Business accounting: managing the finances of your SME

Use a business bank account

The first thing you should do to ensure sound business accounting is open a business bank account. This simple step will help everything else fall into place. 

To ensure sound management, you need to keep your personal and professional finances separate. This will make everything clearer. Having an account just for your SME also makes it easier to:

• Process government remittances (source deductions, GST and provincial tax payments, etc.)
• Export your data to accounting software

Allocate time and resources to business accounting 

It's important to use current data, so you should follow up on your accounts rigorously on a weekly or monthly basis. 

Remember to keep track of all of your receipts and invoices. You can upload documents using your phone and then use a computer program to organize them.

Choose who will be responsible for your accounting

You can manage your own bookkeeping and accounting using a spreadsheet or accounting software for small businesses. 

But as a business owner, you already have your work cut out for you. You can also outsource these tasks to an external accounting service. Although these services aren't free, they can save you a lot of time. 

Take an accounting course

A number of resources are available if you choose to do your own accounting. To help you learn about accounting or upgrade your skills, you could rely on:

• Basic courses on accounting for SMEs
• Online courses offered by bookkeeping programs
• Online learning platforms

Choose one of the two accounting methods

Business accounting involves tracking cash inflows and outflows to analyze financial performance.

You should decide from the start what information you want to extract from your accounting. You’ll also need to learn how to read and understand financial statements. 

The first thing you'll need to decide is whether to use the cash basis or accrual basis accounting method. What's the difference? It all comes down to when transactions are recorded. Here's a summary of the two options:

Cash basis accounting

Under this method, there are no accounts payable or accounts receivable. Revenue is recorded when money comes in, and expenses are recorded when they are paid.

Example: You sell a service in May, but the client pays you in June. Under the cash accounting method, this revenue will be recorded in June.

This method is considered simpler and is often used by small businesses and sole proprietorships whose operations are less complex. It provides an overview of the amounts that are actually available. 

Accrual basis accounting 

Under this method, you record revenues when goods and services are delivered (accounts receivable) and deduct expenses when they are incurred (accounts payable). 

Example: You sell a service in May, but the client pays you in June. Under this method, the revenue will be recorded in May.

The accrual method is used by businesses with more complex operations. It provides a more accurate view of the overall financial situation. You should be aware that incorporated businesses are required to adopt this method.

Be meticulous in your bookkeeping and business accounting

Bookkeeping involves noting down transactions, categorizing them, and reconciling your accounts (checking that the amounts match). It can help you:

• Make more informed choices (based on the financial information available)
• Obtain financing more easily 

Read our article Six sources of financing for businesses.

Income taxes payable by your business

Keeping your books in order will make it easier for you to declare your business income when you file taxes. How you file taxes will depend on the legal form of business.

• Incorporated company: A legal entity (or "legal person") that must file its own tax return. Read our article Filing a tax return for your business in Canada.
• Sole proprietorship or registered business: The owner must add their business income and expenses to their personal tax return.

Financial statements

Businesses produce a number of financial statements: balance sheet, income statement, cash flow statement, etc. These documents provide an overview of the business's financial health and performance over a given period (quarter, year, etc.). Here are two reasons why they are so important:

• Combined with sound budgeting, this information will help you make better decisions.
• They are required by the government (and must comply with certain standards).

Financial statements can provide many important insights for business owners. You can also call on a qualified expert (such as an accountant) to help you analyze them. 

Working capital

Keeping up with your accounts will also allow you to calculate your working capital. To do so, you should subtract your current liabilities from your current assets. The result (your working capital) represents your current liquidity. This information will help you:

• Assess your ability to pay your bills
• Avoid cash shortfalls

Optimize your business's liquid assets

For a business, liquid assets are vital. They are what the business uses to finance its expenses. Here are three key points.

Cash flow

Cash flow refers to the amount of cash your business takes in, minus its expenses. Observing your cash flow allows you to understand where your money is going. 

Collecting payments 

Depending on your industry and the goods or services you provide, you may have to wait 30, 60 or over 90 days to receive payment. 

Good to know: There are ways to accelerate payments. For example, you could offer a 2% discount if payment is received within 10 days (along with a payment deadline of 30 days).

Be diligent in tracking your accounts receivable. 

Tip: Payment deadlines

Call your clients when they miss a payment deadline. It could make a real difference for your business and your bottom line. 

Paying your suppliers 

Pay your suppliers on time, but not too early. This will allow you to keep cash on hand for longer. 

Set up a payroll system

Payments by cheque

Many small businesses pay their employees by issuing cheques. This makes it impossible to know when the cheques will be deposited (and debited from your account). However, it does mean you could keep your liquid assets for a few more days. 

Choosing who will take care of your payroll

You can handle your own payroll processing, but it can be complicated and time-consuming. You can also choose to delegate this task. Your financial institution likely offers payroll solutions that can:

• Boost your efficiency 
• Save you time
• Let you know exactly when the funds will be disbursed

Try to coordinate paying your employees (cash outflows) with receiving payments from your clients (cash inflows). You'll end up with more available cash and a better working capital ratio.

Whether or not business accounting is among your strengths, you should pay close attention to it. Be prepared and get help from specialists. When you know how to analyze your business' financial health and performance, the sky's the limit!