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)
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
15. Prepare/Review Revised Annual P&L Estimate
It’s time to evaluate how much money you are actually making, whether your net assets are going up or down, the difference between revenues and expenses, what caused those changes, how you are spending profits, as well as identifying trouble spots, and making adjustments to improve sales and margins.
16. Review Quarterly Payroll Reports and Make Payments
You have been reviewing your semi-monthly payroll reports. However, the IRS and most states require quarterly payroll reports and any remaining quarterly payments. Again, it’s best if your payroll service provider completes these reports and files them. Your job is to review to make sure they appear reasonable.
17. Review Sales Tax and Make Quarterly Payments
If your company operates in a state that requires sales tax, make sure you comply to avoid serious penalties. The U.S. Small Business Administration (SBA) can help you determine your state tax obligations.
18. Compute Estimated Income Tax and Make Payment
The IRS and states that have income taxes require you to pay estimated income taxes. Review your year-to-date P&L to see if you owe any estimated taxes for that quarter. Your tax accountant can assist if necessary.
Annual Accounting Tasks
19. Review Past-Due Receivables
Now it’s time to check significant past due receivables and decide whether you think customers will eventually pay, whether to send past due bills to a collection agency or whether to write them off for a deduction.
20. Review Your Inventory
Review your current inventory to determine the value of items not sold. Any write-down of inventory translates to a deduction on your year-end taxes. If you do not write down unsellable inventory, you are overstating your inventory balance and paying additional taxes that you don’t owe.
21. Fill out IRS Forms W-2 and 1099-MISC
The IRS has a January 31 deadline that requires you to report the annual earnings of your full-time employees (W-2s) and most independent contractors (1099s). This deadline includes mailing copies of the tax forms to the people who worked for you. Note: A 1099 form is not required for any contractors who earned less than $600. Consider saving time and avoiding errors with an e-filing service.
22. Review full-year financial reports for tax reporting
Collect and store important documents (use apps and calendars for help)
Create email folders to store bank statement and receipts
Store contracts and agreements
Track miles and vehicle expenses
Store all required documents for your business type.