on one or more of the above parameters.
Does the size of the business matter?
The importance of correct accounting nonetheless does not depend on size of business. Irrespective of whether it is a single individual owned, partnership or multi national corporation, accounting operations need to be accurate and arithmetically correct. This is one of the basic non-negotiable conditions of any business that its accounting functions have to be one hundred per cent correct; otherwise the profit estimation would be adversely impacted. In order to judge whether business is doing good or bad, it is critical that the accounting functions are correctly performed and that is completely independent of the size of business in question.
In earlier days, accounting functions in small businesses were mostly a manual activity. It involved maintaining of paper registers and files, several sets of payment vouchers and invoices, tax return filings and other statutory and legal documents. Modern day accounting however, is performed through computer software.
There are several points, which require careful consideration before selecting accounting software for a small sized business. First is the cost element. As a rule of thumb, accounting software is costly to purchase and involve substantial maintenance and upgrading expenses. Unless the business generates adequate revenues it might not be economically feasible to absorb the cost of modern accounting software, as it would increase overhead and subsequently reduce operating profits. So before purchasing accounting software, the owner of the small business should carefully do a CBA (or Cost Benefit Analysis).
The other important consideration would be the vendor selling such software product. More often than not, one particular vendor sells these software programs, but another vendor who entered into a contractual agreement with the selling vendor provides the repair and maintenance support. Before purchasing accounting software, it is imperative to analyze the efficiency and service track record of the servicing vendor, as otherwise the business may face challenges in maintenance and support related functions of the software it has purchased.
Are upgrades available?
There is a possibility of upgrading the small business accounting software with future expansion of business. There are few software versions, which have fixed bandwidth, i.e. they cannot accommodate transactions to be accounted for beyond a certain specified limit. It is very risky to invest in such types of accounting software as they create problems when business volumes go up due to expansion or any other reason. In such cases, the owner has no other option but to completely scrap off or discard the existing accounting software and purchase a new one. To overcome this problem, the owner of a small business can consider purchasing modular accounting software, which can easily be upgraded if the requirements of business change in the future. However, this decision would again be restricted to the availability of resources (or budget) as modular accounting software can be very costly as compared to their conventional counterparts.
Irrespective of the fact, whether small business accounting is done manually or through computer software, it must be clearly remembered that accuracy is one factor, which would be of supreme importance. In fact, the very existence of a small business can actually depend on the correctness of its accounting functions.