Is it Time You Change Your Bad Financial Habits?

It’s time for some entrepreneurs to admit that they keep too much information in their heads; time to end the excuses about not being good with numbers; and time to acknowledge that while you do have good financial records, you never look at them, because you think they exist only to simplify tax reporting.

If this is you, well, it’s time to change your practices.

Solid accounting information gives you tangible verification of the direction your business is going. To obtain this, it’s all about great bookkeeping practices.

Just try tweaking your budget; measuring the impact of growth on your cash flow; preparing for seasonal downturns; and planning for infrequent payments without relying upon superior bookkeeping. Executing these without supporting financial data is like trying to explain baseball to someone from another planet.

Planning big projects

In planning for major expenditures, you need accurate bookkeeping records. Your financial statements give you enough information to anticipate a variety of extraordinary cash needs. For example, if rising sales necessitate new equipment and personnel, knowing where you stand is infinitely better than scrambling to react to situations as they arise.

Upgrades to computers and software are inevitable. Slow periods are the ideal time to complete upgrades. This calls for retaining profits from more prosperous times; recurring fluctuations in revenue will be easier to withstand if you can predict them, and accounting data tells you which phase you’re experiencing. Forecast these events in advance, create a reserve for the necessary funds, and plan for the effect of borrowing.

Collecting income

Bookkeeping systems are not infallible. They require oversight, which is ultimately the business owner’s responsibility. Start by making sure that all deposits are correctly recorded. Each deposit could comprise a combination of revenue, cash infusions from personal funds, loans from financial institutions, or reimbursements. Your bookkeeper needs your guidance to ensure they are correctly recorded.

Just because you have accounting software doesn’t guarantee accuracy. Ensure the correct dates are recorded for invoices generated by the program. Apply all payments to the invoices. Avoid assigning deposits to a catchall income account; it doesn’t allow tracking of outstanding customer balances. Develop a process for issuing second invoices, making phone calls, charging late fees, and collecting on a timely basis.

Managing cash outflow

Careful scrutiny of financial statements ensures you are setting aside enough money for all your liabilities. Maintain a close watch on what you owe, including your tax obligations. Know when payments are due. Study your cash availability. You often can work out an extended payment plan with key suppliers, but you must act well before due dates arise.

Paying the IRS late always results in penalties and interest assessments. Tax payments should be a top priority. Payroll taxes are the most crucial, because these are essentially amounts that belong to your employees, but you also need to anticipate your own income tax consequences.

Wise business operators with long histories of success have learned the importance of staying on top of their financials. Will you?

Three Numbers that Lead to a Successful Financial Dialog

As most successful entrepreneurs know, you don’t just visit your accountant at tax time. You should meet with him or her annually just to discuss the direction of your business.

Accountants have clients in various industries at different stages of growth. The dialog with your accountant will help you compare your results with other enterprises of your size or in your field.

However, to ensure the dialog is useful, there are three crucial numbers that you need to know:

Revenue: Many entrepreneurs fall into the trap of stating how much money they made by referring only to top-line revenue. That amount is what you have been paid or promised. Revenue is a key figure, because it must grow if you want greater profit; however, it must be used advisedly.

Profit: A more substantial value of what you actually made is profit. That bottom line figure gives your accountant plenty of information – particularly when he or she compares it to your revenue. The gap between revenue and profit reveals expenses that confront you, even if sales decline.

You can learn how your profit margin compares to other businesses, but you also can see the factors that contribute to your profits. Your ultimate goal is to discover what projects or products generate the most profit.

Cash flow: Lastly, you must understand your cash flow and how it’s trending. Healthy cash flow is the primary focus of a sound business. Ask your accountant to help calculate cash flow and judge how it’s impacted by potential changes.