Tag: Accounts payable

What accounting records do you need to keep?

most important accounting records canada

In Canada, entrepreneurs must keep accurate financial records of all activities for their company for six years.

Along with your financial statements (balance sheet, income statement, and cash flow forecast), you must keep records for all the individual accounts that make up those statements.

What are the most important accounting records to keep?

In Canada, the major accounting records that you must accurately keep are:

  • Accounts Receivable: Who owes you money, how much do they owe, and for how long have they owed you?
  • Accounts Payable: Who do you owe money to, how much, and for how long?
  • Inventory: How much inventory did you buy, when did you buy, and how much did you pay? How you account for your inventory will affect your cost of goods sold.
  • GST/HST and Provincial Sales Tax: All businesses with an income over $30,000 per year are required to collect and submit on behalf of the federal government a goods and services tax (GST) and, depending where your business operates, provincial sales tax (PST) or harmonized sales tax (HST).
  • Payroll: Total salaries paid to employees, payroll taxes and deductions.
  • Fixed Assets: What you bought, how much you paid, and when you bought, along with depreciation amounts.
  • Cash: Cash inflows and outflows should be recorded to maintain proper control of cash.
  • Other Records: Including insurance, leases, investments.

Looking for a software solution? Ask your accountant for their advice on which program would be best for you and your business. However, keep in mind that outside accounting advice is still important to small business success. Accountants see loads of businesses in different industries and can help you understand and manage the financial health of your company. They also remove some of your own stress by making sure important financial details aren’t overlooked. Win-win!

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Most important accounting records for a small business in Canada

As a Canadian entrepreneur, you must keep accurate financial records of all activities for your company for six years. Along with your financial statements (balance sheet, income statement, and cash flow forecast), you’re required to keep records for all the individual accounts that make up those statements.

What accounting records do I need to keep?

In Canada, the major accounting records that you must accurately keep are:

  • Accounts Receivable: Who owes you, how much do they owe, and for how long have they owed you?
  • Accounts Payable: Who do you owe, how much and for how long?
  • Inventory: How much did you buy; when did you buy; and how much did you pay? How you account for your inventory will affect your cost of goods sold.
  • Payroll: Total salaries paid to employees, payroll taxes and deductions.
  • GST/HST and Provincial Sales Tax: All businesses with an income greater than $30,000 per year are required to collect and submit on behalf of the federal government a goods and services tax (GST) and, depending where your business operates, provincial sales tax (PST) or harmonized sales tax (HST).
  • Cash: Cash inflows and outflows should be recorded to maintain proper control of cash.
  • Fixed Assets: What you bought, how much you paid, and when you bought, along with depreciation amounts.
  • Other Records: Such as insurance, leases, investments.

There’s lots of accounting software that’s easy to set up and use. You can ask your accountant for their advice on which program would be best for you and your business.

Keep in mind that, while software can be useful, outside accounting advice is important to small business success. Accountants see loads of businesses in different industries and can help you understand and manage the financial health of your company. They also remove some of your own stress and worry about overlooking important financial details. Win-win!

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Understanding cash flow in a small business

Why is it important to understand flows of cash as they move through your small business? Even if you don’t think you have a head for numbers, not keeping an eye on your cash needs is one of the quickest routes to business failure. Here are some key things for every small business owner to keep in mind about cash flow.

The difference between sales and cash

When you sell a product or service to a customer, you are entering into an exchange with that customer. The customer pays you or your business for this exchange — a sale has been made.

However, in any business transaction there can be a timing issue. You may not get payment for your product or service right away. This creates a cash crisis, when a business is caught without sufficient cash in the bank to pay bills, salaries, loan payments, and other important things. So even though you’ve made a sale, it doesn’t necessarily mean you have cash.

For example, you might have an outstanding invoice in your consulting business, and the client keeps promising you the cheque is in the mail. What if one day overdue becomes three weeks overdue? Can you pay yourself this month? Can you pay your employee salaries? (PS There are industry statistics from Statistics Canada and Dun and Bradstreet that tell you the average time it takes in your industry for customers to pay you.)

In the other direction, your business might owe another business, like a supplier, for inventory.

Both accounts receivable and accounts payable will impact your cash flow planning.

What is cash flow?

As it sounds, the flow of cash through the business during a period of time. Cash is your most important resource and you must keep a close eye on it, particularly during the start-up stage. Conducting a cash flow analysis is an important step in determining the overall feasibility of your business idea. The examples we gave above illustrate the importance of timing cash flows — proper cash management would enable you to have reserves to cover cash shortfalls.

Did we mention the average time to profitability for Canadian businesses is between three and four years? Yup. Three and half years is the average length of time it takes to establish a business, and for that business to have enough sales to cover its expenses. Yikes.

Want to learn more? Check out GoForth Institute’s online small business training.

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How to manage small business accounts receivable and accounts payable

Note: This post was first published on August 11, 2012, and updated on January 9, 2016, with updated links.

Managing accounts receivable (what people owe you) and accounts payable (what you owe others) is an important skill to master. Here are some tips for keeping your cash inflows and outflows moving along smoothly.

Staying on top of your accounts receivable

The most critical aspect of cash management in a small business is collecting accounts receivable as quickly as possible. No matter how good your business relationships might be, giving credit to your customers means your business can wait even longer to see income. If you decide to offer credit, then you’ll need to establish and enforce credit policies. Of course, we’re not saying you have to break thumbs – here are some violence-free ways to make sure your accounts receivable isn’t a dead end:

  • If you send out invoices, be clear about payment deadlines (30 days, 60 days, etc) and penalties like an interest charge for overdue accounts.
  • Be organized and send invoices out immediately following the sale of your product or service.
  • Review all accounts receivable customers regularly to identify businesses who are always late paying you. You may decide not to extend those businesses credit – or even cease doing business with them in the future.
  • Provide incentives for prompt payment by offering future discounts.
  • Make it easy for customers to pay you – provide a stamped, self-addressed envelope with your invoices, or investigate ways to accept online payments. Certain accounting and invoicing programs, like Freshbooks and Quickbooks, have this feature built in.
  • Get on the phone to remind customers or businesses about their payments due. Be polite, but don’t worry about seeming pushy – it’s business! You can bet they have to do the same thing in their own businesses.

Also, did you know that you can get insurance for your small business’ AR? Check out Export Development Canada’s Accounts Receivable Insurance.

Managing your small business’ accounts payable

Paying your invoices on time is just as important as collecting payment from others. Make note of when payments are due, and try to make those payments on time so that you don’t face penalties for delinquent accounts. Delinquency can also have an effect on your company’s credit rating, which can result in you or your company being charged higher interest rates on future loans.

 

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