Archive for the ‘banking’ category

8 Reasons Small Businesses Can’t Make a Profit

November 11th, 2013

8 Reasons Small Businesses Can’t Make a ProfitI know from running an accounting and bookkeeping practice that many small business owners are making the same mistakes, and those mistakes prevent them from accomplishing the goal of being profitable. After all, a business isn’t there just to make money, it should be profitable.

This list of eight common mistakes that reduce or eliminate profitability is one all small business owners should check themselves against:

1.  Underestimating all the costs involved in producing, packaging and shipping a product
2.  Overestimating the size of the market for a product or service
3.  Undercharging for their services
4.  Not classifying expenses properly to take advantage of tax codes
5.  Purchasing too much, not enough or the wrong kind of insurance
6.  Overpaying on bank fees and credit card fees
7.  No collection process in place for customers that have not paid
8.  Not having accurate, up-to-date reports to provide the above information so corrections can be made

Many business owners try to keep their own records, (or have a spouse or friend help) and because they lack the knowledge and/or time to do it properly, they don’t have the information needed to evaluate and correct potential problems.

Sometimes there is enough money coming into the business to continue despite making many of these errors but correcting them could mean a much better payback for the owner. More often what happens is that the owner gets frustrated and overwhelmed. In such an environment of confusion time is not leveraged properly, decisions can be made in desperation, and more and greater mistakes are made, further distancing the company from its profit objective.

Once a proper bookkeeping system is set up and brought current, the owner can see the whole picture and assess where changes need to be made. Sometimes minor changes like switching to a different bank or credit card company, increasing prices, or outsourcing a specific task can have a big impact on profitability. Other times something more involved is necessary such as implementing a system of pricing levels, changing advertising tactics, or even changing the direction of the company to be able to offer a more competitive and profitable product line.

Having accurate bookkeeping, and its associated reports, provides the business owner with the necessary information to get a clear picture of the economics of the company. Evaluating business operations and making the day-to-day decisions becomes a process based on the facts of the business not the “feel”. Even if your company makes pants, you shouldn’t be running it by the “seat of your pants”.

9 Steps to Manually Reconcile a Bank Statement

January 27th, 2012

A business must track its funds to have a clear picture of its financial health. Bank statement reconciliations are an tool that business owner’s use in a proper cash management process. This procedure compares the account balance, as reported by the bank, against the account register in the company’s general ledger. This process ensures all cash items clear the company’s bank account in a timely manner. It also prevents the company’s general ledger from becoming clogged with inaccurate or irrelevant information. Cash accounts with significant inaccuracies can mislead business owners into believing the company has better cash flow than it really does.

The process of preparing a bank reconciliation involves making adjustments to the balances in both the bank statement and the company’s records to confirm that the ending balances match and that every item is properly accounted for. It is important to prepare bank reconciliations in a timely and regular basis (monthly, for example), so if questions regarding bank fees or errors arise both the company and the bank can be made aware as soon as possible.

Because of the lag time between deposits made and checks written, and their actual posting to your account, it is rare for the ending balances to match. Reconciliation ensures all transactions are accounted for, and provides a true cash balance.

To preform a proper bank statement reconciliation, follow these nine steps:

1. Comparison

Start the bank reconciliation process with a comparison of the company’s bank statement and general ledger cash account. Check off all items that match. This part of the reconciliation ensures all items recorded in the general ledger have cleared the company’s bank account. Once an item clears the bank account, it usually represents the finality of that particular business transaction.

2. Add Deposits

Once the comparison process is complete, note all items that remain on the company’s general ledger. Add any deposits in transit to the ending balance. Deposits in transit are deposits that you have recorded in your register but have not appeared on the bank statement.

3. Outstanding Checks

Deduct outstanding checks from the ending balance. These checks have been deducted from your check register, but have not yet cleared the bank.

4. Bank Errors

Add or deduct any bank errors to the ending balance. Examples would be incorrect deposit amounts and incorrect debits.

5. Check Register Reconciliation

Deduct bank service charges. Service charges could be account maintenance fees, check overage fees if you wrote more checks than you are allotted for the month, wire transfer charges, returned check fees, etc.

6. Interest Earned

Add interest earned if you have an interest bearing account.

7. Check Register Errors

Add or deduct errors in the check register. These errors could include posting a payment that was not actually a cash transaction, or omitting a payment.

8. Journal Entries

You may need to prepare journal entries as part of this reconciliation process. These journal entries will correct any errors found during the bank statement and general ledger comparison. Owners can also use journal entries to post any bank statement items into the general ledger if necessary. Once all journal entries are posted, you may re-run the general ledger cash account to update the ending balance for all new posted items.

9. Compare Both Statements

Compare the adjusted bank statement balance per your reconciliation to the adjusted cash balance per the general ledger. The balances should be equal. If the two balances do not match review the steps; verify that the bank balance has been adjusted for all deposits in transit and outstanding checks, and that all activity has been properly posted in the company’s general ledger.

The Importance of Monthly Bank Statement Reconciliation

January 12th, 2012

The proper reconciliation of bank statements is vital for any small business. Even if you don’t have an accountant on staff, this procedure must be done monthly. Whether you use software such as QuickBooks, or you simply keep track of your bank records, you need to double-check that everything adds up.

Catching Errors

Even if you implement strict control measures, the potential exists for human error in . If companies fail to reconcile their bank statements every month, these errors may go undetected and they could be costly. For example, if a teller at the bank calculates a deposit incorrectly, the company may end up short of the funds it needs to continue doing business. Or if checks you have sent out are lost, or simply not yet deposited by the payee, you might see your bank balance and think there is more money in your account available for you to spend then would be wise. And if those lost checks are found and deposited, and those checks that someone has been holding onto for a few weeks are cashed when you do spend that “extra” money, you’ll soon be bouncing checks all over town. The reconciliation process helps provide a method of double-checking to avoid mistakes.

Following Up on Transactions

If a vendor complains about not receiving funds, it could be possible that a check was lost in the mail. When you are reconciling your bank statement every month, you can catch checks that have not cleared, and this will help you track down any potential missing payments. In addition, you can use your reconciliation statement to make sure your other company transactions are going through and have been calculated for the proper amount.

Keeping a Close Eye on Company Performance

When small business owners do not take the time to reconcile their bank statements personally, or at least see an overview of the results, they may be unaware of potential income issues or shortfalls. While delegating can help you manage your company better, you need to be able to see exactly what is going on within your company. Keeping an eye on bank statements can help you keep your finger on the pulse of your company and spot income fluctuations.

Loss Prevention

When bank statements are not monitored and reconciled, the potential for undetected loss is high. Not all employees or firms are honest, and you may not miss money that has been taken for some time. This is how some employees are able to embezzle thousands if not millions of dollars over time. Reconciling your bank statement helps you prevent losses and may indicate a potential problem in your system.

8 Tips for Establishing Business Credit

March 11th, 2011

As a smart entrepreneur you will want to establish your company’s credit as separate from your own. Realize that your personal assets might be on the line if your business uses your personal credit. You want to be able to distinguish your personal credit from your company’s business credit. It will take some extra effort, but you’ll have a stronger business in the long run. The following eight topics are crucial to giving your company its own credit identity.

1. Separating your personal credit from your business credit protects your personal finances if the business fails, but it also protects the business just in case there are problems with your personal credit. Ideally you will want to incorporate your business or form an LLC to establish business credit without a personal credit check. Sole proprietors and partnerships by definition are personally liable for the business, so if separate business credit is your goal you’ll want to avoid those options.

2. Establish your business’ identity. You’ll need a Federal Employer Identification Number (EIN) for your business as well as separate bank accounts that are under the legal name of your business. Make sure you have all necessary licenses and permits and designate a separate phone line solely for your business. All these things give your business more clout when creditors are reviewing your business potential.

3. Pick a bank and stay there. Loyalty counts in the credit markets. Try to keep your capital in the bank and earning as much as possible. 

4. Open business credit files with the credit reporting agencies that are designed for businesses such as Dun & Bradstreet and Experian. They report on business credit similarly to the way companies track your personal credit. Once you have credit established for your business, you can report your payment history to these agencies to build your credit score. Proactively call to set up your file with a D&B Representative. When applying for business credit, submit your D&B report with your credit application.

5. Obtain business credit cards that are not personally linked to you. Your bank is a good place to start looking for a business credit card.

6. Contact a few vendors and suppliers that report to D&B and ask them to extend a small amount of credit to your business. Vendors that report to D&B build your business’ credit. Vendors that don’t report to D&B don’t build your business’ credit. Pay your bills on time and you’ll soon have solid relationships. If a vendor won’t give you net 30 days terms, then pre-pay your first couple of orders and ask for credit again. You’ll probably get it.

7. Borrow against an asset that your business owns, then make your payments on time.

8. Don’t spend beyond your means. Don’t run up lines of credit that you can’t hope to pay. It will not only destroy your credit, but also your business.  Spend wisely but regularly, and try to keep costs low.  By spending and paying in a timely manner, you’ll develop good business relationships and begin to see your credit score rise, which will ensure that if the time comes when you do need more money to keep your business going, you’ll not only have access to it, but you’ll get better terms.

The Basics of Writing a Business Plan

January 6th, 2011

While there are no strict rules for writing a business plan there are some business plan writing guidelines that you can follow that will ensure your business possesses a professional and effective plan. The amount of information and level of detail included will depend on the intended audience. For external audiences such as investors, lenders and government agencies your plan will be much more detailed and in-depth. For internal audiences such as upper management or board of directors the information can be less detail oriented and more goal focused. In either case all information should be factual with evidentiary back-up. To be effective, you should include the following sections and headings:

Executive Summary:
Sometimes this is the only information that potential investors read so it is essential to give a summary that highlights key aspects of the plan, including the goals and objectives. Usually this section will cover no more than 2 pages.

Description of the Business:
Start-up plans, history and legal establishment of your business.

Operations:
Outline the specifics of your business. Include facility requirements and equipment as well as any outsourced operations.

Management Team and Employees:
Include information on key employees and managers including skills and salary. This section should also include recruitment strategies and salary forecasts.

Product or Service:
Include detailed descriptions of products and services, patents and customer base.

Market Research and Economic Assessment:
Include information on who your customers are and how to reach them. Also include information on the economic environment, market conditions, competitors and supply and demand issues. Analyze the different competitors as well as their products, and especially what you will offer that they do not.

Selling the Product or Service:
Specify the sales process. This will be dependent on the type of business to be established. Will customers be attracted by advertising and promotion alone, or will it require salespeople to obtain business? Is the nature of the business that it will need inside or outside salespeople, or both? Will the owner or partners be the salespeople? Will salespeople need to be hired, or will the sales function be contracted out to a marketing representative company?

Financial Plan:
Do a complete assessment of all the financial elements in your business. Include a balance sheet, profit and loss statement, cash flow, break-even analysis, assumptions, business ratios, and any other pertinent financial reports.

Strategy and Implementation:
Include specific goals and dates as well as management responsibilities. It is also very important to include the potential business risks and the actions that can be taken in each scenario. This will show that you have done your due diligence by thoroughly researching and analyzing the upside as well as the downside of the business. It may also enable external and internal stakeholders as well as investors to feel secure in knowing exactly what the back up plans may be if something were to go wrong.