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In the United States alone, the accounting industry is worth $133 billion, employing 1.3 million professionals, including 665,612 certified public accountants (CPAs) as of August 2022. Accounting isn't a choice; it's the bedrock of a company's success. For all companies, no matter its size, meticulously managing finances is not just essential; it's survival. It's about understanding assets, liabilities, income, and cash flow dynamics, enabling businesses to set budgets, monitor expenses, and spot growth opportunities.

The art of financial accounting is nuanced, demanding a meticulously planned strategy. The success of any business hinges upon its ability to implement and execute an effective accounting plan. In this pursuit, eight universal best practices emerge as guiding principles, ensuring not just survival but thriving in the competitive landscape of modern commerce.  

This article presents eight essential accounting best practices, guiding businesses toward financial stability and lasting prosperity. From meticulous record-keeping to strategic investment decisions, these insights empower businesses to make data-driven choices, ensuring resilience and growth in the face of financial challenges. 

Accounting Best Practices Businesses should Implement

1. Outsource Payroll

Outsourcing payroll services to a third-party company offers numerous advantages that can significantly impact your organization. 

  • By entrusting payroll responsibilities to experts, businesses ensure accurate and timely payment processing while adhering to complex legal regulations from entities like HMRC and the Pension Regulator. 
  • Outsourced providers safeguard sensitive data through secure cloud-based technologies, preventing costly breaches and identity theft
  • These services ensure compliance with ever-changing tax laws, saving businesses from fines due to errors or late filings. 
  • Cost-cutting is another benefit, reducing both direct payroll processing expenses and hidden costs associated with leave and employer PRSI.
  • Time efficiency is improved as well, allowing businesses to focus on core tasks, while access to cutting-edge technology and expert advice ensures accuracy and reduces the risk of non-compliance.

2. Use accounting software or automated accounting

In the United States, recent data from accounting services reveals that nearly 75% of accounting tasks can be automated, driving the rapid growth of the accounting software industry, predicted to reach $12 billion by 2026. Utilizing technology for automated finance and accounting not only expedites processes but also offers significant advantages to businesses.  

  • Real-time insights provided by automated systems enhance cash flow management, allowing swift assessments of revenue, expenditures, and pending transactions. 
  • Time management improves as automation eliminates painstaking manual data entry, generating structured reports and increasing efficiency
  • Customizable templates in high-quality accounting software enhance adaptability across various industries, enabling tailored solutions. 
  • These systems also transcend traditional data storage constraints, ensuring precision and offering cloud-based accessibility, fostering remote collaboration. 
  • Security measures, including encryption technology, fortify sensitive information against cyber threats, while comprehensive analytics facilitate accurate trend analysis and informed decision-making. 
  • Automated bookkeeping simplifies tax preparations, allowing professionals to focus on verifying data accuracy rather than gathering information. 

Small businesses can also start with accounting in Excel and then transition to more sophisticated software.

Key tasks such as invoice processing, payroll management, budgeting, auditing, financial reconciliation, and tax management can be seamlessly automated, enhancing operational efficiency and accuracy while reducing human error. Embracing automation not only transforms financial processes but also bolsters businesses for a future of streamlined and error-free financial management.

3. Streamline and automate accounts payable

The accounts payable (AP) department often operates in the background, receiving little attention. However, overlooking updates to its processes can have far-reaching consequences. Challenges within accounts payable can affect not only the internal functioning of the entire company but also crucial relationships with essential suppliers.

This department holds significant sway over the organization's cash flow, making accuracy and efficiency paramount. Ensuring meticulous attention to AP processes is vital, as it directly impacts the profitability, growth, and competitiveness of any business. In essence, the efficiency of the AP department is intricately linked to the financial health and sustainability of any enterprise, making it a pivotal component deserving of careful consideration and investment.

Implementing AP automation software revolutionizes the accounts payable process, offering a myriad of benefits crucial for modern businesses.  

  • By automating tasks like invoice processing and approval workflows, manual data entry and paperwork become obsolete, allowing your AP team to focus on strategic financial analysis and vendor relationships. 
  • Automation ensures accuracy and compliance through features like automated data validation and duplicate invoice detection, minimizing the risk of errors and fraud. 
  • Automation guarantees adherence to regulatory guidelines, preventing reconciliation challenges and financial losses. 
  • Cost efficiencies are a significant advantage, as automation reduces labor costs and optimizes payment processes. It prevents late payment penalties, captures early payment discounts, assists in setting up multilateral netting, and provides real-time financial visibility, empowering decision-makers with actionable insights for strategic planning. 

Streamlined and automated processes strengthen supplier relationships, enabling transparent communication, timely payments, and efficient dispute resolution. 

4. Separate your accounting duties

Separating accounting duties within an organization ensures a robust system of checks and balances. This approach prevents any single individual from having sole control over an entire transaction, which includes initiation, approval, recording, reconciliation, and asset handling.

Having at least two sets of eyes on each transaction is essential for effective internal control. This division of responsibilities not only reduces the risk of errors but also acts as a deterrent to fraudulent activities, requiring collusion for any fraudulent acts to occur.

In instances where separation of duties is challenging, especially in small departments, compensating controls must be established. Detailed reviews of activities at Tier 2 and/or Tier 3 levels are crucial to compensate for the lack of separation. The separation of duties is structured around three main categories: asset handling and disposition, recording transactions to the general ledger, and reviewing and reconciling transactions. Assigning duties to individuals must adhere to certain guidelines, ensuring that no one person handles multiple roles within different categories. This approach guarantees the integrity of financial processes, enhances accountability, and fosters transparency within the organization's financial transactions. 

5. Set up robust internal controls

Internal controls are pivotal for businesses, ensuring compliance, bolstering audits, and enhancing security protocols. They facilitate efficient operations while adhering to federal and state regulations. These controls fall into three key categories:

  • Detective Controls: Inventory counts, internal and external audits, cash checks, and reconciliations identify past errors or anomalies, allowing prompt correction.
  • Preventive Controls: Segregating duties, limiting system access, employing double-entry accounting, and rigorous documentation prevent errors and fraud, enhancing clerical accuracy and operational integrity.
  • Corrective Controls: Physical audits, ledger verification, disciplinary actions, and policy updates correct errors found by detective controls, preventing further accounting problems.

Importance of Internal Controls:

Some key control measures include: 

  • Segregation of duties prevents undue influence, while restricted system access ensures only authorized personnel handle critical transactions. 
  • Regular reconciliation, especially of banking activities, ensures discrepancies are promptly addressed. 
  • Double-entry accounting safeguards against errors and discrepancies. 
  • Standardized documentation and approval authorizations foster consistency. 
  • Additional measures like mandatory vacations and peer reviews enhance accountability and accuracy.

Implementing these controls instills a culture of accountability and efficiency within financial processes, ensuring accuracy, compliance, and integrity within the organization.

6. Consider hiring an accounting expert/consultant, CPA firm or fractional CFO

Availing of the expertise of accounting consultants, CFOs, and fractional CFOs ensures financial acumen and provides tailored strategies, offering businesses a competitive edge in navigating complex financial challenges. Engaging an accounting consultant, CFO, or fractional CFO offers several invaluable advantages for businesses: 

  • Expertise and Strategic Guidance: Business owners, focused on their products and services, might lack comprehensive financial knowledge. Accounting professionals bring expertise, helping navigate complex financial matters, from modeling and forecasting to banking relationships. They act as strategic advisors, guiding founders through critical decisions.
  • Diverse Experience: Fractional CFOs and Controllers, often working with various businesses and industries, offer a wide breadth of experience. Their exposure to diverse challenges means they bring unique perspectives, enhancing strategic decision-making. This diverse background ensures adaptability and insightful problem-solving tailored to specific needs.
  • Minimal Direct Management: Unlike full-time employees, these professionals require less direct supervision. Their expertise allows them to work autonomously, managing financial tasks efficiently. In hypergrowth scenarios, where managing teams becomes complex, this self-sufficiency saves time and effort for the management team.
  • Cost-Effectiveness: External FCOs and Fractional engagements come with specified fees, avoiding additional costs like health insurance or retirement plans. These relationships offer substantial payroll tax savings. Compared to full-time hires, the fees associated with fractional CFOs are generally lower, making them a cost-effective solution.
  • Flexibility and Customization:  Consultant and Fractional CFO arrangements are flexible, allowing adjustments to the scope of work, making them adaptable to the company's evolving needs. Unlike traditional employment, where changes are more rigid, these arrangements can expand or shrink in response to the company’s financial demands. This flexibility ensures tailored financial support, perfectly aligning with the business's budget and requirements.

By leveraging these financial professionals, businesses gain comprehensive financial acumen, diverse insights, and flexible solutions, enhancing their financial health and promoting sustained growth.

7. Forecast inventory and purchases

Inventory forecasting and purchasing play a pivotal role in the efficient functioning of any business. By utilizing historical sales data, planned promotions, and external factors, companies can predict future customer demand and plan their inventory accordingly. Accurate forecasting offers several advantages.

  • It allows businesses to maintain less inventory on hand, preventing overstocking and freeing up funds for other aspects of the business. This improved inventory management aids in cash flow and reduces unnecessary storage costs. Moreover, having enough inventory on hand ensures that there are fewer out-of-stock items, leading to increased sales and a positive customer experience.
  • Accurate forecasting reduces manual labor and warehousing costs. Automation tools help in reordering, predict labor needs, and adapt to changes in order volume. This not only saves time but also cuts down on operational expenses. Forecasting also enhances the production cycle efficiency by enabling informed decisions regarding manufacturing lead times and stock levels.
  • Inventory forecasting helps in reducing inventory waste, especially dead stock, which results from poor forecasting. By understanding demand patterns and customer behavior, businesses can retire unsuccessful products, simplify their product lines, and optimize their inventory.

Various inventory forecasting methods such as quantitative forecasting, qualitative forecasting, trend forecasting, and graphical forecasting provide businesses with tools to predict demand accurately. By following a systematic approach to forecasting, which involves choosing appropriate forecast periods, identifying trends, forecasting upcoming periods, and making necessary adjustments, businesses can ensure efficient inventory management, reduce costs, and enhance customer satisfaction.

8. Plan early for taxes

Planning for early taxes is crucial for individuals and businesses alike. Tax planning involves a comprehensive analysis of financial situations to ensure the lowest possible tax payments, making the approach tax-efficient. It should be a fundamental component of any investor's financial strategy, aiming to minimize tax liability and maximize contributions to retirement plans, ensuring financial success.

There are three primary types of tax planning. Short-range tax planning occurs annually, focusing on specific objectives for the fiscal year's end. In contrast, long-range tax planning involves practices that do not yield immediate results and typically begins at the start of the fiscal year.

Permissive tax planning operates within a country's tax laws, following the legal provisions to optimize tax strategies. Purposive tax planning targets specific objectives, such as diversifying business and income assets based on residential status and asset replacement.

The objectives of tax planning are multifold.  It aims to reduce tax liability, enabling individuals and businesses to allocate resources efficiently. Additionally, it encourages productive investments, fostering economic growth and stability while minimizing litigation risks. By planning taxes early and effectively, individuals and businesses can secure their financial future and contribute to the overall economic well-being. 

Conclusion

The above accounting best practices serve as indispensable tools, not merely suggestions for companies to survive and thrive in today’s competitive landscape. Financial stability, compliance, efficiency, and strategic foresight are not just goals; they are the benchmarks of a successful enterprise. As businesses integrate these practices into their ethos, they aren't merely aiming for survival; they are laying the foundation for enduring success.