Three Reasons You Need a Good Bookkeeper

For a solopreneur, entrepreneur or small-business owner, having a good bookkeeper is just as important as having a good accountant. One is no substitute for the other.

Generally, a bookkeeper is responsible for recording financial transactions, including sales, purchases, receipts and payments, into a general ledger. Other bookkeeping tasks may include monitoring cash flow, paying bills and collecting money that is due to the company.

Why would you need a bookkeeper? Following are three good reasons:

Time Is Money: Running a business involves a good deal of paperwork, and doing paperwork is probably not the best use of your time. The time you spend doing your own books could almost certainly be better spent.

Accurate Financial Statements: Lenders, investors and creditors expect you to maintain accurate books and produce proper financial statements. These records can also help your business stand up to a tax audit. Of course, you must produce proper financial statements if you ever want to sell your business as well.

Tax and Financial Strategies: A bookkeeper can guard against over- or underpayment of taxes, advise you on the profitability of your efforts, and help you be proactive about your finances.

In the U.S., there is no certification or license requirement for bookkeepers, but the National Association of Certified Public Bookkeepers offers a Certified Bookkeeper credential or Certified Public Bookkeeper license.

How Small Businesses Can Improve Their Cash Flow

It’s a common lament among small-business owners and solopreneurs: “If I’m making so much money, why am I always broke?”

The problem often boils down to the difference between net income and cash flow.

Net income is the bottom line, or the profit or loss that is recorded on your income statement after accounting for all business costs and expenses.

Cash flow is money that has been collected and is available for you to use.

The income statement is updated whenever you make a sale or complete a job.

However, you may not see payment for these activities for 30, 60 or even 90 days. Even though you have generated revenue, it is not yet available as cash for you to spend.

A drastic imbalance between net income and cash flow can lead to a situation where you are generating healthy profits from your business activities, but you don’t have enough cash to cover expenses such as overhead, labor and materials.

The money has been earned and recorded, but it hasn’t been collected and thus is not available to support your operations.

There are a number of ways that cash can get trapped on the balance sheet.

The two most common are for customers to delay payment on receivables and for inventory levels to get out of hand. Here are some ways you can avoid falling victim to your sales success by running out of cash:

  • Monitor cash flow regularly. Get into the habit of staying on top of the amount of money you have available at all times.
  • If your cash flow level falls below a certain threshold, or if you see an adverse trend developing, look into financing options before things reach a crisis point.
  • Use payment policies that enhance cash flow services. Ask customers to make deposits on their orders. Offer discounts to those who pay up front, or use a tiered payment schedule that encourages early payment or pre-payment for goods.
  • Take advantage of your creditors’ payment terms so that you retain use of your cash for as long as possible.
  • Ask suppliers for flexible payment terms as these can be more beneficial to cash flow than discounts or low prices.
  • Avoid keeping excess inventory on hand. Use a just-in-time inventory management system, buying what you need only when you need it.
  • Issue invoices promptly and follow up on payments that are past due.

There are many examples of good, solid companies that failed because they could not generate enough cash.

Cash flow is a better metric of a company’s financial health than net income.

Indeed, operating cash flow is the lifeblood of a company and the most important barometer that lenders and investors use to measure a firm’s financial health.

Your cash flow statement provides immediate insight into your financial position at any point in time and reflects your ability to remain solvent in the near term.

What You Need to Know About Depreciation

Depreciation is an income tax deduction that lets you recover the cost of certain property. To qualify as a depreciation deduction, property must meet the following criteria:

  • You must own the property.
  • You must use the property in business or in an income-producing activity.
  • The property must have a useful life of more than one year.

Most types of tangible property and equipment are depreciable except for land. In addition, some intangible property, such as patents and copyrights, can be depreciated. You may also depreciate the cost of capital improvements on leased property.

Depreciation begins when you place the property in service for your business and ends when you have fully recovered the property’s cost or when it is retired from service, whichever happens first. If you use the property for both business and personal purposes, you can deduct depreciation based only on your business use of the property.

IRS Form 4562, Depreciation and Amortization, is the form used to report depreciation on your tax return.

Straight-line depreciation is the most common method of depreciating assets. However, in order to reduce tax liability as soon as possible, some accountants use other approved methods to accelerate depreciation and record larger amounts of depreciation in the early years of an asset’s life. Check the regulations published by the Internal Revenue Service and your state taxing authority for specific rules regarding depreciation and methods of calculating depreciation for various types of assets.

Confused About Accounting Terms? Here’s a Primer

The following is a glossary of some commonly used accounting and bookkeeping terms:

Accruals: Charges that are incurred and increase even though an invoice has not been received. An example is interest that accrues before you receive a bank statement.

Amortization: The depreciation of an intangible asset such as a loan or mortgage over a fixed period of time.

Burn Rate: The rate at which a company spends money.

Capital: An amount of money put into a business.

Credit: A column in a journal or ledger to record the “from” side of a transaction.

Cost of Goods Sold: A formula for determining the direct cost of merchandise sold over a given period.

Days Sales Outstanding: The average number of days it takes to collect money owed.

Debit: A column in a journal or ledger to record the “to” side of a transaction.

EBIT: Earnings before interest and taxes are deducted.

EBITDA: Earnings before interest, taxes, depreciation and amortization are deducted.

Equity: The net value of a business, calculated by subtracting liabilities from assets.

FIFO: This means first in, first out. It is a method of valuing inventory.

Fiscal Year: A business’s accounting year. It can begin at any point during the calendar year.

Gross Margin: The percentage difference between the selling price of a product or service and the cost of producing that product or service.

Income Statement: A report that summarizes all income and expense accounts and is used to calculate the net income/loss reported on the balance sheet.

Liabilities: Amounts owed to others outside the business.

LIFO: This means last in, first out. It is a method of valuing inventory.

Normalize: This term can be applied to many aspects of accounting. It means to average or smooth out a set of figures so they are more consistent with the general trend of the business.

Profit and Loss Account (P&L): An account composed of revenue and expense accounts. The P&L shows the current profit or loss of the business.

Profit Margin: The percentage difference between the cost of a product and the amount it sells for.

ProForma Financial Statements: Financial statements that have not been officially audited.

Retained Earnings: The amount of money held in a business after the owners have taken their share of profits.

Revenue: The sales and any other taxable income from all sources including sales.

Run Rate: An annual forecast based on current year-to-date figures.

Selling, General and Administrative Expenses (SG&A): Overhead or expenses involved in running a business.

Write-off: An asset that is depreciated to zero.

Marketing Return on Investment: 7 Key Metrics to Track

By measuring and tracking key metrics, you can determine your marketing return on investment and link your efforts to bottom-line goals such as income and revenue. Following are some key marketing metrics that matter:

Leads Generated: Keeping track of the number of leads generated and the source of those leads helps you allocate marketing resources effectively.

Leads Converted: Knowing the percentage of leads that actually turn into customers enables you to home in on target prospects.

Customer Acquisition Cost: The total cost associated with persuading a consumer to buy your product or service, including research and advertising outlays, may surprise you.

Average Dollars per Transaction: Brought down to the individual customer level, this hard metric helps you assess pricing and price your products/services appropriately.

Churn Rate: Churn rate refers to the number of customers who discontinue buying or using your service compared with the total.

Retention Rate: The opposite of churn, retention measures the percentage of customers who stay with you or return and make repeat purchases. Bolstering customer retention is less costly than going after new prospects.

RFM (Recency, Frequency, Monetary): RFM analysis identifies top customers by examining how recently, how often and how much customers spend with you. RFM analysis is based on the 80/20 rule. For example, 80% of your business is derived from 20% of your customers.

Fixed and Variable Expenses: What’s the Difference?

Small-business owners must understand the differences between fixed and variable expenses and how they affect a company’s success.

All business expenses can be categorized as either fixed expenses or variable expenses.

Fixed expenses must be paid no matter how many goods or services you offer for sale.

But just because you cannot immediately change your fixed costs doesn’t mean you should ignore them.

If you can sell more products and generate more income, your fixed costs will be a smaller percentage of your overall expenses.

Fixed expenses are costs that do not change when production levels or sales volumes rise or fall.

Fixed expenses include costs such as rent, insurance, equipment lease or rental expenses, and loan repayments.

Some fixed costs, such as advertising and promotional expenses, are considered discretionary, while other fixed costs are nondiscretionary and exist even if production or sales volumes drop to zero.

Variable expenses are costs that vary directly with changes in production activity levels or sales volume. Variable expenses include things like raw materials, sales commissions, inventory, packaging and shipping costs.

Production and sales volume are the two primary factors that determine variable expenses. However, other factors, such as changes in input costs and transportation costs, also impact the level of variable expenses.

Some expenses, such as utilities and personnel, have both fixed and variable components. For example, an employee may receive a fixed base salary and also earn a variable commission based on sales volume, production quotas or quality thresholds.

Total fixed costs do not fluctuate as unit volume increases, but fixed costs per individual unit decline in this situation.

The more widgets you produce, the less each one claims as a percentage of your total fixed overhead, since the cost is spread over more units. This is not the case with variable costs. Total variable costs increase as volume increases, while variable costs per unit do not change.

As a small-business owner, a working knowledge of fixed and variable expenses allows you to determine your company’s break-even point – the number at which total revenues equal total costs. The break-even point is a key piece of information to consider when making many important strategic decisions.

This formula is the first step in performing a break-even analysis. The number of units required to break even = fixed costs / price variable costs per unit.

This equation gives a small-business owner valuable information about how costs respond to changes in the volume of goods or services produced.

It can also be used to answer other key questions, such as whether a planned expansion will be profitable, whether margins are adequate or whether price increases are necessary.

Knowing how to use this information about fixed and variable expenses is critical if you are considering expanding or developing a new product line and for determining optimal pricing strategies.

Your Balance Sheet: A Health Checkup for Your Business

A balance sheet – or statement of financial position – is a summary of your business’s financial condition at a given point in time. It lists your company’s assets, liabilities and owner’s equity. The balance sheet is one of four basic financial statements and is often described as a snapshot of a company’s financial condition.

The other basic financial statements of a business are the income statement, retained earnings statement and cash flow statement. By showing whether cash flow is adequate and by helping you identify and analyze trends, the balance sheet permits you to assess the financial health of your business.

You can perform a quick but fairly accurate assessment based on:

•    The ratio of debt to equity

•    Cash flow

•    Net gains or losses in equity and assets

•    The ratio of current assets to current liabilities

•    The property, plant and equipment figures in relation to the volume and output of the business

It’s especially important to keep an eye on trends in accounts payable and accounts receivable. Ideally, you want to maintain these at less than a 30-day turnaround. If you find your receivables cycle lengthening, you may need to step up collection efforts.

Lenders, investors and vendors look carefully at balance sheets when deciding to make loans or extend credit to your business. By understanding your balance sheet you can identify your company’s financial strengths and weaknesses.

How a Working Budget Benefits Your Business

Many microenterprises and solopreneurs believe they are too small to need a working budget.

Some start-up owners who are busy launching their operations think it’s a waste to spend time developing one.

And some small and medium-sized enterprise owners reason: “It’s just a shot in the dark, anyway.”

But no matter how small or entrepreneurial your business, you need to have a working budget.

A budget is a critical part of the initial planning stage, a crucial component of your business model and a vital tool for ongoing strategic planning.

A working budget can help an entrepreneur determine whether a new product or idea is financially viable.

It serves as a game plan for planning and timing the growth of a young business.

For an established business, a working budget is a way to monitor the firm’s financial condition and a key part of sound fiscal management.

The term “working budget” refers to the fact that the budget is a work in progress and that it will undergo modification and adjustment as time goes on.

You may need an accountant or financial professional to help you set up your budget initially, but it’s important that you be familiar with the numbers and thoroughly understand all the components of your budget.

If you are a new business owner or an entrepreneur with just an idea, you will need to do some research to come up with realistic budget numbers.

Look at similar businesses in your industry or sector and in your area.

This research will enable you to understand the market potential of your business and will help you in many other ways as you develop products, pricing, promotions and market presence.

Of course, if you are an established business owner, you can use your historical data to estimate future revenues and expenses.

Make sure that your numbers are reasonable or, better yet, on the conservative side.

And be sure that you add plenty of detail about items in your budget, including specific data relevant to your particular business.

The more detailed and thorough your budget is, the easier it will be to use it to secure funding from banks and lending institutions and support from investors.

From time to time, you will need to adjust your budget based on variances between the budgeted figures and your actual figures.

This is a good opportunity to evaluate your financial situation and tailor your business plan to help you reach your business and financial goals.

Maintaining a budget for your business on a regular basis will also help you track expenses, analyze your income and anticipate future financial needs.

Use your budget as a tool to improve and fine-tune your business – and to keep expenses in line.

By having and using a working budget you will be better able to make good decisions about your business and any new ventures you’re considering.

Essential Tips for Reconciling Your Accounts

Reconciling accounts is the process of verifying that your financial records are accurate and that your books are consistent with what your bank statement shows. You should reconcile your accounts every month to stay on top of cash flow and to avoid any nasty surprises from your bank. The following tips might make the process easier:

•    Log all expenditures, withdrawals and purchases into your books immediately.

•    Be sure to include regularly scheduled bill payments, electronic payments and automatic debits.

•    Enter every deposit promptly, whether made at the bank, at an automated teller machine, or by direct deposit.

•    Limit access to company checks and business credit and debit cards.

•    Establish clear policies for employees who expend or handle money for the company.

•    Do a spot reconciliation daily or several times a week.

•    Check your bank statement carefully and follow up on any unexplained items.

The most common outstanding items will likely be checks that have not yet cleared and deposits that have not yet been credited to your account. Other discrepancies may result from miscellaneous charges or credits, such as fees, penalties and interest earned.

If your bank charges a monthly account fee or requires you to maintain a large balance, check around for another bank that offers a free or even interest-bearing checking account. Look for a bank that offers special programs for small and medium-sized enterprises and provides services targeted to the specific needs of small businesses.

Tips for Collecting on Your Accounts Receivable

A receivables aging schedule reveals patterns of delinquency and shows where you need to focus your collection efforts.

The longer accounts receivable (AR) languish, the more likely funds are to become uncollectible.

Accounts receivable are sums due from customers from the time of sale until the receipt of payment.

The time period and the terms of every receivable should be specified clearly. Terms can be stated in various ways, such as:

  • Net 30 days from invoice
  • Net 15 days from shipment
  • 1% 10 days, net 45 days from invoice

The first term calls for payment within 30 days of the invoice date. The second term indicates that payment should be made within 15 days of the shipment date. The third term offers an incentive for early payment; for example, a 1% discount off the invoice amount if payment is made within 10 days of the invoice date. From 10 to 45 days, the customer pays 100% of the invoice.

Receivables are a use of your funds. They are, in effect, loans to customers. While every business owner hopes and expects that customers will pay their debts promptly, the reality is that AR can sometimes linger on the books until they get old.

One simple method of assessing the quality of your receivables is to compare the actual collection period, known as days receivable, to the stated payment terms. The collection period and the terms should be about the same.

If the days receivable are significantly more than the sales terms, consider developing a receivables aging schedule to monitor who owes you money, when the debt was incurred and how long it has been unpaid.

Most receivables aging schedules are broken into 30-, 60- and 90-plus-day increments. Under each of these categories, total the amount due from each of your customers. This allows you to identify the problem customers and focus your collection efforts accordingly.

An aging schedule also enables you to manage your credit policies according to the standards of your particular industry. Many software programs provide aging receivables templates and/or formulas that are handy for small and mid-size enterprises.

It is important to stay on top of your receivables. The quicker you collect your AR, the better your cash flow.

Following are some tips for collecting AR:

Be Prompt: If a payment was due in 30 days, follow up with the customer on day 31.

Be Consistent: Send regular statements to customers who are behind in their payments.

Offer Incentives: Consider offering a bonus or cash price discount for early payment.

Be Specific: Spell out any late-payment fees and penalties prior to granting terms.

Follow Up: Be aware of your customers’ payments and debts. Send acknowledgments when accounts are paid.

Be Realistic: In the final analysis, an AR aging schedule may indicate that it’s time to sever your relationship with a customer or resort to some other type of collection method.