Posts Tagged ‘bookkeeper’

10 Accounts Receivable Best Practices

April 22nd, 2014

accounts receivable cartoonProper cash flow management is always important for any organization. One of the most common causes of cash flow problems is poorly managed accounts receivable. Don’t assume that just because a customer purchased your product or services that they will pay you in a timely manner, or at all.

Slow paying customers may require you to draw down your cash reserves, or increase the amount of financing you need to cover your operations. As delinquent accounts get older, the probability of collecting those accounts diminishes. And of course, the more cash you have tied up in receivables, the less cash is available for running your business.

For charities and not-for-profits, slow collection of donation pledges and annual membership dues can put a strain on cash flow. While donations and membership dues are not technically accounts receivable, many of the same best practices can be applied to accelerate collections from your funding sources. Awareness of accounts receivable best practices becomes even more imperative not-for-profit organizations engaging in the sale of products and services to increase funding.

Follow these 10 best practices to improve the receivables process, which should improve cash flow and strengthen the bottom line:

1. Email Invoices
This will ensure your customers receive your invoices immediately, avoiding mail delays. Confirm with your customers which email address they wish you to send invoices to.

2. Shorten Payment Terms
In the days of paper invoices and checks, it was fairly common for businesses to extend credit to customers to allow for mail and payment delays, by granting credit terms, for example “Net 30”. However with the widespread adoption of email communication and electronic payment methods, businesses are now more commonly specifying “Payment due upon receipt”.

3. Have EFT and Other Payment Options
An increasing number of businesses are now paying their suppliers using Electronic Funds Transfer. By specifying on your invoice that payment may be made by EFT, you will enable your customer to deposit payment directly to your bank account. Simply include on your invoice your EFT banking information; bank, branch and account number. Also consider using PayPal and/or credit cards.

4. Establish Credit Policies
If you were going to extend a customer credit, it would be a good idea to assess their ability to pay. The expense of performing credit checks may be more than worthwhile for many businesses.

5. Review Accounts Receivables Regularly
Track the aging of your receivables, and systematically follow-up on any accounts that are past due more than a predetermined number of days. A good practice is to run an aged receivables report from your accounting system on a weekly basis, paying special attention to any receivables that are over, for example, 20 or 30 days old.

6. Use the Telephone
Follow-up unpaid invoices with a phone call if payment has not been received within a reasonable period. Written collection letters and even emails are usually less effective as they do not engage the customer in conversation. The fastest way to find out if there is a problem with a payment is to speak with your customer. Solving the problem in a manner that maintains a good customer relationship is also more likely if there is such a conversation.

7. Maintain a Collections Record
For each over-due account, keep a log of when follow-up calls or emails were sent, along with a record of customer’s responses to follow-up calls. Knowing that, for example, your customer promised to make a payment by a certain date will be invaluable if additional follow-up calls are required.

8. Offer Discounts for Early Payment
Payments are often made first to companies that offer discounts. The popular 2%/10, net 30 Days Terms means that if a customers pays within 10 days they receive a 2% discount, with the total due in 30 days. Try 2%/10, Net 20 Days. A customer may be less inclined to forgo a discount when the payment is due in only 10 more days anyway.

9. Use a Factoring Service
Using a factor is like selling your receivables to a third party at a discount. The costs involved with this method may be justified by greatly improving your cash flow, especially if you have a long collection cycle.

10. Use a Collection Agency
If you are unable to collect, you should submit the account to a collection agency. No one can guarantee to collect your outstanding receivables, but these companies tend to be very aggressive, and since they tend to charge based on the amounts they collect, this is a viable final option. Don’t expect to see any new business from these customers, but then they aren’t the kind of customers you want anyway.

Managing your accounts receivable is normally pretty straight forward as most customers pay on time. However, collection problems can be avoided, or at least minimized, with a strategy that considers the above best practices.

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”.

5 Ways to Become Profitable

August 23rd, 2013

5 Ways to Become Profitable

All businesses want to make money. And of course if they don’t, then even those with great products or services will fail. Making more money and becoming a profitable business is what it’s all about. Here are five strategies that can help.

1. Change the Way you Operate
Analyze your existing business models and try to establish ongoing revenue streams. If your customers are buying infrequently then you might, for example, sell an ongoing re-supply program or a maintenance plan instead of just a one-time or stand-alone sale. Establish a relationship with new customers and change the relationships with established customers to tie the profitability of their business to your products or services.

Look around, analyze and learn from what your competitors are doing. Think about what you can innovatively apply from those lessons to your business.

2. Become Visible and Connected
If you have a long established company with a great reputation, loyal customers and respected industry experience, then you are probably running a successful business. But along comes the new guy who puts his business on the Internet and posts his credentials all over the place. Everyone, including your customers, can find him. You can’t sit there and assume that just because people know who you are you will remain dominant.

You have to have a marketing plan that addresses the current methods used by potential customers to find the products or services that you offer. When they search the Internet, and you’re not there, or they can’t find you, then in 100% of those cases you will not get their business. A lot of older small businesses don’t have a web-presence. If that’s you, or you don’t have a strategic marketing plan in effect, then you need to take your reputation online through social media, a website and a blog to connect with customers, including the ones you already have, or you won’t have them much longer.

3. Raise the Bar on Marketing
A lot of small businesses think about sales but not marketing. You can’t just go out and try to make sales; you have to have a plan with a strategy coherent to your industry, your company and the prospects you want to target.

In order to track the leads your marketing program generates, you will need customer relationship management (CRM) software, although a well-designed Excel application may be OK as you get started.

Consider using search engine ads, email marketing and other such online advertising.

Give your business an immediate web presence through social media networks including LinkedIn, Facebook, Twitter and YouTube.

Offer tutorials, demos, or new certification sessions as webcasts or podcasts for immediate download.

All these types of promotional vehicles need to be on the table because that’s what your competitors are doing.

4. Make Every Person a Salesperson
Some employees don’t think they’re there to promote sales or the business and are just there to collect a paycheck. But those days are gone and those people are the first to be laid off. Everyone should be an income-producing part of the business no matter what their main function might be. Everyone needs to pitch in to help cut costs, sell, and network on the web. Motivate employees to spread the message and reward those who make the extra effort or are producing new business.

5. Streamline Your Costs
If a business is having profit problems, the options are pretty straight forward. You can increase sales, decrease expenses, or do both. Due to the sluggishness of the current economic recovery, sales may not be where you would like them to be, and increasing sales may be a slow road. Decreasing expenses may be a faster way to turn things around. Try fitting expenses into three categories: fixed costs, such as rent and other overhead, sales-related costs that are tied to producing revenue, and discretionary expenses, such as new equipment and bonuses. Examine every single line item looking for ways to save, even with the fixed costs. Telephone and insurance costs may be fixed, but they are also competitive, and therefore negotiable.

6 Myths About Starting a Business

July 17th, 2013

Lots of people decide to take the entrepreneurial path and start their own business. The idea of being your own boss, making it big, and having a company that you can point to as your life’s work is very appealing. But the realities of starting up a small business are sometimes overshadowed by myths which make it difficult to deal with the real challenges that arise in those first few years, resulting in unreasonable expectations, frustrated entrepreneurs and potentially a failed business.

Here are some small business startup myths that might keep you from realizing your vision:

1. You should spend a lot of time preparing a detailed business plan
A client of mine in Gardena believed, as many business owners believe, that they should spend a lot of time preparing a detailed business plan, and that the business plan needs to include lots of what-ifs and elaborate financial projections. A grain of truth obscures a much larger point here. Yes, it’s smart to have an overall strategy in mind before diving into a business of any kind.  However, it’s very possible that by the time you finish your do-all-end-all business plan, the market will have changed so much that it will be about time to start on a new one. Business plans are especially important in the initial phases, as it is essential your businesses road map includes your goals. It is also important that you refer back to your plan every few months, check these goals, and add or change them accordingly.

The problem is that detailed plans work best when you are pursuing a fixed goal, such as losing weight or sticking to a budget. In these cases, a planned sequence of steps will best accomplish the goal. In business however, the goal is meeting consumer demand, which is often a moving target. Look at all the businesses (like Google) that are now doing something radically different from their original plan. So create your business plan, and then get busy developing a product and trying to sell it. Then resolve to be open-minded and react to opportunities as you see them emerge.

2. You have to develop the coolest, most innovative product
Many entrepreneurs think they have to develop the coolest, most innovative product. Entrepreneurs are often creative-types, dreamers and inventors, and they get so caught up in the coolness of their product that they forget that they need see if anyone will actually pay money for it.

What you do need to do is get your product to market as soon as possible, to start generating revenue and gain customer feedback. All companies, large or small, need to be more customer-oriented than engineer-oriented. You have to take into account customer demand, and develop products based on that feedback. Too many entrepreneurs so endlessly improve their products before starting to sell them that by the time they finally do, they’ve run out of capital and have to shut down.

Get a workable product out the door and fix the bugs as you go along. That way you also get valuable feedback about its strengths and weaknesses, for the market doesn’t necessarily agree with you about what’s perfect.

3. You’ll have more time to do what you want
Yes, you do own your time. By, ironically, you will find yourself using more and more of this time to run your business. Whether this hoped-for scenario actually pans out, is largely a function the business you are in and how much time you devote to it up front. Early on, you will almost definitely not have more time on your hands.

As a client of mine in Manhattan Beach found, there are many benefits (personal and financial) to having your own business, but plenty of free time is not one of them. You will probably have a little more flexibility, as many small business owners choose to work late at night so that they can spend time during the day with their families; but there are still some major sacrifices, such as sleep. Starting up a small business requires that you work until the work is done, without exception. Those fantasies of taking long vacations while your business grows itself are just that, fantasies.

None of this is to say that you will not ultimately have more freedom as a result of running your business. However, to expect a lot of it in the early days would be an exercise in self-delusion. So prepare yourself for immense demands on your time.

4. You’ll be able to write everything off
Absolutely not, unless of course, you have a desire to get audited. I can’t tell you how many clients have come to me over the years for help getting their books in order only to have to be told that even with a complete set of transactions and reconciliations, their books won’t be clean until we remove all the personal expenses they’ve burdened their profit picture with. Personal expenses should not be expensed to your company, and the business expenses you do incur should be clearly connected to the business you’re running. While it’s true that business owners can write off more than employees can, there is great risk in taking this too far.

Typical real expenses can include your computer and business operating and account management software, rent, employee salaries, money paid to independent contractors, advertising costs, and your business phone bills. You probably will not get away with deducting 100% of your car payments, nor gas and repairs. You can write off the portion of auto expenses that you can document as being essential to your operations. The key word here is “document”. Keeping good records is critical. Basically, if you cannot document it and cite a clear connection between the write-off and the operation of your business, your attempt at a write-off could trigger audits, fines or worse.

5. If you build it, they will come
Despite the Field of Dreams reference, setting up shop and getting your startup ready for business, doesn’t mean that the world will beat a path to your door. A former client in Torrance found out the hard way that today’s consumers have an endless array of choices, meaning simply “building it” will not cause customers to walk through your doors and snap up your products. No matter what type of small business you choose to start, it will rarely, if ever, be sufficient to open up shop and idly wait for business to start pouring in.

You still need to market and advertise your business strategically. That means having a plan and a budget.  It also means researching the most effective methods for marketing and advertising. There is no shortage of ways to waste money in advertising, as a client in Lawndale discovered, and it can end up being a huge financial drain on a fledgling company. No matter how good you are, there is lots of competition and your small business has to establish a presence and reputation to go along with your talent.

Consider your number one priority after opening your doors to be spreading the word about your product to your target market as much as possible.

6. Starting a Small Business is Rewarding
One other common myth about starting a small business is that it can be an incredibly rewarding experience. But unlike the myths presented above, this one has great potential to become true.

The independence and the satisfaction of turning a business idea into a successful enterprise are probably what most small business owners find the most rewarding. And there are all kinds of other satisfactions, including creating a successful new product or service as a result of solving unforeseen problems, or from customer feedback. So don’t let the myths of starting a small business put you off; the reality is so much better.

Small business is one of the most exciting arenas for earning a living.  There is plenty of creative potential, and a chance to really make something tangible for yourself and your family. But doing so requires more than just the vision and determination of a bold risk-taker. You need to be intelligent about how your business is framed in the marketplace, and what obstacles there are to overcome. You also need to be aware of the tools and support that you have at your disposal. Staying focused on these realities, and avoiding the myths that many fall prey to will only increase the chances of success and longevity in your small business.

 

Making Any Money? Can You Tell?

March 11th, 2013

Profit means making more money than you spend. Many confuse profit with income. As a result, they don’t understand why all their income isn’t getting them ahead; why no one wants to invest in their high-sales company; why the bank won’t extend their line of credit.

Let’s look at the most basic way to tell if your business is actually profitable, making money, not just recording sales.

Most small business people are very good at tracking their income. Each widget sale is recorded in a spreadsheet, and each payment from a customer or client is recorded in the checkbook. Each is totaled frequently.

Actually, that’s not what you made. That’s income, not profit. It’s what’s coming in. In order to determine profit you have to subtract what is going out from what is coming in.

(PROFIT = INCOME – COSTS)

Calculating Costs
Your business has two basic types of costs; fixed and variable. Fixed costs are costs that don’t change based on your level of business activity, such as rent. Whether you produce 100 widgets per day or 150, your rent will stay the same. Variable costs are directly tied to how many units of goods you produce. If you need $10 of screws to produce 100 widgets, you will need $15 worth of screws to produce 150 widgets. The cost of screws is a variable cost.

Fixed Costs
For the most part, fixed costs can be closely estimated at the beginning of the year and accurately projected for the next 12 months. For example, you know the rent on your facility is $5,000 per month. You may know of, or expect, a rent increase in April to $5,500 per month. As a result, your fixed cost for rent will be $64,500 for the year (3 months at $5,000 plus 9 months at $5,500).

Fixed costs include things like rent, depreciation, licenses, equipment lease payments, some taxes, and indirect labor.

Variable Costs
Variable costs are those that depend on your production level. As the production volume goes up, the variable costs go up as well. If I make lamps, I have to purchase one lamp pole, two light bulb fixtures, a lamp shade and five feet of wire per lamp. If a lamp pole cost $3 and I need enough to make six lamps, my lamp pole costs will be $18. However, if I need to make 20 lamps, my lamp pole costs will be $60. I can estimate variable costs at the beginning of the year, but my estimate will not be as predictable as was my estimate of fixed costs.

Variable costs include such expenses as cost of materials used in manufacturing, certain utilities, some taxes and fees, and direct labor.

Telling the Difference Between Fixed or Variable Cost
Some costs the business incurs, such as labor will have to be split between fixed costs and variable costs. The wages you pay production labor, called direct labor, is a variable cost. It is tied to how many units you produce. Other labor costs, such as the salary you pay your administrative assistant, are fixed costs. These indirect labor costs are not tied directly to production levels. If your production increases from 100 widgets per month to 150 widgets per month it is unlikely you would hire an additional administrative assistant.

Utilities are another cost that is split between fixed and variable costs. Your phone bill, for instance, probably won’t change much as production increases or decreases. However, the demand for electrical power, and the cost of it, will increase as production lines run longer and lights stay on further into the night because of increased production.

Income
When someone pays you that is income. Income is usually related to production levels, but is not tied to it directly.

You may produce more or less than you sell. For instance, if you have 100 widgets in the warehouse when you receive an order for 150, you only have to produce 50 additional widgets. If you make widgets for skis, you may make 20 widgets every month during the summer even though you don’t sell any, just so you have enough in the warehouse when winter arrives.

So income is when you actually get paid, not when you make the product you are going to sell. Total income is just the total of all your payments received during the year.

Break-Even Analysis
The break-even point is the production level where your income for a certain number of units produced equals your fixed costs plus the variable costs for that number of units. For instance, you have fixed costs of $500, variable costs of $20 per widget, and you sell the widgets for $25 each, so your break-even point is 100 widgets.

If you reduce your fixed costs to $400, your break-even point is 80 units. Or if you cut the cost per unit from $20 to $15, your break-even point drops to only 50 widgets.

 

Profit
Any sales beyond the break-even point are profit. In the final example above (fixed cost $500, variable cost $15 each, income $25 each) your break-even point is 50 units. If you produce 50 units and sell 50 units you will break even. Your costs will equal your income. You will have a profit of $0. If you sell less than 50, you will have a loss. If you sell more than 50 you will have a profit.

For example, if you sell 70 units your fixed costs are $500 and your variable costs are $1050 ($15 x 70), so your total costs are $1,550. Your income is $1,750 ($25 x 70) and your profit is $200 ($1,750 – $1,550).

Bottom Line
To make a profit, you must be able to sell each unit for more than it cost to make it and you must be able to sell it for a price high enough to cover both the variable cost of making it and its share of the fixed costs.

This is true whether you are selling widgets, boxcars of apples, dance lessons, or hours of financial consulting.