Setting up your accounting systems

Your business will be much more efficient if your systems are humming. Good systems help you keep on top of things, and spot potential issues before they arise. For example, they can help you determine whether your business is making enough money to meet its expenses, and ensure you have enough money to pay taxes.

Having good systems can:

• Help you make purchasing decisions based on your budget
• Save you time and allow you to get a realistic picture of your business when you need it, without being super time-consuming
• Help you save money – for example, if you’re doing the day-to-day bookkeeping, your accountant won’t have to spend time (that you’re paying for) getting your books in order; but provide you with more specialised tax and financial advice instead
• Help you demonstrate to investors, bankers, and others that your business is sound and is being run professionally.

Good systems can give you a birds-eye view of how your business is running. There are lots of different things you should be monitoring.

It’s important to understand where your income comes from and when. This will allow you to improve underperforming parts of your business or put more energy into areas where sales are high.

Your direct costs of sales are likely to go up and down, month to month. You should monitor these in relation to your sales revenue, so you can maintain your gross profit margins.

Operating expenses are generally fixed costs and don’t vary much from month to month. Still, they need monitoring to ensure they don’t get out of control.

Having too much money tied up in slow-moving stock can lead to cash flow problems, while running short of stock can impact sales and customer satisfaction.

Things to consider when monitoring stock levels are volume of turnover, reliability of supply, the most economical size of deliveries, wastage, and costs of storage.

Paying tax on a ‘pay as you go’ basis throughout the year, rather than a lump sum when the bill is due, can reduce your tax liability and help you manage your cash flow better.

Cash flow is king for small businesses, so it’s important to make sure that where you extend credit to customers, they pay their bills on time. This means having a sound invoicing system and following up any overdue debts.

Producing a working capital statement regularly will show your current assets against your current liabilities. The difference between the two numbers is your available working capital.

You need to keep your business records as Inland Revenue (IR) will use these as evidence if they audit your business. Check IR's website for current information on how long you need to keep your business records for. 

This records all transactions, payments, and receipts. The transactions should be coded into different categories (e.g. sales, wages, electricity) to give you useful information about what your business is earning and spending.

Sales records should distinguish between credit sales and cash sales. For orders, a centralised system is invaluable for management and forward-planning.

If you’re issuing invoices for products or services, you’ll need an efficient, accurate system (such as worksheets) for capturing information on work done and costs to be passed on.

It’s also important to make sure you can easily extract information on outstanding accounts.

These should be checked and filed in such a way that it’s easy to summarise your bills and prioritise them for payment.

Many businesses start off with a physical cashbook or keep track of their sales and outgoings on an Excel spreadsheet. But if you’re serious about being in business, you should consider using accounting software to manage and track your finances. It will be quicker, more accurate, and you can see what’s happening in real time anywhere with a device connected to the internet.

Although there might be an initial cost for the software, you should save money with your accountant or bookkeeper, as they can log in and see your data.

MYOB and Xero are two examples of accounting software providers in New Zealand. If you’re not sure what would be right for your business, search online, ask other businesspeople, or get advice from your accountant.