Once you’ve chosen your system, you’ll need to build your chart of accounts. Your software will typically give you a standard set of codes to customize, but it’s still worth understanding exactly what a chart of accounts is:
A chart of accounts is a set of groups you use for categorising your business transactions (both incoming revenue and outgoing expenses). To give you an idea, a chart of accounts code called “Printing and Stationery” will have related expenses like the lease for your printer and packs of A4 paper.
The groups in your chart of accounts translate onto your profit and loss report, which enables you to review your expenses and revenue, as well as compare records across accounting periods.
Xero and other systems like MYOB connect to your bank accounts and can automatically download your bank statements. If you’d like to learn how to set this up in Xero, click here.
Once the financial information is flowing into your system, it’s time to decide which features are useful to you. Your accounting system can
- Create and send invoices to your customers
- Record and store the bills you need to pay
- Compile, prepare and file your GST returns
- Prepare reports to highlight how you’re performing
- Create budgets
Using your financial system well relies on you establishing excellent financial processes and internal controls. Let’s start by seeing what internal controls look like in practice.
Internal controls describe practical things you do to make sure your business’s money is safe. Actions like using passwords for your internet banking and making sure no cash is ever left in a till overnight.
Some standard internal controls:
- Dual signatories – when multiple people have access to a bank account, this policy ensures any transaction is approved by two people
- Cash security – taking a cash drawer out of the till at night reduces the chances of theft, in conjunction with regularly banking your cash
- Reconciliations – it’s important to regularly check that the money you’re receiving (both in physical cash and digitally) matches the amount recorded in your sales system
- Checking bills – as simple as it is, checking that a bill is accurate before paying it is critical. Scammers have had success with sending in fake bills to businesses!
To create excellent internal controls, it’s important to figure out the biggest financial risks to your business and create systems that safeguard them.
Implementing controls is a manual, human process, and it isn’t the only one. Additional policies like stocktakes and checking received items against packing slips will always be important.
No matter how much you automate, it will remain important for a human to check over your financial systems. That’s why we strongly recommend a monthly check of your financial reports.
- We recommend generating a bank reconciliation report each month. It checks that all your transactions have been coded and that your account balance actually matches what’s showing in your accounting system
- You should run a profit and loss report each month and compare it against your budget or figures from your previous month. Anomalies worth investigating will stick out
- If you’re using Xero for invoicing, run an aged receivables report. It will identify if you have overdue debtors (it’s a good idea to pay particular attention to the invoices in the 60 and 90-day columns)
- Finally, if you’re GST registered, run the Business Activity Statement. You’ll see how much GST you need to pay each period, plus all of your transactions for the GST period – so you can check you’ve coded everything correctly*
* If Beany prepares your Business Activity Statements, we’ll be looking at this in detail (so you don’t need to).
We can help you with all of the above, including getting you set up on Xero. Just get in touch at [email protected] or 0800 755 333 and mention this article!