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.