Think of your business as being a big bucket. As you go along, you fill that bucket with everything you learn about your customers, employees, your business’ finances, and operations. At some point you may realize that you spend more money, time and energy but not getting the results you hoped for. Your bucket is leaking! But where is it leaking from?
Meaningful financial statements that capture what your business is about will invariably identify the culprit. For over two decades, we have been maximizing the money within businesses by designing, implementing, and optimizing positive money flow for small business owners, and obtain over $400 million dollars in capital. Over and over, we have found that there are four core contributors to your leaking bucket:
- Cash Flow
Accounting is often overlooked but is in fact a key component of small businesses’ wealth. Let us dive in and focus on how your accounting could be leaking money and how to fix it.
Not sure you have the right accounting system in place? Find out with this quick 20-question accounting checkup.
Here are some of the most common signs that your books are not doing their best job for you:
- Your financials have not been customized for your business
- Your books are not issued on time
- There are many line items on your income statement
- There is a large suspense account
- There is no breakdown of cost per products, services, or projects
- Everything is written off
- Personal and business funds are commingled
- As an owner, you are not on payroll
- Cash seems to disappear
1.Have a professional general accountant or controller set up your books for your bookkeeper to follow.
We all have a friend or acquaintance that want to help or maybe we can just do it ourselves. This is one of these things where you want to make sure that: a. it is the best use of your time and b. that whoever takes it on as the minimum skillset required. Regardless of who is doing the entries, make sure that your chart of account and opening balance are set by a professional. A general accountant will ask questions to get to know your business in depth and customize your books so that they are meaningful to you. They will make sure that you get the numbers that matter for you to make the right decisions. This minimal expense will save you a lot of money from costly wrong decisions and mistakes.
2.Close your books monthly
Performing month-end-closing enables the consistent production of financial statements. More importantly, it is an early identification mechanism of any issues and a critical support of your management decision-making. Look at your monthly report and see where you met your goals, where you lost money, and where your performance can be improved.
3.Reclassify “other expenses”
Many organizations have “other expenses” that are inconsistent or too small to really quantify. If these “other” line items have high values, then find out what they are specifically and where they belong i.e. income statement or balance sheet. You will also want to know if these expenses are likely to repeat and check with a general accountant if they deserve their own account. The goal is to have an accurate picture of your business and its profitability.
4.Understand your cost/pricing per product, service, or project
It is great to generate revenue and get new contract. It is your responsibility though to understand your cost and evaluate your results: How did you do? When your service has been executed or product delivered, did you keep as much money as you anticipated? Accounting is a great tool to estimate, budget and analyze your results so that you can plug any leak in real time without waiting an entire year of accumulated loss.
Pro Tip: The obvious goal for most businesses is to sell their products and services at a profit. But it is not always wise to calculate prices simply base on cost with a simple “X + Y” formula, where X is the product cost and Y is the profit margin. Strategic pricing takes more variables into account. Cost is not the primary factor of decisions making for your customers. Value is – the value of the product and benefits that customers get from it. Ideally, prices should be set with that in mind instead of what your costs of getting or making the product are. In other words, set prices based on what a product or service is worth to the market rather than what it costs to deliver.
5. Have a growth strategy in place
As a small business, your tax accountant’s mission is to minimize your tax liability. It is viable strategy when you get started. However, as you scale, be mindful of your business’ credit worthiness. You may require qualifying for a loan to take advantage of new opportunities, expand, relocate, etc. By writing everything off, you may have a great business, but your books show no profit. With no profit to show, your business appears to be incapable of paying a loan installment. Consult with a general accountant to work with your tax accountant to better plan for your tomorrow.
6. Keep business and personal separate
As a small business owner, right pocket, left pocket, what is the difference? Taking a salary or a draw or nothing what is the difference? It is important to understand your true cost of operation: pay yourself and put the money back if need be. You will avoid losing money by not accounting for the true cost of business in your product/service pricing or mispricing your business if you are looking to sell it.
Also, by incorporating your organization, you created a separation, a veil, to protect yourself against business liability. By mingling personal and business expenses and accounts, you are breaking that veil.
7.Implement internal controls
It is reported that from the 2018 ACFE’s Report to The Nations that the small business ranks highest in occupational fraud frequency at 31.8% compared to large corporations, government, and non-profits, with over 14% of frauds coming from internal bookkeeping. The biggest contributing factor is the lack of internal controls. The most common methods of fraud schemes in small business are on billing, wire transfer, expense reimbursement, payroll, cash, inventory, etc. As a rule of thumb, one person cannot enter vendors invoice, create client invoice, or prepare payroll, etc., and cut the checks or report your taxes. Seek out the help of a general accountant to establish these controls. This is another minimal and one-time expense that goes a long way in avoiding the one-million-dollar average loss due to fraud.
In conclusion, customize your financials to be meaningful to your business, stay on top of them, check that your results are what you hoped for, don’t mingle business and personal, and have a general accountant set them properly. In addition to helping to maximize your money flow, they will ensure that you have sufficient internal controls.
If you are not sure you have the right accounting system in place, complete this quick 20-question accounting checkup. The results will help you find the gaps between the accounting you have now and the one you need to get you where you want to go.