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Small Business Accounting – A Brief Insight

What is Small Business Accounting? Accounting Information adopts different methods giving rise to Small Business Accounting. It is basically the art and science of maintaining proper and precise accounts of a concern that have employees ranging in numbers from 10 to 249(limit varies from country to country). This form of accounts uses the same book keeping methods buts has a different approach towards Creditors and Cash Flow since smaller businesses require speedy credit collection and constant cash flow. It has gained prominence in most developing countries like India due to the emergence of Small Businesses.

Why is Small Business Accounting needed? Small Business Enterprises like most other enterprises have a number of transactions taking place per day of business. If these transactions are not recorded systematically it would be impossible to ascertain the profitability or financial position of the firm. A business must also publish and declare it’s accounts to various parties like investors, bankers and it’s creditors. A study of these financial statements is also required by certain statutory bodies and tax officials.

What is Accounting Information? One often doesn’t know the complete meaning and nature of Accounting Information. Most companies declare their financial position to their investors by means of Balance Sheets and a Profit & Loss Statement. These statements require constant updates and for that Accounting Information is of prime importance. It is also very necessary for any business to pass on this information to their bank, creditors and investors; hence it plays an important role in small businesses.

The activities included in Accounting Information: The growing importance of Accounting Information makes it necessary to know more about it. Accounting Information System is a derivative of the Management Information System (MIS) which ensures that all accounts are kept up to date and meet all accounting standards. Broadly speaking it is about collecting all the information necessary to compile complete and accurate accounts that a firm may need to show to its bankers, creditors, investors and statutory bodies. Its scope though is very large and so is now referred to as a System.

Accounting Information mainly includes the following:-

Book Keeping: Book Keeping is the process of maintaining the books of accounts with compliance to accounting standards. This includes maintaining Journals, Ledger accounts, Cash Book, Profit & Loss Statements, etc.

Budgeting: This is a process by which budgets for various business activities are set. Budgeting is importance for small businesses due to the capital and possible liquidity constraints.

Cash Flow: It is a method which ensures easy movement of cash or the firms working and projects. A firm must adopt appropriate Cash Flow policies for smooth and constant flow of cash so that it can be utilized gainfully. Small businesses face more challenges while maintaining their cash flow as compared to big companies.

Credit Collection: Credit Collection ensures that all creditors of the firm settle their dues in a timely manner. Credit Collection is important in maintaining cash flow. It is advised to follow a method of constant follow up and reminders.

Finally, Small Business Accounting varies greatly from company to company; some companies may hire Chartered Accountants or Accounting Firms to get a better insight into accounting systems while the others appoint employees to do the same. Ultimately each firm in some way or the other does adopt Accounting Information Systems (AIS).

 

Considerations to Prevent Small Business Frauds

Occupational frauds is a big internal business. Every instance of fraud cause small company a loss of $127500 on an average. Fraud probably occurs in every organization, and you may not be able to totally eliminate it. However you can do something to minimize the risk of fraud.

Information is sensitive and accounting information is even more. Handing over the accounting information poses threat for business secrets. Many Small businesses thinks in this fashion.They are often afraid that if the information is disclosed to a third party be it auditor or competitor , it can be misused. It is hard to change this attitude but there is something which small business owners can do to combat the frauds.

Small business have every reason to worry about fraud. But there is nothing to fear this virus. This is the financial worm that has to be removed from the roots to combat the frauds. There are some useful tips to combat the occupational frauds.

Oversight Process

The second important factor is review of the accounting information. Just because the owners have the authority to sign does not mean that there are no frauds in the accounting databases. Cash is not the only thing to be followed in any business, one more thing that plays a crucial role in commission of the frauds and that is books of accounts such as biils, purchase orders and payment terms. Reasonable internal controls are critical in a small business. It is accepted that the small business owners have some more priority works but to review the accounts they need to spare the time.IF THEY THEMSELVES CAN NOT do it then they should buy the softwares which can perform the requisite functions on their behalf.

Limited controls

Small businesses rarely have sufficient personnel to adapt adequate controls; “one-person accounting departments” as in are the rule, not the exception. Owners are unable to look into the accounting matters. But the business owner should actively understand and verify the financial information reported to him or her. The owner can engage a external auditors to attest to the credibility of the financial information, even if the company doesn’t have a regular audit.The controls in the organisation needs to be checked up regularly for the deficiencies and loopholes, though not the only one, internal controls are the powerful deterrents of the frauds.

Employee Education

A small business owner if takes few cautions he can stop many occurrences of frauds in his organisation. Most crucial factor in any occupational fraud is the empoyee.If there are no employees then there will be no occupational frauds but without employees no growth of the business.Educated employees adds value to business. Now it is well accepted that education about the frauds helps to combat the frauds successfully.Making the employees aware about the nature of frauds makes them aware about the methodologies and they do not remain the passive visitors to the instance of the fraud.Most of the times it is observed that the employees have blown up the whistles against the frauds where they have come to know that what is happening is called fraud. Some of the big financial scandals like Refco or Enron are the outcomes of the employee awareness about frauds. Anti-fraud training is an essential factor.

Adequate employee prescreening

Small businesses rarely spend the money to check work references, criminal records or professional recommendations of potential hires or require applicants to undergo drug screening, psychological testing and other vetting procedures. It is frequently seen that the employees in small softare companies are recruited based on the interview and the resume, however no checking is done regarding his past performances,whether employee was involved in any fraudulant case or not.

Undesirable applicants know this and thus gravitate to small businesses. The problem, according to ACFE study, is that about 7% of employees have a history of workplace theft and fraud. This small but costly group know the degree of scrutiny into their past likely will be minimal; all too often, they are right.

Too much trust

The third factor for large fraud losses in small businesses involves the human element. In a situation where employees know each other well, it is natural for them to trust one another. Indeed, the intimate familial atmosphere of a small business is one of its most appealing features. Most of the time, believing in your coworkers is well founded, but not always. The dichotomy is that trust is an essential element of business as well as an essential element of fraud. Never having faith in your employees is a bad thing; so is always trusting them. The goal is to strike a balance between the two. Or, as Mark Twain said, “Trust everybody, but make sure you cut the cards.”

These few things a small and medium sized business owner should adhere to in order to reduce the median losses of $98000 caused to it every year.