Business Finance Articles

You already know that good cash management is paramount for any business, particularly small business. Still, running low on funds is a common occurrence for small businesses, and even experienced entrepreneurs make errors when managing cash.

Learning how to recognize many of these common mistakes is the first step to avoiding them. Here are some typical traps for the unwary:

Spending mistakes

Just like householders who unwittingly blow their family budgets, entrepreneurs are predisposed to impulse spending. Eliminate unnecessary purchases.

For instance, resist the temptation to acquire the latest tech gadgets. Not only do they not guarantee increased productivity, a technology upgrade is a budget item. You should be setting aside funds so you can replace your current technology every few years. Capital expenditures are not surprise purchases.

Stocking up on supplies or inventory is another mistake that seems appealing until it starts to squeeze your cash flow. The marginal savings from bulk orders typically aren’t worth the resulting cash shortage. Items that lie around unused or sit on shelves unsold tie up funds you should be using for more important endeavors.

Managing bills

When managing bill payments, be aware of other priorities. For example, you need to reserve funds for new equipment. Machines eventually wear out, and you will need money to replace them. As well, when a big job comes along, you’ll need extra cash to cover costs incurred before you get paid. Always account for these priorities when evaluating available funds for bill payment.

Never pay a vendor too early and never promise a payment you can’t deliver. Your goal is consistent cash. You risk having a shortage of cash in the growing phase of your business when you pay vendors early to get discounts.

When you do see a drop in cash, communicate early with key vendors. Let them know why you have a cash setback. Identify whether the difficulty is temporary or systemic. Only make promises accordingly.

Controlling collections

Never allow accounts receivable to age beyond the due dates. Set aside time at least once a week to review what’s owed to you.

Personally call every customer who is even one day late in remitting payment. Sure, you’re busy and don’t want to be a pest, but you also don’t want to jeopardize the sustainability of your organization.

Polite phone calls often elicit the response from customers that they simply forgot about your invoice. Maybe they have cash flow problems but were too embarrassed to send a partial payment. Make firm payment arrangements with everyone, including specific dates for expected amounts.

Payroll management

Always have enough money set aside to fund the next payroll. Payday should never sneak up on you. Know how much manpower is required for tasks that lie ahead and schedule workers accordingly. This system is the essence of project management and the root of minimizing payroll expenses.

Last but not least – and you’ve heard this one before – remit your payroll tax deposits on time. Borrow from anyone rather than the US Treasury.

The time has come to close the gap between accountants’ and entrepreneurs’ different perceptions of finance.

Business owners with a fear of numbers need accounting experts to help them overcome phobias, and accountants need to conquer the addiction that leads them to record numbers without evaluating the financial data.

Entrepreneurs realize that numbers on a page can translate into strategies that work when accountants explain debits and credits in a way owners can understand and act on.

Entrepreneurs are focused on growing their operations and want to stop little problems before they impede success. For example, an out-of-whack inventory indicates the need for a new process of accurately recording cost of sales. This information is revealed in financial statements, and if caught in time, a potential problem can be resolved before it even becomes a problem.

Are some charges on the company credit card missing from accounting records? Do payroll expenses not equal gross wages on quarterly IRS reports? Accountants anticipate such difficulties, because they know entrepreneurs hate reconciling.

But as much as they hate reconciling, business owners still want a tax deduction for their expenditures, and to avoid conflicting information that may trigger IRS trouble.

Entrepreneurs should ask their accountants how to find vital business information in their financial records. And accountants should make suggestions regarding ways of improving record-keeping procedures to maximize the usefulness of financial statements. It’s a win-win.

Successful business owners don’t keep doing the same things that initially made them successful. If they did, thriving 30-year-old businesses would still rely on snail mail and telephones on desks instead of email and smartphones.

Likewise, growing businesses that fail to adopt new accounting procedures soon encounter barriers to progress.

Early basics. Most businesses begin small, with basic accounting systems, and over time switch to more sophisticated approaches.

As a small operation, you can simply list your daily expenditures and income in the same way as merchants did in the 14th century. Sometimes you may forget how to classify certain types of purchases. No problem. Your accountant can straighten out these details later.

Even if you forget to track a few petty cash transactions, such as not recording the toner cartridge you picked up on the way to work, you don’t worry because these are only small amounts.

Accrual basis. However, once your business begins growing, accounting for everything is a little more challenging. Money goes in and out much faster, and new ways of moving money arise.

You now have a number of employees who handle sales orders, merchandise receipts and office purchases.

At this point, you need to know what’s happening and when. Instead of recording transactions when cash changes hands, you now need to account for events as they occur. To do this, you’ll need to develop an accrual accounting system.

Throw out the cash accounting method; only accrual basis tells you about customer orders not yet delivered and bills you owe but haven’t yet paid.

The benefits. Accrual accounting permits a bookkeeper to accurately match expenses with revenues. You can manage inventory easily, instantly knowing what items you’re holding for certain customers and the cost of unsold merchandise.

Wages are matched with the level of sales activity. This allows you to gauge when you need to add staff or promote employees and give them new tasks.

Many businesses that start small stumble and fall after reaching a size that necessitates accrual accounting. They ignore the complications caused by an increasing number of customers and expenditures.

Also, as more employees are given access to petty cash, new security measures are required. Your accounting process serves this purpose by periodically comparing receipts to cash. Expenses are dutifully recorded, and the cash reserve is replenished on a timely basis.

Final measures. Small-business owners often pay personal expenses with company funds and vice versa. This is a bad habit at any stage of development but absolutely must cease when your operation grows.

For one thing, it’s forbidden if your business is a corporation. Never pay personal expenses from the business account; move personal money into the business bank account if you need an infusion of capital to pay company expenditures.

A growing business that lacks mechanisms to verify and balance its accounts will gradually collapse. Profitable pricing and expense control are impossible. Money disappears without a trace.

Avoid these mistakes by adopting a sound accounting system to manage business growth.

QuickBooks is a popular accounting program for small businesses; it’s easy to use and creates reports that summarize multiple transactions, but it’s easy to make mistakes in QuickBooks. Here are three top mistakes.

Bank transactions. One of QuickBooks’ most helpful features with potential for problems when used incorrectly is downloading of bank account transactions. Difficulties arise when selecting the download date range; overlapping dates on different occasions create duplications.

Always review your register in QuickBooks for duplicates. Uncleared items following account reconciliation are suspect, and remember that bank transactions don’t know what account they apply to in QuickBooks; you need to classify the categories.

Payroll module. In QuickBooks, the payroll module is a program within the program. Examine your balance sheet to see whether payroll liabilities keep growing, which can happen when you remit payroll taxes on time but don’t use the payroll module.

Make sure you’re using the function to pay payroll liabilities instead of opening the screen to write checks. And examine the date range when paying payroll liabilities.

Undeposited funds. Your balance sheet shows amounts as “undeposited funds.” When you create invoices in QuickBooks, they stay on your list of accounts receivable until you select them to receive payments.

After you receive payments, the money is recorded as undeposited funds. Open the QuickBooks screen to make deposits and select the exact items totaling your bank deposit receipt from the undeposited funds.

Monitoring financial statements is an ideal way to assess your progress toward achieving business goals and identifying ways to modify your planning.

Each business milestone should trigger adjustments that will keep your business growing and thriving. At each stage of development, you must know what to expect. A review of your financial statements will show whether operational changes have achieved the desired effects.

Starting up

For new businesses in particular expenses soon rise as they acquire more customers. This is the phase where many companies stumble. Rising sales trigger increased cash outlays; the eventual result is a severe cash shortage, as too much money is tied up in inventory, new equipment, additional office space and staff.

Avoiding inefficiencies as you grow is crucial in the early stage. Monitoring inventory levels and average time to collect your invoices are vital uses of financial statements. Now is the time to make sure that you keep a tight rein on operations. Stay in the race by averting a cash crisis.

Gradually advancing

After gradual advances in sales and profit, businesses need to stop acting like start-ups. If you’ve recently reached this point, you’ve discovered that having everyone doing everything no longer works. So you build a real organization structure. The trade-off is that new costs can easily get out of hand. You face pressure to increase revenue to cover the extra expenses.

This is a time for measuring revenue per employee. A steady rise in that figure substantiates the new layers of expenditure. Measuring return on assets is useful for industries requiring additional equipment. If employee productivity is slipping, ask workers what they could use to improve output. In a surprisingly large number of cases, the culprit is something as simple as ineffective automated systems. Cheap and easy solutions are often found in technology that improves computer speed and performance.

In the big leagues

As the business grows to unprecedented levels, you may start to lose touch with the front line. To close this knowledge gap, you should hire additional high-level officers. They’ll comprise an operational structure that advises you on new initiatives required to better reach your market.

Typical examples are opening new store locations, adding new warehouse space or transportation systems, and offering a different product mix.

At this point, you need sophisticated financial projections to improve your decision-making. Over time, compare actual results to your plans to ensure that you’re meeting expectations. If you’re falling short of intended goals, amend your plan before proceeding further; new projections and revised spending patterns are more likely to give you what you need.

Systematic progress

Chances are that management changes improve some elements of business and cause disappointment in others. Because change is constant, monitoring your financial statements permits improvements in the process.

Therefore, businesses of all sizes should possess and use financial data that measures results from every product, department, customer segment and location. That holds the key to ensuring that your business reaches the success you expected from the changes you implemented.

Capturing all available tax benefits for your business is challenging because tax rules change often. One new tax law is a substantial change in the way businesses have been handling employee travel.

Previously, tax-deductible travel expenses applied only when employees traveled away from home. If an employer paid for local accommodations for employees working late, it was not tax deductable; rather, the cost of accommodations became a personal expense not deductible by that employee.

Reimbursing employees for local accommodations caused difficulties for a business. Employer reimbursements of personal expenses to employees were being added to employees’ compensation amounts, triggering payroll taxes and difficulty in preparing accurate W-2s.

A new rule permits tax deduction for local lodging when it satisfies a bona fide requirement imposed by the employer; for example, providing local accommodations so an employee can participate in meetings.

In these instances, a business may provide tax-free reimbursement to the employee and deduct the cost as a travel expense.

Extravagant expenses are not eligible, and the employee must stay overnight at the function’s locale. Special provisions limit the local stay to five consecutive nights, and this deduction is allowed on only one occasion per calendar quarter.

The new rules are good news for employers and employees. Businesses can avoid tax complications when arranging local lodgings so employees can attend early morning presentations or late-night business social events.

Just as The X Factor’s Simon Cowell judges singers without having singing talent of his own, you don’t need to understand bookkeeping to evaluate a potential bookkeeper’s level of knowledge before making the hiring decision.

Most small businesses seek bookkeepers with knowledge of QuickBooks, since this is the most popular accounting software. Bookkeepers without a full understanding of QuickBooks are soon in over their heads. Then you subsidize on-the-job learning or overpay for someone who isn’t able to keep up with transaction volume.

In the same way, you also may face problems with a bookkeeper who has QuickBooks skills but lacks accounting knowledge. QuickBooks can easily record duplications and other inaccuracies that require identification and correction; bookkeeping entries should establish clear audit trails.

Top-quality bookkeepers make sure financial statements look correct and are also capable of creating custom reports that can help you develop insights into your business results.

One method for assessing bookkeepers is to ask if they have certification from Intuit as a QuickBooks Certified Pro Advisor. Even better, ask your accountant to give you a few questions – and corresponding answers – about QuickBooks and basic accounting for use in testing potential bookkeeper hires.

By addressing these few crucial issues, you are ensuring that your bookkeeper knows the essentials for most common situations. Don’t hand over the responsibility for your business financial records to a bookkeeper without being reasonably certain that your new hire is proficient in these areas.

Unlike many of the numbers that measure human achievements, figures that identify sound business operations are remarkably consistent. While athletes’ records are regularly broken, the measures that reflect business success remain unchanged.

In order to use these financial benchmarks, you must first know what measures to collect. These are the absolute essentials:

Cash flow

Cash flow is a crucial figure in your financial arsenal. You decide future actions based on this, which is measured by subtracting the money going out from the funds coming in during any given period. Make sure that cash flow exceeds zero. Healthy top-tier businesses have positive cash flow.

Next, compile cash flow ratios by comparing last quarter’s cash flow to the immediately preceding quarter and to the same quarter a year ago. Look for ratios that are greater than 1. A negative number means your cash flow is declining and you should find out why.

Growth rates

Growing your business too fast usually foretells upcoming difficulties. Growth requires cash, and rapid sales increases necessitate a cash outflow for additional staff, equipment or space to serve more customers. In addition, as a business becomes larger, expensive changes to organizational processes and systems are required.

The amount of available cash is always limited. Additions of people and other resources should enhance profits rather than chase revenue growth.

Measure the rates of revenue growth and profit growth. Compare the two numbers. Try to maintain approximately equal growth rates for revenue and profit: That is, try to achieve a ratio of 1. When this situation exists, your business expenses are correctly tied to revenue growth.

Misaligned growth rates for revenue and profit signal a need to spend money you don’t have just to keep up with rising sales. The worst case occurs when revenue grows at a faster rate than profit. The eventual result is a shrinking profit margin. Thus, although revenue is increasing, you will spend yourself out of business.

Quick ratio

When reviewing the monthly financial statements of your business, start with a calculation of the “quick ratio.” This is the ratio of your current assets divided by current liabilities. The desirable quick ratio for most industries is 1 or more; this is the Holy Grail for any small business.

Current assets are all cash and accounts receivable plus any investments that are quickly convertible to cash. Current liabilities are accounts payable and other amounts your business owes in the next year. Make sure your financial statements accurately report these figures. You can uncover the components of all current assets and current liabilities in a discussion with your bookkeeper or accountant.

Reality check

Cash flow, growth rates and quick ratio are starting places for discovering the general direction your business is taking. After conducting these assessments, other financial measurements compiled with the aid of your accountant will help you understand the conditions that are contributing to any problems you may have identified using these essential measurements.

Whether you have a home-based business or a second office at home, a tax benefit is available if you meet certain requirements and maintain accurate records. And now’s the time to set it up.

Claiming this tax deduction requires a designated area of your home to be used exclusively and regularly for business. This means that you don’t use the space for any other activity, such as a TV room or kids’ playroom.

You also might qualify for a home office deduction even if another location is your primary place of business. In this case, as well as proving that you use your designated home space exclusively and regularly, you also must prove you use it to meet with customers or clients.

Another obstacle arises if your business is incorporated. In that case, claim a home office only under rules applying to employees. Employee home offices require regular and exclusive use; it must be an arrangement that is convenient for the employer and supported with documentation.

If you meet the home office requirements, you can deduct a percentage of your home expenses. To prepare a tax return, your accountant needs to know the total area of your home and the area of your office space. Be scrupulous: Don’t round up or define a room as your office when you only use part of it. You’ll also need separate accounting of home expenses by category.

Accounting for home offices can be a challenge, but by putting in some effort you can reap substantial benefits.

Another year is over and a new one begins, along with resolutions for improving the things that make your business more profitable and less stressful. Finding potential improvements requires investigation, but you don’t need the skills of Sherlock Holmes. The clues are in plain sight on your financial statements.

Getting started

First, you’ll need your financial statements for two years – the one recently ended and the prior year. With this information you’ll be able to do a simple comparison analysis to discover which categories increased and which declined.

Don’t just look at the bottom line on the income statement and decide you don’t need to do anything if profits increased. You won’t continue to remain profitable by doing nothing, so find out what components contributed to profits – or losses.

Your income statement should compare both years on a single report and show percentages of change from one year to the next. You may end up with several pages taped together and draped over a conference table, but that’s the easiest way of spotting the variances between the two years. Otherwise, you’ll have to manually enter the figures on a spreadsheet to compare.

What you’re looking for

Increasing revenue is the easiest identifiable source of greater profitability. Determine the year-to-year percentage change in revenue. Then compare that percentage to the rate of change in profit. Rising revenue should cause profit to increase at a higher rate. This happens because most expenses are fixed; they don’t increase along with revenue. Thus, more of each incoming dollar goes straight to the bottom line.

Some business costs do fluctuate with revenue. For instance, the cost of goods sold will typically change with sales.

Actions to take

Suppliers want your company to prosper and remain their customer. Based on the information gleaned from your financial statements, ask your top providers for discounts.

Suppliers often give discounts for early payment. Take advantage of this when rising revenue makes you flush with cash. If revenue is declining, you need supplier help to improve cash flow. Request extended payment terms, even if you’re required to pay a little more. As conditions improve, go back to paying early.

When revenue is pouring in, you’re often tempted to spend on extras. If your profit didn’t grow as much as expected, look to your operational expenses to find that leaking cash.

How to reduce expenses

You don’t have much leverage with routine expenses such as rent, utilities and equipment maintenance contracts. But you can negotiate new arrangements when the old ones expire.

Advertising and travel expenses are always ripe for adjustment. Finding new providers of phone service and IT support are also money-saving opportunities. And always search for lower bank fees and merchant credit card fees.

Reducing expenses does more than raise profit and give you a feeling of security. The extra cash offers you the flexibility to invest in new technology as well as expand your offerings or reach new markets. Greater opportunities await business owners who learn to maximize cost efficiency.