Small Business Owners: Accounting Is for Profit Planning, Not Just Tax Preparation

One might be led to believe that profit is the main objective in a business but in reality it is the cash flowing in and out of a business which keeps the doors open. The concept of profit is somewhat narrow and only looks at expenses and income at a certain point in time. Cash flow, on the other hand, is more dynamic in the sense that it is concerned with the movement of money in and out of a business. It is concerned with the time at which the movement of the money takes place. Profits do not necessarily coincide with their associated cash inflows and outflows. The net result is that cash receipts often lag cash payments and while profits may be reported, the business may experience a short-term cash shortage. For this reason, it is essential to forecast cash flows as well as project likely profits. In these terms, it is important to know how to convert your accrual profit to your cash flow profit. You need to be able to maintain enough cash on hand to run the business, but not so much as to forfeit possible earnings from other uses.

Why accounting is needed

Help you to operate better as a business owner

Make timely decisions
Know when to hire a team of employees
Know how to price your products
Know how to label your expense items
Helps you to determine whether to expand or not
Helps with operations projected costs
Stop Fraud and Theft
Control the biggest problem is internal theft
Reconcile your books and inventory control of equipment
Raising Capital (help you to explain financials to stakeholders)
Loans
Investors
What are the Best Practices in Accounting for Small Businesses to address your common ‘pain points’?
Hire or consult with CPA or accountant
What is the best way and how often to contact
What experience do you have in my industry?
Identify what is my break-even point?
Can the accountant assess the overall value of my business
Can you help me grow my business with profit planning techniques
How can you help me to prepare for tax season
What are some special considerations for my particular industry?

To succeed, your company must be profitable. All your business objectives boil down to this one simple fact. But turning a profit is easier said than done. In order to boost your bottom line, you need to know what’s going on financially at all times. You also need to be committed to tracking and understanding your KPIs.
What are the common Profitability Metrics to Track in Business — key performance indicators (KPI)

Whether you decide to hire an expert or do it yourself, there are some metrics that you should absolutely need to keep tabs on at all times:

Outstanding Accounts Payable: Outstanding accounts payable (A/P) shows the balance of cash you currently owe to your suppliers.
Average Cash Burn: Average cash burn is the rate at which your business’ cash balance is going down on average each month over a specified time period. A negative burn is a good sign because it indicates your business is generating cash and growing its cash reserves.
Cash Runaway: If your business is operating at a loss, cash runway helps you estimate how many months you can continue before your business exhausts its cash reserves. Similar to your cash burn, a negative runway is a good sign that your business is growing its cash reserves.
Gross Margin: Gross margin is a percentage that demonstrates the total revenue of your business after subtracting the costs associated with creating and selling your business’ products. It is a helpful metric to identify how your revenue compares to your costs, allowing you to make changes accordingly.
Customer Acquisition Cost: By knowing how much you spend on average to acquire a new customer, you can tell exactly how many customers you need to generate a profit.
Customer Lifetime Value: You need to know your LTV so that you can predict your future revenues and estimate the total number of customers you need to grow your profits.
Break-Even Point:How much do I need to generate in sales for my company to make a profit?Knowing this number will show you what you need to do to turn a profit (e.g., acquire more customers, increase prices, or lower operating expenses).
Net Profit: This is the single most important number you need to know for your business to be a financial success. If you aren’t making a profit, your company isn’t going to survive for long.
Total revenues comparison with last year/last month. By tracking and comparing your total revenues over time, you’ll be able to make sound business decisions and set better financial goals.
Average revenue per employee. It’s important to know this number so that you can set realistic productivity goals and recognize ways to streamline your business operations.
The following checklist lays out a recommended timeline to take care of the accounting functions that will keep you attuned to the operations of your business and streamline your tax preparation. The accuracy and timeliness of the numbers entered will affect the key performance indicators that drive business decisions that need to be made, on a daily, monthly and annual basis towards profits.
Daily Accounting Tasks

Review your daily Cash flow position so you don’t ‘grow broke’.
Since cash is the fuel for your business, you never want to be running near empty. Start your day by checking how much cash you have on hand.
Weekly Accounting Tasks

2. Record Transactions

Record each transaction (billing customers, receiving cash from customers, paying vendors, etc.) in the proper account daily or weekly, depending on volume. Although recording transactions manually or in Excel sheets is acceptable, it is probably easier to use accounting software like QuickBooks. The benefits and control far outweigh the cost.

3. Document and File Receipts

Keep copies of all invoices sent, all cash receipts (cash, check and credit card deposits) and all cash payments (cash, check, credit card statements, etc.).

Start a vendors file, sorted alphabetically, (Sears under “S”, CVS under “C,”etc.) for easy access. Create a payroll file sorted by payroll date and a bank statement file sorted by month. A common habit is to toss all paper receipts into a box and try to decipher them at tax time, but unless you have a small volume of transactions, it’s better to have separate files for assorted receipts kept organized as they come in. Many accounting software systems let you scan paper receipts and avoid physical files altogether

4. Review Unpaid Bills from Vendors

Every business should have an “unpaid vendors” folder. Keep a record of each of your vendors that includes billing dates, amounts due and payment due date. If vendors offer discounts for early payment, you may want to take advantage of that if you have the cash available.

5. Pay Vendors, Sign Checks

Track your accounts payable and have funds earmarked to pay your suppliers on time to avoid any late fees and maintain favorable relationships with them. If you are able to extend payment dates to net 60 or net 90, the better. Whether you make payments online or drop a check in the mail, keep copies of invoices sent and received using accounting software.

6. Prepare and Send Invoices

Be sure to include payment terms. Most invoices are due within 30 days, noted as “Net 30” at the bottom of your invoice. Without a due date, you will have more trouble forecasting revenue for the month. To make sure you get paid on time, always use an invoice form that contains the right details such as payment terms, itemized charges, and your payment address.

7. Review Projected Cash Flow

Managing your cash flow is critical, especially in the first year of your business. Forecasting how much cash you will need in the coming weeks/months will help you reserve enough money to pay bills, including your employees and suppliers. Plus, you can make more informed business decisions about how to spend it.

All you need is a simple statement showing your current cash position, expected cash receipts during the next week/month and expected cash payments during the next week/month.

8. Executive Dashboard (weekly review)

This dashboard gives you a ‘snapshot’ of your operations on a weekly basis.

It consist of Cash on Hand, Cash burn rate, Account Receivables, Accounts Payable, Items sold, Inventory on Hand, inventory turns, outstanding issues in the business, and gross profit margin, new sales wins, customer losses, customer service performance, on time delivery rate and product quality performance.

Monthly Accounting Tasks

9. Balance Your Business Checkbook

Just as you reconcile your personal checking account, you need to know that your cash business transaction entries are accurate each month and that you are working with the correct cash position. Reconciling your cash makes it easier to discover and correct any errors or omissions-by you or by the bank-in time to correct them.

10. Review Past-Due (“Aged”) Receivables

Be sure to include an “aging” column to separate “open invoices” with the number of days a bill is past due. This gives you a quick view of outstanding customer payments. The beginning of the month is a good time to send out overdue reminder statements to customers, clients and anyone else who owes you money.

At the end of your fiscal year, you will be looking at this account again to determine what receivables you will need to send to collections or write off for a deduction

11. Analyze Inventory Status

If you have inventory, set aside time to reorder products that sell quickly and identify others that are moving slowly and may have to be marked down or, ultimately, written off. By checking regularly (and comparing to prior months’ numbers), it’s easier to make adjustments so you are neither short nor overloaded.

12. Process or Review Payroll and Approve Tax Payments

While you have an established schedule to pay your employees (usually semi-monthly), you need to meet payroll tax requirements based on federal, state and local laws at different times, so be sure to withhold, report and deposit the applicable income tax, social security, Medicare and disability taxes to the appropriate agencies on the required dates.

Review the payroll summary before payments are disbursed to avoid having to make corrections during the next payroll period. A payroll service provider can do all this to save you time and ensure accuracy at a reasonable cost.

13. Review Actual Profit and Loss vs. Budget and vs. Prior Years

Each month, take the time to review your budgeted expenses and compare them to what you have actually spent. Are you spending above or below budget? Discuss the variances and take action as needed

Your profit and loss statement (also known as an income statement), both for the current month and year to date, tells you how much you earned and how much you spent. Measure it against your budget every month (or quarter). Comparing your actual numbers to your planned numbers highlights where you may be spending too much or not enough, so that you can make changes.

If you have not prepared a budget, compare your current year-to-date P&L with the same prior-period year-to-date P&L to identify variances and make adjustments.

14. Review Month-End Balance Sheet vs. Prior Period

By comparing your balance sheet at one date-June 30, 2015, for example-to a balance sheet from an earlier date (December 31, 2014), you get a picture of how you are managing assets and liabilities. The key is to look for what is significantly up and/or down and understand why. For example, if your accounts receivable are up, is it due to increased recent sales or because of slower payments from customers?

Quarterly Accounting Tasks

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All the Ws of a Business Plan

A business plan is a written description of the future of your business and more importantly, how you are going to get there. It is a document that explains what you are going to do to make your company profitable and how you are going to achieve this. It defines both your business model and your strategies to make this business model work and more importantly profitable.

Normally when a business idea arises, you know what resources and capabilities you have at the start of your business and where you want to go in a certain period, usually in 3 or 5 years. But what is the way to reach that goal? Where to start? How to arouse investor interest? Even, how to get your business off the ground? Everything seems so easy when you have the great money winning idea and concept. It is how you are going to achieve these dreams and get enough money to keep the business going for many years to come.

Writing a business plan is to build a map that will guide you to where you start making money with your initial business idea. At is very basic structure, your business plan is a mixture of strategies and plans. It involves financials, marketing, staffing and products. Think of it as the foundation to your new business.

WHAT are the reasons that I might need one?
• To look for investors.
• To apply for a loan.
• To establish the viability of your business idea.
• To make improvements to your current business.
• To expand your current business.

All of these types have different emphasises and a different structure.

WHAT is a business plan?
It is a tool or document that describes a business opportunity or idea, the work team, the operational and marketing execution strategies, the business risks and the economic viability of your business. A well written document guides you to turn an idea into a viable business.

It can also be defined in another context in that the business plan becomes a fundamental tool within the analysis of a new business opportunity, a diversification plan, an internationalisation project, the acquisition of a company or an external business unit, or even the launch of a new product or service within the current business.

To summarise, both for the development or launch of a startup and for the analysis of new business investments, the business plan becomes an indispensable tool. So even though you have an established business, you will still need a business plan as you expand and improve that business.

A business plan is never finished and should be reviewed from time to time at least annually but certainly when large changes to an existing company are anticipated. This implies that every plan must adapt effectively and efficiently to the changes, helping the project to continue.

WHAT is the point of a business plan?
Many entrepreneurs think they only need a business plan when they are seeking investment or when the bank asks for one. However the act of business planning, when completed correctly, enables the entrepreneur to carry out an extensive market study that will provide the information required to design the best possible business model that will be both profitable and efficient.

Additionally, the business plan will develop the strategic measures for all functional areas that will enable them achieve the objectives for the new business.
Once written, the business plan will serve as an internal tool to assess the management of the company and its deviations from the planned scenario. Proposing, if necessary, adaptations to the agreed business model in order to obtain updated information for the daily management of the company. This will include preparation of the required changes and processes to bring the business back on track.

So lets dive into the concepts behind business planning a bit more.

The WHY of The Business Plan
• Why do you want your business plan?
• Why are you writing the plan now?

The WHAT of the Business Plan
• What is the purpose of developing a specific plan?
• In what period do you consider it possible to carry out your projects?
• What is your business model?
• What is your Value Proposition?
• What are your products or services to be offered?
• What positioning do you plan to develop to compete?
• What are your measurements of success?
• What markets do you plan to penetrate?
• What market percentage do you estimate to obtain?
• What margins do you consider possible?
• What income do you consider you will receive?
• What are the costs of expansion?
• What are the costs of obtaining new customers?
• What do you want to do with your business?
• What strategies do you want to undertake – financial, marketing and planning

The WHERE of the Business Activity
• Where will your products be sold from? Shop, office, website, social media, road side, party planning,
• Where are you based? Locally, centrally, virtually etc.
• Where are your products produced?
• Where are your distribution channels?
• Where are they going to be sold?
• Where is your market?
• Where will your staff need to be based?

The WHEN of your business planning activities
• When will you need to start your new activities?
• When will they end?
• When will your investor need to invest?
• When will your investor get their money back?
• When will you have enough staff to carry out your new changes?
• When will your products and services be available?
• When will your products need to be updated and/or improved?
• When is the best time to attract new customers?

WHO do you present your plan to?
• Bank for loan purposes and they will take a charge over a property usually.
• Investor to join your company as a shareholder.
• Angle Investor to join as a shareholder but also be involved in the running of your company.
• Management team so they know what is expected of them.
• Suppliers who will be offering credit.
• Director level hires so that they are encouraged to join your company.
• Believe it or not the entrepreneur should also refer back on a regular basis.

As you can see there are a lot of Ws involved with a business plan – the biggest W is why should you write a business plan and the answer is – because it is such a great business tool.

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