Budget Planning Can Lead to Success

Budget planning for your business doesn’t automatically make you a successful entrepreneur. But you’re on the right path, if you conduct some financial forecasting.

Creating a budget allows you to accomplish business goals. A financial forecast is probably already on your mind most of the time, but it helps to see it in black and white. Recording the details and turning them into a cohesive plan will give you a reliable strategy to implement. The budget helps you anticipate profitability of each of your products or services and gauge the impact of new decisions.

Elaborate projections are not required. You simply have to understand your business and apply some common sense. To begin, you must establish some basic bookkeeping elements. This is the foundation of your budget planning.

Cash vs. Accrual

Your first objective is to have financial information that accurately matches the timing of income and expenses. This may require accrual basis accounting. Accounting software like QuickBooks produces either accrual basis or cash basis reports. Accrual basis shows income when earned and expenses when incurred. Cash basis counts income when payment is received and records expenses only when they are paid.

With some businesses, cash and accrual are nearly identical. For example, when customers pay at the time of sale, cash basis revenue is the same as accrual basis revenue. Accrual accounting is a little more accurate at matching the timing of expenses to the income generated from incurring them. You may use cash basis for tax purposes, but use accrual basis for budgeting – especially if your type of business has significant lags between sales and receipt of payment and time gaps between receiving and paying bills.

Adjusting for Current Circumstances

Start your budget with categories and amounts that exactly match your historical income and expenses. Sales accounting must have distinct revenue accounts for each type of product or service. Also, your bookkeeper should separately classify the direct costs of each sales category.

Amend your budget to reflect new sales projections by category. Sometimes the best seller is the least profitable. So endeavor to sell more items with the highest profitability. Increase or decrease direct costs that change in relation to revenue adjustments. Finally, determine which general overhead expenses are higher or lower than you expected. Adjust your budget to curtail excessive expenses.

Adding New Actions

Add budget lines for new products or services you plan to introduce. For each of these, budget separate revenue and associated costs. Ask your bookkeeper to systematically account for these differential categories.

Increase budgeted spending for areas where you plan changes such as adding new employees or launching an advertising campaign. Maybe you need to pay for revising your website or improving your physical location.

As you write down objectives, you begin to prioritize which ones you can truly accomplish this year. This makes you focus on what’s most important and avoid being distracted by less-worthy tasks. Plus, you will find you can execute the plan to achieve these goals when you know they are affordable.

Communicate With Your Bookkeeper to Avoid Problems

You don’t need to live in a barn to judge a livestock show, and you don’t need a formal accounting education to evaluate bookkeeping procedures. Many business owners rely entirely upon bookkeepers to accurately record financial transactions. That’s a mistake; you need regular communication with your bookkeeper to avoid problems.

Your normal bookkeeping process may entail recording all bank deposits as revenue. However, certain transactions should not be counted as revenue; the result will be inaccuracies and excessive income tax.

Often cash that isn’t revenue finds its way into your bank account: For example, you make short-term loans of personal funds to your business or deposit the proceeds from selling a business asset. In these circumstances, you need to alert your bookkeeper to prevent errors.

The most complex case of miscounted revenue arises in businesses that accept customer deposits – a common practice in many industries. These amounts are not revenue until the service is completed or the product delivered. Suppose you receive a $500 down payment to begin a $900 project in July. You complete the project in September and receive the additional $400. You should book the entire $900 as revenue in September; the $500 down payment should be tracked separately from revenue.

You must have a system to account for customer deposits and recognize previously received amounts as revenue once the work is finished. You need to communicate clearly and regularly with your bookkeeper to prevent this.


Three Accounting Errors That Will Cost You

All business owners should periodically examine their bookkeeping practices to ensure that their system provides an accurate map of the company’s financial condition instead of just a general idea of its direction. After all, even a lost hiker descending a mountain knows that he’s going down. You can avoid becoming lost by keeping a close eye on these three areas:

Incorrect Revenue Reporting

The first accounting error that can cost you money is the incorrect recording of sales revenue. Businesses often receive money that doesn’t count as sales but may be incorrectly recorded as such. Incorrectly recorded revenue in your financial statements results in an overpayment of income taxes and gives you a false sense of your company’s profitability.

A primary source of the complication is accounting software. Using a computer program for invoicing creates accrual income.

Ask your accountant to explain the difference between accrual-basis and cash-basis financial statements.

Make sure your accounting software is recording revenue at the correct time. Entering money received as payment on a customer account before creating an invoice doesn’t record any sales revenue.

You must create invoices first, with a date preceding the recorded date of customer payment.

By far the biggest cause of inaccurate revenue reporting arises in businesses that take deposits from customers prior to delivering a product or service. Customer deposits are not income until you complete the job.

You need to account separately for customer deposits even if you never make refunds. This is particularly important for companies that build, install or repair anything for which customer deposits are required.

Large Purchases

The second common accounting error is failing to understand the financial impact of a large purchase. Just because you buy equipment with cash doesn’t mean you can immediately deduct the full cost. You typically write off the expenditure over time.

Some equipment is eligible for deduction of cost in the year of purchase, but a threshold amount is imposed. Even if you can deduct the entire cost in the purchase year, you are prohibited from doing so to create a tax loss.

Borrowing money to make a large purchase has the same consequences as a cash purchase. You don’t deduct the loan payments as an expense. The only expense is interest. Principal payments comprise the equipment cost that’s written off over time.

Cash Flow

The third accounting mistake is confusing profit with cash flow. Some issues related to cash flow are addressed above in the discussion of the first two accounting errors. But beyond these factors is the matter of inventory.

Inventory is not an expense until you sell it, but adding inventory does tie up cash. You need to have just enough product – but not too much – for resale. Track what you’re selling versus what you’re buying for inventory.

To gain a better understanding of this entails translating the amount of inventory on hand into the number of days it takes to sell it. Your accountant can help you calculate this figure.


Do You Really Need to Relocate Your Office?

To expand or not to expand? Summer is often a good time to assess whether you have outgrown your current office space and to consider whether to move. Here are some tips to help with the decision:

Assess the Viability of Your Current Space

With many of your employees on summer vacations, now is a good time to look at how your office currently functions and decide whether to update, change or move.

Often the output gap left by vacationers will reveal whether they have been overworked and whether you may need to add staff. Also, with regular employees on holiday, the substitute staff is more likely to notice an awkward office layout then the incumbents, who have gotten used to it. Even if layout is a problem, it needn’t mean a move. Simply shifting around some filing cabinets and desks may do the trick.

Decide What You Need

If a redesign won’t solve the problem, or if you anticipate outgrowing your current space, decide how much space you need and consider a larger unit in your current building. As long as you remain a tenant at the same location, you may avoid a lease-breaking penalty.

If you do plan to relocate, you’ll want to avoid locations where Internet service is slow or cell phone reception is poor. Ask tenants at your prospective location about their service providers.

Moving an office, like moving a home, can be traumatic. Take advantage of summer to be sure that disruptive move is actually needed.

Mid-Year Tax Planning for Small Businesses

For a small business, dealing with income tax matters is an unfortunate necessity, and you can’t easily dispense with the burden. Even though you recently finished your last year’s tax return, now is the perfect opportunity to make improvements for the current year. Waiting until the next filing deadline is too late.

Acting at midyear allows you to plan effectively for reducing your tax bill. You also can start implementing strategies that will save time in the future.

Start by examining your business income. The objective is to estimate your earnings for this year. Make sure that you account for all expenses, including depreciation. Your accountant can estimate tax depreciation for the year.

Compare your projected full-year income to the tax amounts you are scheduled to make this year. If you are paying too much in estimated tax payments, you can conserve cash by reducing future installments.

When you have more income than originally expected for this year, you are incurring additional tax liability. Your accountant can determine whether your estimated tax payments are sufficient to avoid an underpayment penalty. Even if you will not owe a penalty, you need to plan for paying extra tax next April.

Assess whether your business will require new equipment. By examining your overall financial picture now, you can decide to add or replace assets this year or wait until 2013.

Reducing your tax bill

You can reduce your tax bill by expensing the cost of equipment under Section 179, making it advantageous to purchase the equipment now. The large cash outlay is partially offset by saving money that would have gone to the IRS. Your accountant can determine your estimated tax savings based upon your expected marginal tax rate.

An evaluation of your business balance sheet reveals whether borrowing to make new purchases is reasonable. Banks are still lending to small businesses for expansion as long as they’re not already too highly leveraged.

Midyear is also a good opportunity to analyze the workforce. While workers are off on summer vacations, an astute business owner will take the opportunity to evaluate the impact of their jobs on the organization.

Some employees need additional duties, while others are overwhelmed with work. You can gain considerable insight by temporarily assigning their responsibilities to others while they’re away.

You also may find you have to plan for extraordinary cash outlays, for example, a computer upgrade to increase an employee’s output or new software to enhance overall productivity. You may want to spend more on employee training come fall.

Organize your records now. Your accountant can explain what is required to substantiate certain types of business expenses such as detailed mileage logs, which are necessary to deduct auto expenses, and adherence to specific rules for business meals and entertainment expenses. By accurately collating data now, you don’t miss valuable tax deductions or face disallowed deductions for lack of proper records.

As much as you would prefer to leave 2012 tax planning for another time, putting your mind to it now will save you time and money in the future.

What to Watch for When Reviewing Bank Statements

As a business owner, you know that finding the right tool for the job is critical. One of the most important items in your toolkit is the ability to reconcile bank statements to your business records.

Even if your bookkeeper handles the reconciliation process, you need to personally examine your bank statements for potential mistakes and fraud. This also allows you to notice and assign for disposition any returned checks from customers’ banks. Here’s what to watch for:

  • Bank charges. Ask your bank to explain those you don’t understand. Negotiate to reverse fees for services you don’t want or seldom use.
  • Scan for small transactions, usually less than $0.25 each. They are signs that a hacker is “phishing” for an active account number.
  • Review all debit card entries to ensure that you recognize vendor names, and check for duplicate transactions.
  • Inspect the check sequence. A number should identify each check. Fraudulent items may appear without check numbers.

Ask your bookkeeper about deposits not yet posted at the bank. Outstanding deposits should arise only near month-end.Identifying bank statement errors and fraud in a timely manner is essential. It ensures early detection of problems and avoids fraud loss. As well, failure to detect and immediately report fraud to your bank could result in your losing your right to pass the liability back to the financial institution.

4 Financial Ideas to Rejuvenate Your Business

Like elite athletes, successful entrepreneurs are always up for challenges. It doesn’t matter what economic situations they face, elite entrepreneurs are constantly finding ways to improve. Great managers achieve steady success regardless of occasional setbacks.

It’s a relentless commitment to excellence that enables them to meet and exceed their goals. That and realizing that numbers are critical management tools.

While attention to customer service and marketing are important in tough economic conditions, it’s financial actions that help entrepreneurs remain competitive.

Here are four actions to give you that edge.

Customer payments: Maintain a system that reveals aging of your accounts receivable. Ask your accountant to measure the average balance relative to sales. When you see this figure creeping up, your customers are waiting longer to pay.

Allowing customers to pay several days after a purchase is a privilege you offer, not a buyer’s right. You have the right to expect prompt payment, and the regular customers with whom you’ve established valued relationships will understand.

Of course you can afford to be lenient with customers who keep their word and are honest about temporary cash shortages. But you may want to change transaction terms – even requiring payment at the time of sale – for those customers who consistently let you down when it comes to payment.

Vendor priority: Just as you expect prompt payment from customers, your vendors expect the same. But not all vendors are equal. Remitting payroll taxes, for example, is critical and should be a top priority. Paying your rent should also be a priority, more so even than paying your banker, who is often willing to resolve issues and avoid collateral repossessions.

Keep an accounting of amounts owed to each vendor. If the numbers creep upward relative to sales, it is essential to prioritize vendors. Be proactive. Contact vendors and ask for extra time to remit payments. Always pay the highest-priority bills first and describe your circumstances honestly to every vendor.

Inventory balance: Holding too much inventory relative to sales is a recipe for disaster, and a successful business sells its inventory promptly. The basic procedure of measuring your inventory turnover must be conducted often. Your accountant can show you the equation, which uses numbers readily available from your bookkeeping system.

Don’t be afraid of discounting stale inventory. Too many businesses don’t hold enough cash during a downturn in sales and unloading old items from inventory helps you to weather a slump. In fact, the cash you raise through liquidating your stale inventory allows you to accumulate new inventory at low prices.

Experiment: Top-quality business owners always have an eye to the future. They improve upon what they do well and discard mistakes. They experiment and measure the results.

For example, you can enhance sales with free installations or by offering extended warranties. Create customer loyalty clubs or invest in training your sales team. Most important, you could schedule regular meetings with your accountants to review company bookkeeping and evaluate overall your financial condition.

Proper Data Storage Can Save Time and Money

Few business problems are more costly, and more unnerving, than losing information. Recovering just a few hours of data entry can take several days and hundreds of dollars. The solution is proper storage of digital information.

There can be intentional and unintentional reasons for losing data. Take, for example, deleting a file by accident. Or not saving it to start with. Fortunately, automatic save features are now built into most applications and self-service local backups represent an easy solution to recovering deleted files without requiring an IT wizard. Cloud-based backups are an inexpensive option to prevent against data loss from natural disasters. In addition, this offsite backup offers protection against data theft and infection of files by outside viruses. A basic offline backup is another solution, which retains at least one copy of data that intruders are unable to access or modify.

Hardware failures are inevitable. Downtime crashes are reduced or even eliminated by servers equipped with RAID (redundant array of inexpensive disks). Using a UPS (uninterruptible power supply) reduces data corruption from power failures and overloads. Large businesses have backup data centers and smaller companies can rely upon external hard drives. But, ultimately, there is only one sensible strategy for storing and protecting data and eliminating concerns over data loss. That is redundancy. Simply synchronizing data is not the same as creating redundant copies. The best solution is having multiple backups in different locations.

Secrets for Getting a Small-business Loan

Small-business owners run short of cash for many reasons. Understanding how the loan process works is half the battle to getting money from a bank.

Bank Limitations

When applying for a business loan you must remember that banks require assurance of repayment. Most importantly, a banker seldom possesses sole authority to approve a loan. The banker must sell the idea to the bank’s loan committee and he or she has no desire to look like a fool presenting a poorly conceived loan.

In addition, banks are heavily regulated institutions. Government authorities closely review loans to assure compliance with bank lending policies.

To avoid complications, many loan officers deploy strict suitability standards. They refuse to evaluate any circumstances beyond the basic measurements. You cannot obtain loan consideration from them if you don’t fit their narrow criteria.

The Right Banker

Consequently, your strategy for getting a business loan is to first interview loan officers before they start assessing your qualifications. This doesn’t entail asking specific questions about lending philosophy. It actually means taking stock of general demeanor. A banker with plenty of self-confidence is most apt to evaluate your loan proposal with a broad view using a personal sense about business matters.

Confident bankers listen to narratives about how a small business operates. They develop an appreciation for the system an entrepreneur uses to prevail in the market. These loan officers rely upon their experience in knowing if a loan applicant is sound. You can explain to such people how you expect to generate earnings for loan repayment.

Organized Information

A good first impression is imperative. You must substantiate your business plan. Demonstrate how your past strategies succeeded. Provide financial reports and understand their meaning. You need a balance sheet as well as a profit and loss statement. Use them to support your oral history of the business and description about current conditions. Determine some key financial ratios that define trends. Present a projection of cash flow from following your plan that reveals funds for repaying the loan. Describe why the loan proceeds will make more money for your company.

Explain the reason you are short of cash.

A banker will know if the cause is poor management. However, healthy businesses can have sound explanations for needing loans. Equipment breaks down at the wrong time. A sales slump sometimes occurs. Expansion opportunities arise when insufficient capital exists.

Remedies are available, but they require more than cash infusions. Reversals of misfortunes demand guidance by organized managers. Show that you have the skills and discipline required to effectively operate the business.

Every banker deals with countless people seeking loans who don’t even know where to find a financial statement.

Other applicants have financial statements but not a clue about what they mean.

A customer in possession of well-understood financial statements and a plan for loan repayment is so rare that it commands a banker’s full attention.

The Consequences of Having Negative Business Equity

Monitoring business equity is as important as knowing the amount of money in a company’s bank account. Adverse consequences arise if equity becomes negative.

Equity is all of the owner’s investment in the enterprise. Retained earnings are the component of equity comprising all profits that remain in the business. A new business has no retained earnings. Profit at the end of year one is retained earnings to start the second year. Subsequent accumulation of profits further adds to retained earnings.

Withdrawals of profit reduce equity. Business structure determines how an owner withdraws company profits for personal use. Proprietors withdraw money at will. Partners have the same privilege in proportion to their ownership percentages. S corporation shareholders receive distributions, and C corporation shareholders obtain dividends.

Contrary to popular perception, business owners can possibly withdraw more than accumulated profits. This creates negative retained earnings. When that happens, the business has more debt than assets. Selling or liquidating the operation will likely require owners to input capital for repaying liabilities.

The worst consequences of negative retained earnings occur with S corporations. Distributions to S corporation shareholders that create negative equity are taxed as capital gains – unless the shareholder is the source of loans to the business. In addition, a shareholder is not allowed a tax deduction for the loss of an S corporation when he or she has no equity or loan investment in the company.