Posts Tagged ‘bank’

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”.

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Posted in , Accounts Receivable, action plans, banking, best practices, bookkeeping, business goals, cash flow, entrepreneur, management, profit, small business, tax, Uncategorized

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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.

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Posted in , Bank statement reconciliation, banking, best practices, bookkeeping, cash flow, entrepreneur, small business, start-up

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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.

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Posted in , Bank statement reconciliation, banking, best practices, bookkeeping, cash flow, entrepreneur, small business, start-up

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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.

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Posted in , banking, best practices, business goals, cash flow, entrepreneur, financial management, profit, small business

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Small Business Banking Mistakes

September 2nd, 2010

Entrepreneurs are so busy working on their business rather than in their business–as they should be–that sometimes your friendly neighborhood banker can end up robbing you blind! The following are four common banking mistakes made by busy small business owners.

Only Banking at One Bank: As a small business owner with 100 things to do, it is easy to settle in with one bank and do all of your banking activity through that one institution. This can have a number of ill side effects. When it comes time for a loan and your bank denies you, if you don’t have a relationship with another bank, you may be out of luck. Secondly, you should make banks compete for your business. Don’t simply give all of your business to one bank by default. Shop around for the best deals.

Failing to Focus on Collateral in Loan Application: When you are submitting a loan application, you may be asked for an executive summary. Make sure that your executive summary focuses on why you are a good risk for the bank. Don’t talk about your exponential growth or potential. Bankers want to know about the facts of your financial situation: your assets, liabilities, and what you can offer as collateral.

Relying Too Much on Line of Credit: If you run your business on a line of credit, as many entrepreneurs do, you may be setting yourself up for disaster if your bank decides to reduce or eliminate your credit line. This can actually happen and has happened to many small business owners during the current recession. Try to wean yourself off your line of credit if at all possible.

Carelessness With Bank Fees: Small business owners remember: Cash is king. You must avoid bank fees at all costs. What a careless way to let your money literally vanish into thin air. Don’t get too lax with your banking, even during those busy weeks and months, because when you look back at your bank fees you will realize what a hindrance they can become to your business if they are a recurring issue.

Don’t fall victim to these common banking mistakes. This may mean you need to hire a part-time bookkeeper, but in the words of the E-trade commercial baby, avoiding these mistakes can “save you a pantload.”

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Posted in , banking, bookkeeping, entrepreneur

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