Ronika Khanna (CPA, CFA, founder of Montreal Financial) explains why every small business needs an accounting system, and presents five concrete reasons: (1) to track sales and expenses (with categorization and chart of accounts); (2) to generate profit & loss statements (sales, COGS, operating expenses); (3) to track cash flow and understand accrual vs cash timing (accounts receivable/payable); (4) to prepare tax reports required in Canada (T2125 and GST/HST/QST tracking and remittance schedules); and (5) to analyze financial data for pricing, cost control, and trend insights. The video targets small business owners, freelancers, and self-employed individuals.
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Hello everyone. Today I want to talk to you about accounting systems for small business owners and five reasons why every small business needs one. My name is Ronica Canna, I am a cpa, a CFA and the founder of Montreal Financial, where you can find lots of resources for small businesses, especially relating to finance and tax. Okay, so what is an accounting system? And at its core, an accounting system is a way to organize your financial data. And there are all kinds of accounting systems. You can use something complex, you could use a small business accounting software. I talk about QuickBooks a lot on this channel and there is various other accounting software, or you can simply use a spreadsheet. And a lot of business owners just do that if they don't have a lot of transactions and their businesses are simple. So let's go over the five reasons why all of you who have small businesses need some kind of accounting system in place. The first reason is that you need a way to track yourself sales and expenses. And so every time you invoice a customer or a client, it is very important to track the amounts that you are invoicing, the various details ideally that are pertinent, especially from an accounting perspective. And this way you can add up all your sales and similarly you want to track all of your expenses. And you can add some categorization to this. Your sales can be for products or for services, they can be in different geographical regions, etc. And similarly for your expenses, and perhaps a little more importantly, for expenses, you want to categorize them. For example, you might have some dues and subscriptions, you might have some product related expenses for raw materials or shipping or labels. There are office supplies, rent, and there are a variety of categories. And there's some pretty standard categories that most businesses have and which you can find, you know, all over the Internet. And there's also something called a chart of accounts. So if you do want to look up some of these standard categories, you can look at your chart of accounts. And one category that I would like to highlight is advertising. Because most business owners have some form of advertising, even if it's just their website or web hosting and a very wide category of expenses. Secondly, you want to be able to generate a profit and loss statement which relates to point number one. Once you were tracking your sales and expenses, the net profitability of your business is determined by your sales, less your expenses. A typical profit and loss report will have your total sales at the top and then it will have expenses by category. You have cost of goods sold, which are direct expenses. If you Sell products, generally speaking, and then under that you have your operating expenses, which will include things, things like advertising and dues and subscriptions and rent and office supplies, etc. And then you deduct all of those expenses from your sales to see how profitable you are. And of course, all businesses are striving to be profitable. This might not happen in your first year, or it may take some time, but regardless, at some point, hopefully you will be profitable. And it is absolutely essential to track this. The third reason you want to have an accounting system is to be able to track your cash flow. And this is similar, but it is not the same as your profitability. Cash flow is a little different from profitability in that some items may actually contribute to profit, but you might actually not see the cash from them. So, for example, and the most significant example of this are accounts receivable. So if you sell to your customers on credit, that is you allow them to pay after the invoice has been issued, you may actually have a profit, but the cash from that has not come in yet. Similarly, if you owe money to suppliers, if you're allowed to pay them two weeks or a month after the invoice date, it actually, it doesn't impact your cash, but it does impact your profit. And this is also known as the accrual method of accounting, which means that you reflect sales and expenses when they happen, rather when the cash related to them changes. Hence, the fourth reason, and for some, the most important reason that you need an accounting system of some kind is to be able to create reports that are required for tax purposes. And in Canada, you have to have, if you are a small business, if you're unincorporated, you minimally need a profit and loss statement that then gets reflected on what is known as the T2125, which is attached to your personal tax return. And here you would again simply reflect the items from your profit and loss, which are your sales and your expenses by category. The T2125 has specific categories that can be mapped to your profit and loss statement. In addition to your income tax, you also have your sales tax, which is your gst, HST, and qst. If you're in Quebec, and if you were registered, and I have a couple of videos on this, then you must track how much you are collecting in terms of gst, HST, and QST from your customers. And you also should track the gst, HST and QST payout expenses, because you can deduct these from the amount that you collect from your customers. This tracking then allows you to calculate how much you owe to the government, or if your expenses exceed your sales in terms of sales tax, then you might actually get a refund from the government. And this has to be remitted to Revenue Canada and or Revenue Quebec, at least on an annual basis and sometimes on a quarterly or monthly basis, depending on the period which you have registered for. And the fifth and final reason that you as a small business owner need an accounting system is to be able to analyze your financial data. And this can be really really useful to see trends in your data to to ensure that you are pricing correctly. Perhaps you're not pricing enough and therefore you are not profitable. Perhaps you are paying too expenses and there's ways to reduce the amount of your expenses and you can look at sales that happen from different customers at different times of year in different locations. There's all kinds of ways to slice and dice your data and a good accounting system will really help you with this. And if you are at this stage then an accounting software might make sense.
So those are the reasons I think that all of you who are small business owners and by small business owners I include freelancers, people with a side hustle, people who are self employed, anyone who is earning income other than employees where taxes are deducted off of their salaries should be tracking their income. Expensive. I hope this was useful. I'd love to hear what kind of accounting system you're using. If any or if you have any questions relating to your accounting system, please leave a comment. And if this video is useful then please like and subscribe and I will see you next time. Thanks for watching.
