Most operators of a new and growing business have a flair for the environment in which the business operates. They may be a great salesperson, an outstanding mechanic, carpenter, lawyer or inventor. Unfortunately, most people don't like to keep the books. As an owner of a business, you must remember that your company's books and financial statements represent a score sheet which tells how you are progressing, as well as an early warning system which lets you know when and why the business may be going amiss. Financial statements and the underlying records will provide the basis for many decisions made by outsiders such as banks, landlords, potential investors, and trade creditors as well as tax authorities and other governing bodies. The necessity for good, well organized financial records cannot be over emphasized. One of the greatest mistakes made by owners of small businesses is not keeping good financial records and making improper or poor business decisions based on inadequate information.

Quality financial information does not necessarily translate into complicated bookkeeping or accounting systems. Far too often owners of businesses become overwhelmed by their accounting systems to the point where it is of no use to them. An accounting or bookkeeping system is like any tool used in your business; it needs to be sophisticated enough to provide the information you need to run your business and simple enough for you to operate it ( or supervise the bookkeeper). Questions you should ask in developing an accounting and financial reporting system are:
1. Who will be the users of the financial information?
2. What questions do I need answered to manage the business?
3. What questions should be answered for government or other regulatory authorities?

As your business grows, you should work closely with your accountant to ensure that your accounting system is providing you with appropriate information.

Chart Of Accounts

The basic road map into any accounting system is the chart of accounts. It is this chart which helps establish the information which will be captured by your accounting system, and what information will subsequently be readily retrievable by the system. This tool, like the rest of the accounting system, needs to be dynamic and should grow as the size and needs of your business changes.

To help establish a good working chart of accounts, you need to answer some questions, in conjunction with your accountant, as to how your business will operate and what is important to you. Some of these considerations might be:

1. Will your business have inventory to account for? If so, will it be purchased in final form or will there be production costs?
2. Are fixed assets a significant portion of your business?
3. Will you sell only one product or service or will there be several types of business?
4. Will you have accounts receivable from customers which you will have to keep track of?
5. Are you going to sell in only one location or will you do business in several provinces?
6. Are the products you sell subject to sales tax?
7. Do you need to track costs by department?
8. What type of government regulations are you subject to?

Each one of these questions can have several answers and will probably generate more questions. Each answer will have an impact on how the chart of accounts is structured. It may seem that developing a chart of account is not particularly high on your list of things to do as you start a new business; the amount of time and money which a well organized accounting system may save you can be significant as the need to generate information for various purposes increases. An example of a basic chart of accounts follows this chapter.

Cash Or Accrual Accounting

The cash basis of accounting is the simplest method. Under the cash basis of accounting you record sales when you receive the money and account for expenses when you pay the bills. The increase in the money you have at the end of the month is how much you have made. Unfortunately, unless you are a farmer or fisherman, Revenue Canada does not permit the use of this method.

The accrual method requires that you include in income sales which you have made but for which you have not yet received payment. Of course you may also deduct expenses which you have not yet paid.

A Word About Computer Software

The computer is probably the single most valuable invention for bookkeeping and accounting since the advent of double entry bookkeeping. If your business includes any of the following, then a computer would be a useful tool in your business.
1. Many repetitious or routine tasks.
2. Lots of paperwork; i.e. payroll cheques, invoices, purchase orders, mailing labels.
3. Lots of general correspondence.
4. Written reports, contracts, newsletters, catalogues or brochures.

Your accountant knows both your business and computers so he or she can take much of the confusion out of the selection process by assisting you in the purchase and installation of your computer.

There are a number of very good, easy-to-use accounting software systems which are commercially available, but none of them will solve the problems of inaccurate or poor quality financial records. All they will do is generate bad information faster. This is one of the reasons that the computer has also probably caused more headaches for the owners of modern businesses than any other single cause. If you want to use a computer-based accounting package, either in your own business or through your accountant, it is imperative that you generate accurate information to be entered into the system.

The real value of the computer becomes apparent once it is running smoothly in your business. Your accountant can then function in the capacity for which he or she was trained and not as a "number cruncher", but as your business advisor, consultant, and strategist. Both of you can focus not on producing reports for various regulatory agencies but on analyzing your business to make it more profitable.

Internal Control

What is internal control? It is the system of checks and balances within a business enterprise which helps to ensure that the company's assets are properly safeguarded and that the financial information produced by the company is accurate and reliable. When you're operating as a "one man shop" or at least handling all of the company's financial transactions, maintaining good internal accounting control is relatively straight forward.

However, when your company grows to the size where you must delegate some of the functions it becomes more difficult to ensure that all the transactions are being accounted for properly.
No matter the size of your business, you should be always able to answer yes to the following questions:
1. When my company provides goods or services to our customers, am I sure that the sale is recorded and the revenue is recorded in accounts receivable or the cash is collected?
2. When cash is expended by my company, am I sure we received the goods or services?

No matter what the size of your enterprise, you should consider controlling your business and safeguarding hard earned assets as a priority from the outset.

Chart of Accounts