8 Ways to Prepare for Year End Financials
Living An Abundant Life
Thanksgiving and the start of the holiday season is a great time of year to reflect on all that we have to be thankful for. Fun celebrations abound at this time of year allowing me to focus on spending time with friends, loved ones, colleagues and clients. It is time when I focus on my abundant life.
Abundance is a mentality in how we live our lives; interact with others and how opportunities present themselves both on a personal and professional level.
This year has been an abundant one for me.
From the joy I get at watching my grown children live their lives, experiencing things together and apart and learning from each other based on different perspectives, to growing from the opportunities that have presented themselves in running my business. Learning and adapting to change every day keeps me growing and is fun most times even with the challenge of figuring out how to stay in touch upon the loss of my cell phone for 3 days after it fell into the cleaning water bucket at puppy training class (was there really life before cell phones?).
With year-end approaching and being in business, it is a time to make sure everything is up to date and look at the results. I have also experienced abundance in working with a great team of people and delivering the results to help businesses grow through having good and meaningful financial information. Our team loves working and showing businesses how to run more efficiently and effectively with good accounting processes and reporting.
This holiday season, what are you most thankful for?
Are You REALLY Reconciling Your Bank Accounts?
Business owners frequently tell us that they are “reconciling” their bank account because they are categorizing and matching transactions downloaded into the connected bank feed. While bank feeds have significantly reduced the amount of time a business has to spend doing data entry and allows for business to have real time information in their accounting system, it is NOT a replacement for doing formal bank reconciliations.
The bank reconciliation process requires the matching of transactions recorded in the accounting system to a bank statement received from the financial institution at the end of each month. It is the only way to ensure that all transactions recorded in the accounting system actually took place and are properly recorded. It is a check and balance to safeguarding a business owner’s most important asset, cash.
Problems That Can Occur
Not doing formal monthly bank reconciliation could be costly to a business owner and can result in inaccurate financial statements due to any one of the following:
Duplicate entries
Missing transactions
Transactions entered for the wrong amount
Transactions entered that never took place
How This Affects Business Image
This can lead to making bad business decisions based on misinformation verses the actual results of the business. The business image with customers and vendors could be negatively impacted if accounts receivable and accounts payable aging reports are not accurate due to misapplied receipts or payments. Any one of the above errors could also result in theft of cash.
How This Affects Taxes
No business owner wants to pay more than they really owe in taxes. If there are duplicate income amounts recorded in your accounting system you may be paying too much in income taxes. If expenses either don’t get recorded or get recorded incorrectly, you may be missing or not taking enough of a tax deduction again resulting in paying more taxes. If audited, IRS agents will ask to see your bank statements and bank reconciliations.
How We Can Help
We guarantee that the time and cost it takes to properly reconcile your bank accounts on a monthly basis will be less than the headaches and errors that could result by not doing it at all. Our expert trainers can show you how to properly and efficiently download and reconcile your banking and credit card activity.
The Concept Of Internal Control
Internal control is a very special phrase in the accounting profession. Tactically, it’s the set of processes that help a company produce accurate data throughout the organization, follow reporting requirements and laws, and maintain consistency and accuracy in its operations. Strategically, it’s an entirely new way of thinking and doing business.
Internal control helps to reduce organizational risk. A blunt way of putting it is internal control is what you put in place to avoid mistakes, intentional or accidental, and to control accuracy and quality. It impacts every aspect of an organization.
As a small business, you’ll want to be familiar with the concept because it can help you reduce risks you might not realize you have. Here are some practical examples of good ideas that support internal control:
When data is private and secure, provide access only to employees who need to know the data and restrict access of others.
Have someone check that your bank balance matches the reconciled amount in your books, and that someone should be different from the person who does the reconciliation. This is an example of what’s called segregation of duties.
Lock up paper checks and use the missing check number report to make sure none of the stock could be used for nefarious purposes.
Have employees sign in and out equipment that they take home. This is part of asset management.
Write and enforce a hardware and software use policy that includes items like employees should make sure their anti-virus software is active at all times, they should not bring in disks or CDs, and they should not download games or other unauthorized programs. This protects from computer viruses and helps to avoid catastrophic network failures.
There are literally hundreds of internal control procedures that should be implemented in small businesses as they grow into larger businesses.
Internal control is typically a big part of an audit or an attest function in accounting; it determines how many additional procedures an auditor needs to do in order to provide assurances about the reliability of the financial reports. But it’s also just good plain common business sense to implement as many internal control processes as are cost-effective for your business to protect it at the level of risk you’re comfortable with.
If you’d like to discuss the idea of internal control further, please feel free to reach out any time.
Should You Have A Financial Dashboard?
A quick glance is all you need to check your fuel gauge, speed limit, engine temperature, and RPM when you’re driving down the road. Your car’s dashboard is designed to focus you on what’s important and what you need to know to have a safe trip.
Your car’s dashboard items, if they applied to business, would be called key performance indicators or KPIs. Unlike a car’s, the KPIs of your business vary depending on your business goals and what’s important to you. Common ones might include your cash balance, how fast you get paid, how much revenue is coming in, and whether you’re making plan. There are literally hundreds of them to choose from, and many of them are not derivable from your financial statements, such as number of orders, client satisfaction levels, and employee turnover.
Would it be useful to have a dashboard of KPIs for your business so you can know what’s working and get alerted to what needs focus? Here are the steps to creating a dashboard for your business:
Decide on the KPIs you want to track. Selecting 6-10 to create and track is a good place to start.
Select a tool that will provide you with the KPIs in the format you desire. There are many great add-ons to your accounting software that will instantly crunch the financial KPIs for you and present them in insightful formats, including charts, graphs, dashboards, and reports.
Create any new processes to calculate the new KPIs and get them entered into the dashboard app.
Hold a review meeting to go over the KPIs and determine any action based on the review.
There are many great KPIs available right in your accounting system, which might be plenty to get started with. And there are some real gems outside your accounting system that will take a bit of work to calculate. In any case, we can help you through this process. Feel free to reach out to us any time to discuss the possibilities of having a dashboard in your business.
How To Survive A Worker's Comp Audit
If you have employees, you have the distinct honor once per year of being part of a worker’s compensation audit. You likely receive a form in the mail, an email request, or a phone call that will ask you about your payroll numbers and employees for the prior year.
Worker’s compensation is an insurance program that covers employees in the case they get hurt on the job. Each employee receives a classification code that describes the type of work they do, and a rate is figured based on the classification and its risk factors.
If you’ve hired anyone throughout the year, you might need to get a new classification by contacting your provider. If you have employees working in different locations (especially different states), that matters too.
The audit form will typically ask for gross payroll numbers by employee or by category or location of employee. That’s easy enough, but seldom does the policy run along your fiscal year, so the payroll figure needs to be prorated to match the policy period.
Your numbers need to tie back to the numbers reported on your quarterly payroll reports for both state and federal. The provider may also want copies of your 941s and your state payroll reports.
Once you’ve submitted your numbers, the insurance provider will calculate whether they owe you or you owe them additional fees.
The worker’s compensation audit happens every year (even if you pay worker’s comp premiums each pay period, some companies still request an annual audit). It’s not difficult, but it is time-consuming. If this is something you’d like our help with, please feel free to reach out.
How To Cut Costs With Fixed Assets Management
Fixed assets are special kind of assets in your business. They include land, buildings, equipment, furniture, and vehicles that your company owns. While we frequently look at expenses to cut costs, fixed asset management is another place we can look to find ways to better utilize our resources and, in some cases, improve our profits.
Fixed asset management is a discipline that requires keeping good records of the assets a company owns. In the case of furniture and equipment, many businesses place an asset tag on the item and assign it a number that goes in a spreadsheet where data is kept about the item. There are also software apps more sophisticated than spreadsheets that track all of the fixed assets for a company, including original cost, depreciation method and history, and tax treatment.
You never know how many of an item you might have until you record and count them. How many computers (and computer parts) do you have lying around your office? Extra desks and chairs? Maybe you even have extra office space or extra land.
Part of being a great entrepreneur is fully utilizing all the resources you have at your disposal. Where can you put to better use the extra assets you have? Could you sell the surplus items? Or donate them for a write-off? Do you have extra room to rent out to a tenant, earning rent?
Sometimes we’re so focused on operating the core of our business that we don’t see what else is a money maker right in front of us. In addition to focusing on income and expenses from operations, consider the resources you have in your fixed assets.
At the very least, consider developing a spreadsheet that tracks the major items your business owns. Or reach out to us, and we’ll help you develop a fixed assets schedule and tracking process for your business.
And if you do sell some of your fixed assets, be sure to reach out to us so we can help you book the transactions properly.
How To Read Your Income Statement
The income statement of any business is probably the most important report of all. It is a snapshot of the financial performance of your business over a period of time, such as a month or year. You might also hear it called the Profit and Loss Statement, or P&L.
The income statement can give you all kinds of insights as to whether you are bringing in enough sales, if your prices are generating enough profit, and how your expenses are running. Let’s take a look at the report, step by step.
Revenue
The report starts by listing the revenue for the period of time covered. Revenue includes all sources of income, including sales from operations, interest and investment income, revenue from insurance claims, sales from assets or other parts of the business, and any other source of revenue. In most small businesses, sales will be the largest part of the revenue, if not all of it. In some countries, the term used for sales is turnover.
If you sell more than one item or have more than one location, it might be a good idea to be able to view the sales detail from these categories. This may or may not be on your income statement depending on how formal it is, but you should be able to get a drill down report on your sales detail.
Look for exceptions to what you expect to see. There can be some decisions you can make and actions you can take from the insights you discover.
Cost of Goods Sold
This section of the income statement includes costs you incur directly on items you sell. If you maintain an inventory, it’s the cost you paid for the inventory items that you sold during the period. If your business is a manufacturer, cost of goods sold, or COGS, will include costs of materials and labor to produce the items.
If you own a service business, COGS will typically be zero. As a service business, you may incur direct costs when providing services, and these costs can be booked in a variety of expense accounts, including supplies.
Gross Profit
Some income statement formats will include a gross profit number which is sales minus cost of goods sold. This number is important for businesses with inventory.
Expenses
The expenses section of the income statement is the longest part. It includes all of the expenses you incurred in your business, including advertising and marketing, rent, telephone, and utilities, office supplies and meeting expenses, travel, meals, and entertainment, payroll and payroll taxes, and several more.
You might also hear the term overhead. Overhead is a subset of expenses that have to be met whether you sell zero items or millions. They include items like rent and utilities, management payroll, and office supplies.
To review your expenses, check line by line to see if anything looks out of sorts, and take the appropriate action.
Net Profit or Loss
The final number on your income statement represents whether you made or lost money in the period the report covers. The formula is simple: revenue less COGS less expenses equals net profit or loss.
Net profit/loss can go by many names, depending on the size of your business and your accountant’s vernacular. You may also see EBITDA: Earnings before interest, taxes, depreciation, and amortization. Earnings is another word for net profit.
Perspective
It’s a good idea to compare your income statement numbers to other periods in your business. Common comparisons include last period, last several periods, and same period last year.
It’s also a great idea to have a budget that sets goals for your income statement numbers. Then you can compare budget to actual numbers and take action on the variances.
If your business falls into a standard type of business, you may also be able to see how it is doing compared to others in your industry. This is called benchmarking, and the income statement is a very common format that’s used in benchmarking.
Do spend some time each period reviewing your business’s income statement. It can help you make a faster course correction in your business so you can be even more successful than you already are.
Boost Your Accounting Know-How With These Terms
The field of accounting has its own vocabulary, which can sound like a foreign language to some people. Your financial savvy will increase by learning a few new accounting terms. You’ll be “speaking accounting-ese” in no time, and you’ll become a smarter entrepreneur too.
Trial balance
A trial balance is an accounting report that simply lists the current balances of your accounts in your chart of accounts as of a certain date. It can also be called working trial balance. Another way to look at the trial balance is it’s a very informal version of a balance sheet.
Entity
Entity is a generic term for a company or organization. There are many types of entities: nonprofit, corporation, partnership, and sole proprietor.
Going concern
Going concern is an accounting principle. An entity is a going concern if it’s expected to continue operations in the near future.
Double entry
A double entry bookkeeping system means that when a transaction occurs, two accounts are impacted. For example, when an invoice is generated, entries are made to both the sales account and the accounts receivable account. It was invented in the 1400s and is widely used in modern accounting today.
Retained earnings
Retained earnings is an account in the equity section of the balance sheet. It’s the amount of earnings that is reinvested in the company after dividends are paid out. It’s computed by taking the retained earnings beginning balance, adding income or subtracting loss for the period, and subtracting any dividends paid.
Realization
A business transaction has many stages. It starts with an idea, may progress to a promise, then it actually happens. Accountants need to figure out when it becomes “real,” when to record it on the books. This is the concept of realization. A transaction is realized and put on the books when there is a contract, a legal obligation, an exchange of products or services, or an exchange of cash. There are many complicated principles and rules to help accountants determine this timing.
Cost principle
The cost principle is a foundational accounting principle. It means that when a transaction is booked, it is booked at cost and not market or current value. So even though an asset may have gained in value after you bought it, your books will still reflect the cost of the item, not the current value.
Client portal
A client portal is a software application where client files can be stored and retrieved securely. Both the accountant and the client have access to the portal.
Engagement letter
An engagement letter is the contract that defines the relationship between the client and the accountant. It is typically signed before the work starts and can be renewed once a year. It can also be changed if the scope of the work changes.
Matching
The matching principle is another basic accounting principle. It says that for any particular transaction, all aspects should be booked in the same accounting period. For example, let’s say you incurred expenses on an order in November. The order wasn’t delivered or invoiced until December. To meet the matching principle, the expenses should be deferred until December when they can be matched with the revenue that relates to the expenses.
Adjusting entry
An adjusting journal entry is made when account balances need to be corrected. An example is depreciation expense, which is typically booked with an adjusting entry. Accountants will make several adjusting entries like this at year-end.
Reversing entry
A reversing entry is a form of adjusting entry that is made in the period following an adjusting entry. It reverses the adjusting entry. One example of this is a cash basis taxpayer that is tracking accounts receivable. The accounts receivable balance is adjusted to zero prior to year-end and reversed on January 1.
How many terms did you already know? Now you can talk with your accountant about these concepts.
The Perfect Chart Of Accounts For Your Business
Your “Chart of Accounts” is the list of accounts in your accounting software. The accounts are listed in your reports, and the totals allow you to determine how much you’ve spent, made, own, or owe depending on the type of account.
It’s essential to create a list of accounts that you need in order to make better business decisions. Your chart of accounts needs to be designed intentionally. If it hasn’t been, it’s never too late.
Two Types of Accounts
There are two major types of accounts:
Balance sheet accounts that tell what you own and owe. These are determined by your checking accounts, inventory, and credit cards.
Income statement accounts that tell you about current period operating results. These, in turn, have two major categories, income and expenses. For companies with inventory, expenses are further broken out into cost of goods sold and other expenses.
Three Purposes
A chart of accounts should meet three needs:
Make it really fast for you to do your taxes
Give you all sorts of “Aha’s”
Allow you to spend far more time on revenue analysis than expense analysis because that’s where success lies for small businesses
Taxes
Your accounts should be the same as (or be able to be grouped into) the lines on your tax return. You can find a copy of the tax form you fill out. For example, a sole proprietor will use a Schedule C of the 1040, and a corporation will complete an 1120.
There are a few special needs, such as meals and entertainment which are only partially deductible, that you need to pay special attention to. We can help you with that.
Aha
As small business owners, we work with a gut feel, but when you see what you’ve made or spent in black and white, it takes on a whole new level of meaning. Your income statement and other reports should do that for you. If they don’t you may not have your accounts set up right.
Revenue
Think about how you want to see your revenue:
By product line
By major supplier
By category of solution to the customer
By customer type
By service type
By location (you can also use Class for this)
By job
By distribution method
We can help you brainstorm based on your industry and type of business.
Actionable Intelligence
If you’ve been putting all your revenue into one revenue account, it will be exciting the first time you see your new Profit and Loss statement.
If you’ve been breaking out your revenue but it hasn’t led to any actionable change in your business, then there may be a better way to break it out.
If you’re happy with the way your revenue is broken out, then think about how you can take it to the next level.
Once you see your new chart of accounts, you will likely have even more questions. The chart of accounts can be an evolving entity, designed to serve your business needs.
Five Numbers You Should Know About Your 2016 Performance
Before we get too far into 2017, let’s take a look back at 2016 results and five meaningful numbers you may want to discover about your business’s performance. To start, grab your 2016 income statement, or better yet, give us a call to help you compute and interpret your results.
Revenue per Employee
This number measures a company’s productivity with regard to its employees and is relevant and meaningful for all industries. If you have part-time employees, compute a full time equivalent total and use that as your denominator.
Compare this number to prior years to see if your company is getting more or less productive. Also compare this number to businesses in your same industry to see how your company compares to peer companies.
You may also want to compute other revenue calculations, such as revenue by geography, revenue by product line, or average sale: revenue by customer, if you feel these may be meaningful to your business.
Customer Acquisition Cost (CAC)
How much does it cost your business to acquire a new customer? That is the customer acquisition cost and is made up of marketing and selling costs, including marketing and selling labor. You’ll need the number of new customers acquired during 2016 in order to calculate this number.
Compare this number to prior years as well as industry peers. You can potentially do a lot to lower this number by boosting your marketing skills and implementing lower cost marketing channels.
Overhead Costs
Overhead costs are costs that are not directly attributable to producing or selling your products and services. They include items such as rent, telephone, insurance, legal expenses, and executive salaries. Although it’s not standard practice to break out overhead expenses from other expenses on an income statement, it’s valuable to know the numbers for performance purposes.
Compare your overhead costs to prior years and industry averages. You can actively manage your overhead cost by re-negotiating with vendors on a regular basis and trimming where it makes sense.
Profit Margins
Your profit margin can help you determine which division of your business is most profitable. If you sell more than one product or service, you can compute a gross or net margin by product or service. You can also compute margins by geography, sales rep, employee, customer, or any other meaningful segment of your business.
Your accounting system may be able to generate an income statement by division if everything has been coded correctly and overhead has been allocated appropriately. Reach out if you’d like us to help you with this.
Seeing which service or product is most profitable can help you decide if you want to try to refocus marketing efforts, change prices, discontinue items, fire employees, attract a different type of customer, or any number of other important decisions for your business.
Breakeven Point
Do you know how many units you need to sell in order to start generating a profit? If not, the breakeven calculation can help you learn this information. The formula is Fixed Costs / (Sales Price per Unit – Variable Costs per Unit) which results in the number of units you need to sell in order to “break even” or cover your overhead costs.
The breakeven point helps you plan the amount of volume you need in order to ensure that you have healthy profits and plenty of cash flow in your business.
These five numbers can help you interpret your business performance on a deeper level so you can make better decisions that will lead to increased success in your business. If we can help with any of them, please give us a call any time.
Understanding Payment Terms
If there is a period of time between when your customers receive your goods or services and when they pay for them, then several things are true:
You have a balance in Accounts Receivable on your balance sheet that represents how much customers owe you
You have an invoice process that you follow
You have granted credit to customers
You may have some that don’t pay as quickly as you’d like them to
Each invoice you send should have payment terms listed. A payment term is the period of time you expect the invoice to be paid by the customer. Your payment terms should be set by you, not your customers!
Payment terms are always measured from the invoice date and define when the payment should be received. Here are some common payment terms in accounting terminology, and then in English.
Net 30
Payment is due 30 days from the invoice date.
2/10 Net 30
Payment is due 30 days from the invoice date. If you pay the invoice in 10 days, you can take a 2% discount off the total amount of the invoice as an early pay discount incentive.
Due Upon Receipt
Payment is due immediately
If you use Net 30 or Due Upon Receipt, then you may want to change your terms to get paid faster. When people see Due Upon Receipt, sometimes they translate it into “I can take my time.” A more specific term spelled out such as Net 7 or Net 10 will actually get you your money faster than Due Upon Receipt.
Do you have issues with people paying you late? If so, you might want to set consequences. Consider adding a line on your invoice that provides interest charges if the payment is late. Utility companies do it, and so do many businesses. A common percentage to charge is 1% – 2%, however, some states have laws that limit you to 10% or another percentage.
The wording would be something like this:
“Accounts not paid within __ days of the date of the invoice are subject to a __% monthly finance charge.”
You will also need to make sure your accounting system can automatically compute these fees.
If you have questions about payment terms, your invoicing process, or your accounts receivable, please reach out.
Signs You Might Be Outgrowing Your Accounting System
If you’re struggling with your accounting system, it might be a sign that you’re ready for something new. Perhaps your company has grown so much that it’s outgrown its older accounting solution. Here are several indications to look for that justify moving to an accounting system with more features and scalability.
User Permissions
Some companies have a need to limit certain functions to certain users. Most systems come with basic functional limitations, such as restricting Accounts Payable and Accounts Receivable functions. But what if you need more granular user permissions such as access to only purchase orders or a certain bank account? Mid-market systems like QuickBooks Enterprise provide those features.
Multiple Companies and Consolidated Financial Statements
Do you have multiple companies that are the “children” of a parent company? You might need consolidated financial statements and the ability to open multiple companies at the same time.
Number of Customers and Vendors
If your business is growing and the number of customers and vendors you do business with exceeds 14,500, you will have reached a list limit in QuickBooks Premier. Each system has their own list limits, and these limits can get complex quickly, so check with us if you feel you are getting close.
File Size and Performance
There may also be file size limits that you need to watch, especially if you have a high volume of transactions or multiple years of history in one file.
You could also have performance issues. If you have a new PC and your accounting system is still running slowly, we can help you improve your performance by condensing your file or setting preferences differently before you have to switch.
Inventory Features
A mid-market system like QuickBooks Enterprise provides advanced features, such as tracking inventory in multiple locations, using the FIFO method, and managing lots or serial numbers. If you need these features, it may be worth it to switch.
Enhanced Customization
Most mid-market accounting systems provide better customization such as additional custom fields, better reporting, and improved form design.
Number of Simultaneous Users
The final reason to switch to a larger accounting system is if you need more simultaneous users. QuickBooks Pro allows for up to three simultaneous users, QuickBooks Premier handles up to five, and QuickBooks Enterprise makes room for up to 30 simultaneous users. QuickBooks Online allows up to 25 simultaneous users. Check with us if you are curious about your system’s license limits.
Did any of these reasons resonate with you? If so, let us know so we can discuss your needs.
Beyond Saving Trees: New Trends In Receipt Management
Accounting automation has come a long way in the last few years, and the process of handling invoices and receipts is included in those changes. No longer is there a mountain of paperwork to deal with. In this article, we’ll explain some of the changes in this area.
Vendor Invoices
Most invoices are now sent electronically, often through email or from accounting system to accounting system. Some accounting systems allow the invoice document, usually in PDF format, to be attached to the transaction in the accounting system. This feature makes it easy for vendor support questions as well as any audit that may come up.
Some systems are smart enough to “read” the invoice and prepare a check with little or no data entry. Others are able to automate three-way matching – this is when you match a purchase order, packing slip, and invoice together – so that time is saved in the accounts payable function.
Receipts
Today’s systems allow you or your bookkeeper to scan in or take cell phone photos of receipts – whether cash or credit card – and then “read” them and record the transaction. This type of system cuts way down on data entry and allows the accountants to focus on more consultative work rather than administrative work.
Some vendors will email you receipts so all you have to do is use a special email address where your accountant is copied or forward the receipt as you receive it.
The biggest challenge for business owners is getting into the habit of photographing the receipt and sending it to the accountant. The days of shoebox receipts are not completely over, but cloud-savvy business owners are definitely enjoying the alternative options of today’s paperless world.
Approvals
Some systems automate bill approval. This is especially handy for nonprofits or companies with a multi-person approval process. It cuts down on approval time and the time it takes to pay the bill.
New Systems
Here is a short list of new systems that automate a part of the vendor payment or receipt management system. There are a lot more, in addition to your core accounting system, and all of them have different features, platforms, software requirements, integration options, and pricing.
Bill.com
Hubdoc
Receipt Bank
Expensify
SmartVault
Doc.it
Tallie
Concur
LedgerSync
ShoeBoxed
ShareFile
DropBox
If you are interested in finding out more about automating your accounts payable invoices or receipts, please reach out anytime.
What's Your DSO?
If you grant credit to customers, then you have a balance in accounts receivable. DSO stands for Days Sales Outstanding, and this helps you measure how fast your receivables are being converted to cash.
Here’s how to calculate it:
DSO = Accounts receivable balance / Annual net credit sales * 365.
DSO is measured in days and it represents how many days it takes to collect the customer invoice balance and convert it to cash.
Whether the DSO measure is “good” or not varies by industry as well as the terms you’ve set for your clients. If you’ve set your invoices to be due in 30 days and your DSO is 45 days or less, that’s pretty good. If you’ve set your invoices to be due in 10 days and your DSO is 60 days, then you might want to consider a more aggressive collection policy to speed up your cash flow.
Here are some tips to reduce DSO:
1. Invoice clarity.
Make sure your invoices are accurate and clear. Make it clear whom to make the check out to, where to mail it, the due date, and the amount due. All of these features should be easy to find on the invoice.
2. Consider discounts.
A common discount term is 2/10, net 30. This means the customer can take two percent off their invoice if they pay in 10 days; otherwise they owe the whole amount in 30 days. If you have customers from large companies, discounts are often required by policy to be taken and this can speed up your payments from them.
3. Consider electronic payments.
Going paperless with your invoicing as well as your payment process can speed up the entire billing cycle. Customers getting their bills earlier will also pay earlier.
What’s your DSO? If you need help calculating it, give us a call.
Have Your Layer Cake And Eat It Too
The best cakes have layers and layers of different delicious flavors to enjoy. Stacked on top of one another, each layer is baked separately and becomes part of the whole. Like a layer cake, your business expenses have layers of meaning to them. When you can understand how expenses play a part in profit, you can manage them better.
Here’s how to make a layer cake of your business expenses. Let’s start with the most direct expenses.
Direct Costs
If you have inventory you will have a balance in the Cost of Goods Sold account. It should represent how much you paid for product or inventory that you are selling. It is the most direct expense of all the expenses; if you don’t spend this money, you would not have a product.
If you sell services, you should not have a balance in Cost of Goods Sold, but you will have direct expenses that are tied to performing your services. These might include labor from wages of the employees who carry out the services for clients. Any supplies directly involved with delivering services should be included as well.
You may also have other direct costs related to selling specific products or to servicing specific accounts.
Indirect Costs
The next layer includes indirect expenses. These expenses do not make up your product directly and might contribute to several different lines of products. Indirect costs might be attributable to a group of products or projects and can be apportioned accordingly.
Overhead
Although overhead is technically a form of indirect cost, it’s good to create a separate layer for it. It includes management salaries, rent, utilities, and other fixed costs that cannot be directly allocated to a product or service.
Assembling the Layers
A wonderful exercise is to classify each of your expense accounts in your Chart of Accounts as direct, indirect, or overhead. In that way, you can see how each account contributes to the costs of running your business. Some questions to ask yourself:
What is my gross margin before indirect costs and overhead?
What is my gross profit after indirect costs and before overhead costs?
How can I cut down on any of these categories of expense?
What is my breakeven volume in sales before overhead is factored in?
Can my profit margin be changed if I spent less in a certain area?
This layered view is just another way to view the financial aspects of your business and can help you make better decisions down the road.
You can also break the layers down even further by classifying the expenses as critical and non-critical. This will help you determine where best to invest while maintaining the level of profit you desire.
You can’t manage what you don’t measure. Layering your expenses will help you have your cake and eat it too. And if we can help, just reach out as always.
Marketing By The Numbers
Two very important skills for entrepreneurs to master are marketing and finances. Combine them by understanding the numbers behind marketing, and you have an even more powerful understanding of exactly what makes your business tick.
Key Numbers – Cost Per Client Acquisition
Do you know how much it costs your business to bring in one client? The technical term is “Cost per customer acquisition,” and it’s computed by adding the total marketing and sales costs excluding retention costs and dividing them by the total number of clients acquired during a period of time.
Cost per customer acquisition is important to know because then you can compute how long it takes before your business begins to make a profit on any one customer. In software application services with a monthly fee, the breakeven for a client can be around ten months.
It’s essential to understand this dynamic for pricing and volume planning purposes. If your services or products are priced too low so that your acquisition costs are not recouped in a reasonable period of time, it can play havoc with your cash flow as well as your profits. If you don’t have enough volume to cover overhead and acquisition costs, then your company will be in trouble in the long term.
Customer Lifetime Value
There is a simple and an academic formula for customer lifetime value. You can estimate it by multiplying the average sale of a customer by the average number of visits per year by the number of years they remain a customer. That’s the easy version.
The more difficult version of this formula takes into account retention rates and gross profit margins. The formula is: Average customer sales for life times the gross profit margin divided by the annual churn rate.
Once you know and track these numbers in your business, you’ll be better able to make smart decisions about your marketing investments and your pricing. And if we can help you, please reach out as always.
Boost Your Accounting Know-How With These Terms
Outsmart your accountant and other financial friends with these accounting-related definitions:
Fiscal Year
Most companies report their results on a calendar year, from January 1 through December 31. Some companies use a different year for reporting, and that’s called a fiscal year. For example, Intuit’s fiscal year runs from August 1 to July 31. A nonprofit commonly runs from July 1 to June 30.
The word fiscal alone refers to government or public revenues and expenditures. A fiscal year can also be considered the period where companies report their financial results to the public.
Budget
Most companies sit down once a year and plan what they intend to spend. This set of numbers is a budget. It is prepared in income statement format which includes planned revenue and expenses. It can be done for a year, monthly or both.
A common report that compares budget to actual figures is the Income Statement Comparison to Budget which includes columns for month and year-to-date actual, budget, and variance (the difference).
Forecast
While a budget is a longer term plan, a forecast is an attempt to predict the short-term future. Forecasts can be made for cash flow, predicting your bank account balance, or can be focused on potential profit for a period. A forecast is created by enumerating current and expected short-term cash commitments.
General Ledger
A general ledger is a fancy word for your accounting books. It’s also a very specific report that lists each account within the chart of accounts, beginning balances, the activity of each account for a particular period of time, and ending balances. It includes both balance sheet accounts, such as cash, accounts receivable, and accounts payable, and income statement accounts, such as revenue and expenses.
Fixed Asset
A fixed asset is a special type of asset that includes items such as land, vehicles, furniture, buildings, office equipment, plants, and machinery. Fixed assets cannot easily be converted into cash (cash equivalents are termed current assets) and they must last longer than one year. They are physical or tangible (as opposed to intangibles such as patents and trademarks).
Depreciation
Most fixed assets except land depreciate in value over time. For example, when you drive a new car out of the lot, no one will give you what you just paid for it. This reduction in value over time is recognized on accounting books by recording depreciation. Since assets need to be recognized at market value, depreciation is an estimate of this adjustment. Depreciation becomes an expense and reduces the value of the fixed asset. Unlike most other transactions, cash is not affected when recording depreciation.
Accrual
There are two ways to keep books when it comes to the timing of how items are recorded: the cash method and the accrual method. Let’s invoke Popeye the Sailor Man’s friend Wimpy who always says, “I’ll gladly pay you Tuesday for a hamburger today.” Let’s say today is the Friday before this famous Tuesday.
If you are using the cash basis method, you would record the entire transaction on Tuesday, when you get the cold hard cash. If you are using the accrual basis, you would have two entries: one on Friday to record the sale to accounts receivable and one on Tuesday to zero out the receivable and increase cash. It’s the same net, effect; the only difference is in the timing.
Most small businesses that extend credit keep their books on an accrual basis so they can keep track of everything. Most taxes are paid on cash-basis books, requiring adjusting entries at year end that reverse at the beginning of the year.
Balance Sheet
A balance sheet is a very common report of all of the business’s account balances as of a specific date, such as December 31. These accounts include cash, receivables, fixed assets, liabilities, equity and others.
Journal Entry
A journal entry is usually an adjustment that is made to the accounting books. The result is that some accounts increase and others decrease. In theory, every transaction made to a company’s books is a journal entry. When you write a check and it’s cashed, cash goes down and an expense is increased. When you receive a payment, cash goes up and revenue goes up. Each of these transactions is a journal entry.
Do you feel a bit smarter? I’m not sure how exciting this is for cocktail table talk, but hopefully you feel smarter when it comes you’re your business’s accounting function.
Get Finance-Savvy With 10 Accounting Terms
It’s good to know some basic accounting terms, and here are ten terms with friendly definitions for your review.
Asset: Essentially, assets are what you own. These include your bank accounts, business equipment, and even the amounts that customers owe you.
Revenue: Revenue is what you make. Another word for it is Sales. You generate revenue in your business when you make a sale to a customer. The amount of the sale is included in revenue.
Expense: An expense is what you spend in your business on items that are not expected to benefit you in the long term. Expenses include credit card fees, office supplies, insurance, rent, payroll expense, and similar items that you need to incur to keep your business running.
COGS: COGS stands for Cost of Goods Sold. It’s a form of expense that directly relates to the product or service being sold. For example, if shoes are being sold, the cost of purchasing those shoes are consider COGS, while something like rent or insurance is simply an expense. COGS is more important in manufacturing, retail, and distribution companies.
Net Income: Another word for net income is profit. It’s calculated by subtracting expenses from revenue. If what’s left over is a positive number, it’s net income and if it’s negative, it’s a net loss. Besides your salary, it’s the amount of money you can either keep or re-invest into your business.
Debit: A debit is a term that tells you whether money is being increased or decreased. The hard part is that it’s opposite depending on the account and the company. Here are some examples:
A debit to cash increases it, so that’s good.
A debit to a loan you owe decreases it, so that’s good too because you are paying it off.
When you talk to a bank teller and they want to debit your account, it means they are taking money away, because your account is a liability to them. So it’s opposite.
Credit: A credit is a term that tells you whether money is being increased or decreased. The hard part is that it’s opposite depending on the account and the company. Here are some examples:
A credit to cash decreases it, as in writing a check to someone.
A credit to a loan you owe increases it, so you owe more money.
When you talk to a bank teller and they want to credit your account, it means they are putting money in, because your account is a liability to them. So it’s opposite.
GAAP: GAAP stands for Generally Accepted Accounting Principles. It refers to the set of standards that must be followed by accountants when creating accounting reports for people like bankers and investors who rely on them.
Liabilities: Liabilities are what you owe. If you have loans taken out for your business or owe vendors money for invoices of purchases they sent you, those are liabilities. Common liabilities include sales tax that you’ve collected but not paid, unpaid vendors’ invoices, credit cards that are not paid off each month, mortgages on buildings, and any bank loans you’ve taken out.
Equity: In mathematical terms, equity is the net of your assets less your liabilities. In more philosophical terms, it’s the net amount you and your fellow business owners have invested in your business adjusted by the years of net income you’ve made less what you’ve taken out of the business.
How many terms did you already know? Do you feel smarter already? Knowing accounting terms will help you understand this aspect of your business a bit better.