by C Norman Beckert
Since SCORE receives many questions about what small businesses need to consider related to accounting requirements, I met with two of our financial experts at SCORE, Jason Gray and Joe Reger: Jason is a partner in a CPA firm and has many small business clients, Joe is also a CPA and has owned four successful small businesses.
There are good reasons for accounting records:
▪Determine if the business is profitable
▪Help in making business decisions
▪Substantiate and demonstrate compliance with tax regulations
▪Support applications for credit
▪Provide control over valuable assets
▪Discovery of theft and embezzlement
While there are many financial considerations we selected the following accounting priorities:
1. Prepare and review financials
Record your expenditures and your sales. For a small business you can use a manual system using multiple column ledger sheets available at any of the office products stores. Expense accounts will likely include: rent, utilities, wages, wage taxes, materials or product costs, office supplies, telephone, insurance, vehicle costs. Accounting for sales is similar to recording expenses. Sales data should include: buyer name and address, date of sale, description, quantity, unit price and total invoice amount, due date, amount, date paid. For many businesses an accounting package such as QuickBooks is the answer.
2. Control costs
If you have recorded your expenses and your sales, you can readily assess whether you are in the red or the black. If in the red, you need a recovery plan. Your expense’s report may identify areas for reducing costs. Are there factors effecting sales and are they controllable? Maybe you need to refocus on your marketing plan.
3. Stay tax compliant
A sure way to get into serious trouble is to not pay your taxes, especially the taxes due periodically on your employees’ wages; Form 1099; Federal; State; Sales and Use Tax.
4. Be aware of your cash position
Constantly review your cash position. That is the money on hand less the money you owe to others. If you don’t have enough cash on hand to pay your bills, is it a temporary situation? You should know. Project cash flows for the next three months. If cash in doesn’t cover what you owe, action is needed.
5. Timely invoicing and collection
When the product or service is delivered, bill the customer. The transaction is not completed until you are paid. It starts with an invoice. If you allow payment terms in addition to cash-upon-sale, then make sure you contact delinquent customers within a day of the account being past due. A reminder is in order. Treat family and friends as you would any other customer.
6. Develop monthly and annual budgets
Budgets are a valuable planning tool. If you follow the recommendations of this article then comparing expenses, sales (income), and receivables to budget will highlight the current condition of your business.
7. Monitor inventory
You need enough to meet customer demand. Replenishment lead-time will help determine the maximum inventory you’ll need. Many retail businesses can turn their inventory 12 times per year. If some items are inactive such as no sales during the past 12 months try returning them to your suppliers or conduct a special sale.
8. Modify your business and marketing plan
Perform a business and self-evaluation of your capabilities and weaknesses. If your weaknesses inhibit your business, plan accordingly and budget for employees with that skill set or seek professional help.
9. Talk to your CPA
At least once a year review your financials with your CPA. You should expect a critique of where you stand and suggestions for improving your business. It will be money well spent.
10. Separate business from personal accounts
Don’t combine your accounts. Keep business expenses and income in a business account.