Automation Requires More – Not Less – Outside Support

Business owners know that to stay on top of conditions impacting their companies, they need to become one with their financial reports. However, this isn’t easy; wringing useful information from financial reports needs to be the result of tireless bookkeeping work.

In the start-up phase, pieced-together data in a spreadsheet may deliver adequate information. But a business owner expecting to thrive over the long haul needs better numbers. Fortunately, there is accounting software to automate the process. Unfortunately, automation is also the bane of small-business owners with limited bookkeeping knowledge.

Why? Because not everything in an automated system is automatic. Individuals lacking experience with double-entry bookkeeping commonly make data entry mistakes. Some events, such as purchases and sales of capital assets, depreciation expense, and borrowing arrangements, pose real problems.

If you enter data yourself, you may make mistakes – which can slow you down or throw you off track. If you expect a family member or college intern to handle the function, well, more of same.

Truth is, there’s no substitute for an expert. Whether you’re a do-it-yourselfer or you opt to hire someone for data entry, you still need professional assistance to check for errors and record complex transactions. Skilled accountants and experienced bookkeeping services deliver crucial value. In return for the cost, you have the security of reliable financial statements to aid in managing your business.

The takeaway: Automating your accounting doesn’t relieve you of the need for outside assistance tailored to your needs and budget. In fact, it may make it even more crucial.

How to Limit Those Nasty Financial Surprises

We all know people who are quick to respond. But thought leaders, entrepreneurs, and mega-successful business owners don’t wait to respond. They’re proactive. And it pays off for them – big time.

Some people are born with a “proactive personality.” But research shows that no matter where you are in your life cycle, you can develop a proactive mind-set. Even if you weren’t born with this trait, you too can improve your chances of success by choosing to look – and act – ahead.

The list below comes from an article written by David Van Rooy, Walmart Canada’s vice president of talent and organizational capability. In it, Van Rooy outlines seven tips to help you become more proactive. They are:

  • Focus more on the future. Learn from the past, but look toward the future.
  • Take personal responsibility for your success. Don’t wait for others to lead you.
  • Think big picture. Consider your ultimate goals and determine how to achieve them.
  • Focus on what you can control; let go of the stressors you can’t.
  • Prioritize. Not everything is important. Choose what is and focus on it.
  • Think through scenarios. Anticipate what could happen in your industry and stay ahead of your competitors.
  • Make things happen.

Reactive people respond to events after the fact, and, as we all know, sometimes that just needs to happen. But those who look ahead, anticipate what may happen, and take steps to capitalize on opportunities create their own reality.

What kind of business owner do you want to be? It’s your choice.

Find the Narrative in Your Financial Statements

Reliable financial statements are essential for every business. Small companies included. To fulfill your vision for your company, you need to use, and understand, your financial statements, with the help of your team: your accountant and your bookkeeper.

The narrative: By design, financial statements summarize past events. They’re only relevant to future action when accompanied by explanations. Simply recording transactions and not studying the resulting financial reports accomplishes little. Similarly, don’t let complacency take over when you receive financial information from a professional bookkeeper. Instead, examine and learn from it.

Understanding all the elements in financial statements is often challenging. For instance, a business may have a profit but insufficient cash. The income statement doesn’t indicate cash paid for unsold inventory, loan payments, new equipment, owner distributions, or income tax payments. Therefore, along with the balance sheet and income statement, a cash flow statement is an important component of financial reports.

Cash in the bank is like insurance against uncontrollable events. For any business, shifts in the market can arise suddenly. Be prepared with enough cash to survive events like reduced customer orders or the need to replace equipment.

If you check the financial statements of a large organization, whose securities are listed on a public stock exchange, you’ll find an analysis and discussion by management. Your bookkeeper can give you access to similar types of information on your company; he or she can highlight major trends, identify recent issues, and point out any red flags in your financial statements.

The significance of financial statements comes in knowing what they convey. Wise business owners, with support from their bookkeepers, are always aware of year-to-date sales, profit margins, changes to primary expenses, debt ratios, payroll hours, and the collection of receivables. They recognize when inventory on the balance sheet isn’t worth the stated cost and when receivables should be written off, as well as the tax implications of selling particular capital assets.

Own the numbers: If an accountant issues a compilation of your financial statements, a cover page will accompany this report. Read the language describing the accountant’s responsibilities. The accountant assumes no responsibility for any of the numbers. Rather, the compilation report clearly states that the figures are the responsibility of the company’s management. Even with fully audited financial statements – which are uncommon for almost any small enterprise, because they’re costly and usually unnecessary – an accountant only provides reasonable assurance that the statements are free of material misstatements.

The takeaway is that company management is responsible for the financials. Hence, you must take ownership of the financial data and understand every line on the statements.

Your business tax return: Be aware that the internally prepared financial statements of a small business are commonly adjusted for tax reporting purposes. Tax returns treat assets differently, don’t allow deduction of some expenses, and distinguish certain incoming cash from ordinary sales income. Ask your accountant to explain how your tax return reconciles to your financial statements. Your financial team members are available to explain the complexities. So use them!

The Easy Way to Monitor Your Financial Health

Money problems can be avoided by monitoring a few key financial areas. The good news: you don’t have to be a wizard at financial statement analysis; you just have to be vigilant.

Cash on hand: Monitoring cash balances is a simple process. It just requires a regular glance at your company’s balance sheet. Bank accounts appear at the top of this report, and you should frequently compare account balances over time.

Determining whether you have enough cash on hand involves some quick math. Cash, plus the receivables you expect will become cash within a month, should exceed the near-term debts you owe – called “current liabilities” on the balance sheet. Current liabilities include credit card balances, payroll taxes, sales tax, and other upcoming amounts you expect to pay.

Spending: A significant number of business errors are the result of not knowing where the money is going. Money should be spent for things that simplify your business and make you more productive. The income statement (also called the profit and loss statement) will help you evaluate your spending habits.

Here you’ll find the percentages of each expense category relative to revenue. By comparing this report over multiple periods, you’ll discover how your expenditures may have changed as percentages of revenue.

When business is going well, you’ll want to keep spending the same percentages of revenue for the expense categories that are variable. With fixed expenses, such as rent and telephone, what will hopefully be an increase in sales will cause the percentages of revenue for these categories to favorably decline.

Tax-Deductible or Not? Ask Your Expert

As business owners prepare to file tax returns, many find they have to reconstruct some of last year’s expenses. This is usually a result of paying business expenditures by personal means instead of through a checking account or credit card used exclusively for business. Delays and frustration result when there isn’t sufficient information, or you can’t remember the details required for some write-off claims.

By hiring an accounting professional, you can be sure every expense deduction your business is entitled to will be captured in a timely manner. Bookkeeping experts know how to record expenses regardless of the payment method. And they understand the conditions that make certain types of expenses tax-deductible.

Double-entry systems

With a double-entry bookkeeping system, every transaction records a balanced combination of debits and credits. Unlike spreadsheet entries, double-entry accounting will debit an expense category and simultaneously record the offsetting credit to an account that shows how the expense was paid.

Using accounting software for do-it-yourself bookkeeping is not a complete solution because it leaves you with the burden of learning about account categories and tax classifications. But when a skilled bookkeeper sees checking account outflow or credit card use, he or she will immediately seek information about the balancing expenditures. Even when your personal funds are spent for business purposes, your accounting professional will know the account that offsets the expenditure.

Normal expenses

A deductible business expense must be necessary and normal for your type of enterprise; personal expenses are never tax-deductible just because they’re paid by your business or have a loose connection to business operations. These types of transactions are considered owner draws.

For example, an accounting professional knows that business owners are prohibited from claiming tax deductions for wardrobe items or personal grooming. Expenditures such as haircuts and gym memberships are strictly personal, regardless of the intangible benefit derived from maintaining a good appearance.

Businesses also cannot deduct costs for the owner’s residence. However, if you meet home office requirements, the business may reimburse you for a percentage of your home expenses. This is based on the portion of your home used regularly and exclusively for business; in most cases, the home office space also must be the primary business location.

Special rules

There are special tax rules that allow deductions for business education and travel. General business education is deductible, but seminars and conferences must maintain or improve skills required in your current line of business.

Business travel is generally associated with overnight stays away from home. A deduction for all the travel cost is allowed when the primary purpose of the trip is to conduct business. When the trip is primarily for pleasure, only expenses directly related to business are tax-deductible. In this case, deductions for transportation and lodging costs are based on the percentage of days during the trip that business is conducted.

Obviously, caution must be exercised when claiming certain tax deductions. Your accounting professional is a valuable source of knowledge about what can – and can’t – be claimed.

Tax Implications of Business Losses

Business profits will always incur income tax, but a business loss does not necessarily provide a tax benefit. Typically, individuals may use business losses to offset income from other sources when determining their adjusted taxable income. But there are limitations.

A business owner with a loss can determine if the loss is tax-deductible by applying at-risk rules. The at-risk amount generally comprises money or property contributed to the activity in question plus the amount borrowed that, legally, the owner must repay personally.

Individuals in partnership businesses are also subject to the at-risk limitation; plus, they must satisfy the requirement for a sufficient tax basis. A partner’s basis is generally the amount of money and property contributed to the partnership, plus the partner’s allocation of undistributed profits that have accumulated over all past periods. A tax basis, therefore, decreases as a consequence of distributions received along with nondeductible expenses.

The income tax consequence for a partnership’s profit or loss is assessed on the individual tax returns of the partners. But deduction of a loss is limited when a partner has no tax basis or at-risk amount. Here, a capital contribution or a personal guarantee of partnership debt is required so the partnership’s pass-through of loss can be deducted from each partner’s personal return.

This presents a complication for limited partners, who avoid liability for the entire enterprise because their exposure to a business is limited to their contributions of cash. That said, having less money at risk may also restrict a limited partner’s ability to deduct a partnership loss.

How Much – and When – to Pay Yourself

Let’s face it, every entrepreneur wants (and needs) to get paid. This is the foundation for a sustainable business trajectory.

The difficulty comes in deciding how much your business should pay you. Although there’s no specific formula that covers all cases, the following standard factors can help you make this all-important decision:


The first element to consider is timing; your compensation as owner must not negatively impact the health of the business. For instance, in the early planning stage, the company has no revenue but probably has lots of start-up expenses. At this point, it doesn’t provide cash to feed you; rather, you are feeding it.

When your operation is generating revenue, sustaining the momentum is paramount. In the first six months or so, the business builds cash for expansion, so you don’t take any distributions in that time period. However, after six months, you need to take a distribution; after spending all your time and resources, it’s crucial to your psychological well-being that you pay yourself something.

You are the most important – and possibly only – employee of your business. Even small recurring compensation demonstrates that the company exists to reward individual effort. This also means that predictable owner distributions become part of the business cash flow along with general operating expenses.

The amount

After a bit of history with your business, you’re able to build a financial forecast. This considers your available resources – especially money – and predicts future revenue along with expenditures. Your owner compensation is one of the cash outflow categories. The budget should allow your pay to be adjusted based on other required costs for business operations.

Not all of the outgoing cash is for recurring overhead expenses. For instance, if your company sells products, funds are needed to replace inventory. Likewise, a service-oriented business may need parts or materials for the projects expected in upcoming months. Or maybe you’ll require extra cash for necessary travel or subcontractors. The company bears these costs prior to getting paid by customers.

The key is remembering that your primary concern is the strength of the business, and you need to have a cushion of cash to reinvest in it. However, one of the costs of conducting operations is your labor. While you don’t want to bleed the company dry, some amount of recurring compensation is reasonable. Find that amount in the company budget and pay yourself consistently. As you reinvest cash for growth, the cash cushion should rise, allowing you to take larger distributions in the future.

The people

Do you have investors or have you borrowed from financial institutions? Investors generally want to know that you are being paid by the business, and will usually set your salary ceiling along with performance goals. Lenders, too, want to see owner compensation as an indication you have an incentive to grow the business. Note that demonstrating sufficient cash flow for debt repayment is easier if your historical compensation is a consistent amount; variances complicate lenders’ abilities to evaluate cash flow.

How to Prevent Common Cash Projection Mistakes

Cash flow is vital to the financial stability of every business – from the smallest to the largest. Therefore, every entrepreneur should become familiar with the cash flow statement.

Forecasting cash flow is a necessary foundation for future planning, enabling you to measure actual results against goals: meeting specified targets validates your initiatives, while missing targets identifies where improvement is needed.

However, a number of common errors with cash flow projections will result in poor strategic decisions. For example, projecting operating income is often the cause of cash flow blunders. This top line of the projected cash flow statement should represent a realistic profit forecast based on available resources.

The best starting point is a separate projection of revenue and expenses, and subsequently, an examination of changes in receivables and payables. This is accomplished by using figures for the average number of days that receivables and payables are outstanding. Cash flow is different from income because of the lag between sales and collection, as well as the lag between receiving a bill and paying it.

Other cash flow variables are investments and financing. These do not appear on the income projection, so they appear on a cash flow forecast. Investment in a new asset – such as machinery or equipment – subtracts cash. Financing these purchases by borrowing adds to cash.

Those entrepreneurs familiar with the components of cash flow statements can recognize the forecasting limitations, and they will seek professional accounting assistance to overcome these limitations.

Your Vigilance Can Prevent Accounting Issues

As a business gets rolling, a myriad of factors can combine to create accounting issues. Although perfect accounting is as mythical as the unicorn, it’s important for business owners to adopt a strategy of keen bookkeeping oversight. The alternative is certain to result in mistakes, which can jeopardize the progress of your business.

In fact, losing track of your financial data is bound to result in inaccuracies that can cripple an operation. Sound basic procedures go a long way to promoting business success.

Receivables reconciliation

Matching customer payments to invoiced work is clearly a crucial objective for every enterprise. The proliferation of accounting software to aid in this process has been both a blessing and a curse. The blessing is that less time is spent finding invoices and comparing payment amounts. No more verbal quotes and hand-written invoices; accounting software permits simplified tracking of unpaid invoices and eliminates disputes. Moreover, summary financial statements of income and costs are compiled with no additional steps.

Its curse is that it results in a false sense of comfort that the computer accurately records what’s transpired. In fact, accounting applications only record what a human enters. You must scrutinize reports regularly to ensure that transactions are posted to the correct accounts.

For example, entering a received payment and not applying it to an invoice-or to the correct invoice-results in erroneous statements of income and costs. Prevent this by monitoring accounts receivable aging reports to be sure payments are posted to the correct invoices. An accounting program should produce “cash basis” financial statements, which by definition will not indicate any balance for accounts receivable-unless an error has been made.

Payables problems

Another bookkeeping goal is paying bills received from vendors. Accounting software facilitates the entry of a bill and subsequent payment. But correctly applying payments to existing bills in the system may be problematic: for example, matters are distorted when someone pays a bill by company credit card and then pays the credit card bill. Failure to follow the exact steps in these events will render inaccurate reporting of income and expenses. This solution rests with examining accounts payable reports; a “cash basis” balance sheet should not contain any amount for the accounts payable account.

It also makes sense not to enter loan payments as bills to pay. The indebtedness is already in the bookkeeping system and is reflected as a liability on the balance sheet. Loan payments, therefore, need not impact the accounts payable process. Simply record a check and apply respective amounts to the separate accounts for the liability and interest expense.

You can reliably compile business income and expenses by setting high standards of accuracy for accounts receivable and accounts payable. Tax professionals will know if accounting software mistakes have been made in these areas, and won’t permit income tax reporting of spurious data.

However, it’s difficult for your accountant to locate errors that occurred over long periods. In order to eliminate problems later, it’s important to quickly find bookkeeping mistakes and immediately correct them.

Misconceptions about Business Vehicles and Taxes

There are many misunderstandings around tax deductions related to business vehicles. One common one is that a business automatically receives a tax deduction for vehicle costs just because the vehicle serves a business purpose.

Usually, the vehicle is only partially used for business; often it’s the business owner’s personal automobile. Although it may be titled in the company name, expenses for a personal/business use vehicle aren’t considered business expenditures. Deducting vehicle costs as automobile expenses is actually an inflated deduction, and it may disguise wages that are actually subject to payroll taxes.

A genuine company vehicle is used almost entirely for commercial purposes; however, incidental personal use, such as driving home after work appointments, is acceptable. Routine commuting is considered non-incidental personal use.

Personal use of a company vehicle is a form of compensation to the user; in allowing an employee to use a company auto, a value for personal use miles will be added to his or her reported taxable wages. (Rates per mile are set each year by income tax authorities.) Similarly, a business owner’s personal miles will be added to his or her wages or profit distributions. Therefore, your mileage records and those of your employees must separate business miles from personal miles.

Rather than using company vehicles for personal purposes, it’s easier for the company to reimburse the owner/employees at the standard mileage rate when using their personal vehicles for business purposes. The general standard practice is not to title any vehicles used for personal purposes in the company name.