Paula Geisinger

How bookkeeping can help with cash flow

Good bookkeeping can help with cash flow. It keeps you on top of what bills need to be paid and when, what customers owe money, and how much of your on-hand cash is actually available to spend. (I know; it’s a nuisance when mundane and boring tasks are good for you; think diet and exercise.)

Recently, I took on a client whose organization had a decent stream of income, but was draining the bank account monthly because things hadn’t been planned well, and this lack of planning was catching up with them in the form of too high receivables, bills overdue, and late fees assessed.

Working with the owner, we did three things to alleviate the day to day angst about the bank balance, and then put cash flow on a more even keel. Each was greatly helped by utilizing the accrual method in their accounting software.

First of all, cash was needed to make things more stable. To do this, we made sure all money owed was recorded in the software if it wasn’t already. This let us see which customers were most in arrears. Then we did what seems a no-brainer, but is too often overlooked: we asked for payment. Customers know they owe you, but whether the bill was lost or they are procrastinating, they’ve not yet paid. Send another bill or, better yet, pick up the phone and call. Most customers can and will pay; you just need to remind them to do it. 

Note: if this has been a chronic problem, your customers may assume you’re okay with late payers. Using good customer service practices, let them know you are tightening up your collections.

Next, we entered all outstanding bills and new ones as received into the accounting software. This allowed us to see what bills were due immediately and which payment due dates were out seven days or more. When cash is an issue, paying a bill today that isn’t due for 20-30 days doesn’t make sense. 

We also looked at bills that had been put on credit card payment. Some online services will only accept such payment, but changing to emails/paper bills where possible allowed better visibility of what is due when. It also eliminated the big monthly credit card bill. And there were weeks of the month that had the most bills due, so we worked with vendors to change the due dates of bills. 

Finally, I implemented a cash worksheet that at any time would show what cash could actually be spent. It starts with that day’s bank balance, takes into account any outstanding transactions, and then compares that result to the accounting system’s balance. Then by listing bills and payrolls due in the next 20-30 days, we could gauge if an extra effort in collections was needed. This mini, any-day-of-the-month reconciliation keeps you on top of your cash position, and away from the month end cash crunch. 

We made a lot of progress in six months, and the best indicator was that the owner said sleep was coming much easier each night!

Bookkeeping terms you need to know

If you’re a new small business owner, dealing with bookkeeping and financial reports can be a chore. Even reading a profit and loss sheet can be a challenge, especially when there are many other things demanding attention.

But take heart! Those terms are not nearly as complex as you might think, and you don’t have to be lost in a sea of terminology. Here are some basic terms you’ll want to know to keep on top of the business side of your business.

Sales/Revenue/Income

Sales can also be called revenue or income-the terms all mean the same thing. It’s the money your business earns during the routine course of doing business, such as selling products you manufacture, services you provide, or a combination of those.

COGS/COS

COGS and COS are similar terms, depending on your business: cost of goods sold and cost of sales. Both refer to expenses incurred in direct relation to jobs or product lines. Cost of goods sold generally refers to physical goods, while cost of sales generally refers to a service. For example, if you have a manufacturing business making the ever popular Widgets, the cost of the materials, labor, and identifiable fixed overhead would be rolled into COGS. 

Gross Margin

In its simplest form, gross margin is the difference between what you sell a good or service for and what it cost you to make it happen. In accounting terms, it’s the difference between sales and COGS/COS. This allows you to see how much you’re charging over cost, and it’s a handy number to keep track of even if you’re not selling physical goods. Tracking it from month to month can help you figure out if you’re charging the right amount. 

Overhead

Overhead also refers to expenses from your business, but unlike COGS or COS it’s not tied to a particular job. Overhead includes cost of buildings, utilities, payroll, business licenses, banking fees and more.

Overhead can either be fixed or variable. Fixed overhead doesn’t change much over time, but variable does. For example, if you were to run a lawn care business, the cost of gasoline would be variable-you’d use more in the summer and noticeably less in the winter.

Net Profit/Net Income/Net Revenue

While you may be pleased with the gross margin, keep in mind there are expenses that must be subtracted from it to arrive at your net income. After you’ve figured out sales and then subtracted COGS/COS and overhead, what remains is net profit. This is calculated before taxes and before any depreciation.

Depreciation

Depreciation refers to the downward change in value over time of an asset-for example, a vehicle or a piece of equipment. That asset’s value decreases over time as it ages and accumulates wear and tear, and that is its depreciation. Your CPA generally calculates this for tax purposes, and then gives you the number to enter in your books.

Accounts Payable

This is a bill you have received from a vendor or supplier that has not yet been paid. It is money you owe someone else now or at some point in the future.

Accounts Receivable

Accounts receivable relates to customers: an invoice you’ve sent out that your customer has not yet paid. This is money owed to you.

There are more accounting terms than these, and some are industry-dependent. Some industries have terms of their own, and individual companies may have their own idiosyncratic vocabulary. But for basic bookkeeping, if you know these terms you’ll be able to converse comfortably with your accountant or banker, keep your books straight, and read a profit and loss statement.

The importance of account reconciliation

 Just how important is account reconciliation? If you’re running a small business-or even in your personal life-it can be easy to think, “I’ll just wait till the bank or credit card statement comes.” All you have to do then is put the information into your accounting software.

Right? Nope, not so much.

Reconciling accounts is one of the most basic and crucial tasks you need to perform, and is an important part of keeping your business running. If you do it right, you can avoid possible problems and headaches down the road.

What is reconciling, and why do I have to do it?

Simply put, reconciliation is checking the statements you receive against the records you keep yourself to ensure they agree. For most small businesses, this applies to four areas: bank statements, credit cards, accounts payable, and accounts receivable.

As for why, let’s start with the fact that humans do bookkeeping and humans are fallible, so sooner or later errors are made. No one catches everything. If there’s a fraudulent charge on your bank or credit card statement, it’s much more likely that you’ll notice when you’re reconciling accounts than if you were just downloading your bank statements with little or no review. The process gives you something against which to cross-check your books.

Reconciling payable and receivable accounts is fairly simple if done monthly. A quick check of the general ledger Accounts Payable balance against the aged payable journal total will tell if they are the same. If so, you’re done! Same for Accounts Receivable. But if the totals do not match, there may have been general ledger entries made that did not get linked to a vendor or customer. If that is the case, you’ll have to go back through the account to determine where the error is, and that’s not so simple. 

When should you reconcile?

Reconciling your accounts should be something you do every month at the bare minimum. I usually do mine every two weeks, and if I’m in a particularly high-activity period or have a lot of unusual expenses, I might even do it every week. But at the very least, it should be done once a month. Statements come out on a monthly basis, so go with that schedule. Check your balance sheet and your profit and loss and make sure your business books are correct.

This is the beauty of the double entry bookkeeping system: if something’s wrong, you can tell. During the reconciliations, you can quickly spot what doesn’t match up and make sure it’s corrected before someone like the IRS does it for you. And if your books are clean, you’ll have a much easier time finding financing if you look for a loan, too.

Keeping your accounts reconciled will help your business run more smoothly and give you peace of mind. You don’t have to guess how much money you have to work with or run around madly trying to pull together documents when it’s tax time. You can know. Start today, if you’re not already doing it, and keep your accounts reconciled.

Speaking the same language

 As a business owner, you’re responsible for your business first and foremost. For example, I’m a bookkeeper. I know about bookkeeping. Maybe your business is running a grocery store, so you know all about grocery retail. Or maybe it’s a dealership, and you know all about selling cars.

Whatever your business is, you know it inside and out. But chances are there are aspects of running your business that you don’t know as well. Maybe you’re not great with writing or marketing, or maybe you’re not comfortable keeping your own accounts.

Those areas can trip you up when you’re trying to sort out problems. I had an incident recently where we had to solve a problem with a bill. Three simple steps helped us reduce communication errors and resolve the bill with a minimum of time and fuss.

Ask what they need first

Too often, when we’re trying to resolve a problem, we provide way too much information. If you’re dealing with a network error, you don’t have to tell the IT person about the crumbs you got in your keyboard. If you’re dealing with an accounting error, you don’t have to explain the organizational chart of your company. All you have to do is explain the situation that you’re asking them to help with.

Once you’ve laid out the situation, ask them what they need to get it resolved. Don’t just dump all the information you have, or you’re wasting both your time and theirs.

Avoid jargon

Jargon and acronyms can lead to confusion if you’re talking to someone who’s not in the same industry. A contractor will immediately know what EIFS is, but if they’re talking to someone in the billing department at the electric company, no one will have a clue. An accountant or bookkeeper will know what you mean when you talk about FA and CA, but if they’re talking to someone who works in marketing, they won’t have a clue.

Make sure you’re not using jargon when explaining a problem to someone in a different industry or discipline, and ask for definitions if other people use jargon when explaining something to you.

Find a translator

Often this is actually the easiest and most effective way to resolve things.

You’re responsible for your business-what it does, how it works. But you probably employ people who do aspects of it for you and understand those aspects better than you do yourself. If you’re trying to sort out a bill, have your bookkeeper help-they’ll know what the customer service person is asking for. The same goes for any other area of your company. You have people with specialized expertise-use them!

If you do these three steps-ask what they need first, avoid jargon, and find a translator-you’ll find that communication issues start to magically clear up. You’ll have fewer headaches and be able to devote more time to running your business. Take advantage of these steps to have clearer and more effective cross-industry communication.

Preparing your bookkeeping before a vacation

 Need a break from the office? Before taking a vacation, it’s important for both business owners and bookkeepers to prepare in advance and leave the office (and the books) in good shape.

You’ve been working hard, and you’re ready for that much-needed vacation on the beach that you booked months ago. But there’s a lot to do before you leave, including making sure your books are up to date and key functions in the office are covered while you’re away. 

Sometimes if you’re rushing through things before you leave, mistakes will happen. Though they can happen if you’re rushing through things independent of taking a vacation, too. The important thing to remember is that, in bookkeeping, there’s really no mistake that you can’t fix. 

If you have a clearly defined process for keeping your books, it should be pretty easy to prepare them before heading out on vacation. If you’ve been hobbling along without a clear process, it might take a little more time and effort, and your chance of making a mistake might increase a bit. It’s a good idea to look back over your work and retrace your steps to minimize the chance of making a mistake. 

If you do find a mistake, you can complete the transactions to adjust the books just like correcting income to a loan payment, for example. Identify the cause of the mistake and adjust your process to prevent similar mistakes from happening in the future. If you’re working with a bookkeeper, they can help ensure regular reviews of your books and a set process for revising any mistakes that may occur. 

Whether you’re the business owner functioning as a bookkeeper or you’re paying a bookkeeper, there has to be a process regardless. You could be on top of your game and still make a mistake. We are human. And that’s why you need a vacation! Just know that if you plan a vacation, you will have to do some extra work on the front end to keep your books current. You’ll have to do extra work after vacation to catch up as well. That’s true not only for your bookkeeping, but also for the rest of your business, of course.

If you are a business owner, it can be hard to walk away and take a vacation. But it’s important, and you should enjoy your time off! We all need vacations to recharge, and with some advance planning and a clear process for bookkeeping, you can ensure your business and your books are fine without you for a little while. 

Don’t delay finding a CPA

As the calendar turns to a new year, many small businesses start thinking about taxes. If you already have a CPA, great! If not, don't delay.

Certified Public Accountants are insured, have a code of ethics, and are, well, certified. Some work in specific industries, some have a focused niche, but any CPA is bound by professional ethics when completing a tax return for any client.

You have until around March 1st to find a CPA that will consider taking on your tax returns. After that, it might be difficult to find a qualified CPA who wants to take on new business. That can be a smoother process, however, if your records are already organized. If that's the case, you are in a position to hand off good financial statements to a tax preparer.

Many sole proprietors include a Schedule C with their personal return that is due April 15. But if your business is organized differently, your return may be due March 15.

If you find someone in early March who is willing to work on a return that is due March 15, they are probably going to charge you an extra fee; that, or they’re taking on the work because they don’t have anything else to do. (And you may want to ask yourself why.) However, if an available CPA is building a new business, it could be an opportunity to build a relationship that will benefit you both.

The CPA will ask you to sign an agreement acknowledging that you are responsible for the accuracy of the financial statements, and that tax returns will be filed based on those statements. They may have questions if there is missing information, but they don't analyze every transaction; that's why good, ongoing record keeping is important.

Finding the right tax preparer for your business

Periodically, I am asked to recommend a qualified tax preparer. Finding such a professional is like finding a qualified plumber, tree trimmer, or physician. Ask around, and get several recommendations from people you already know, like, and most importantly, trust.

Also, the IRS provides a guide to choosing a tax professional on its website, and there are links on that page with more information. Among them are the avenues to check on qualifications.

Here are a few things to consider as you look for a tax preparer for your business.

Is the firm or individual taking new clients?

Start looking long before your tax returns are due; good tax preparers are usually booked with existing clients, and simply won't take on a new client's returns right at tax time. If they do, the bill will, understandably, show it. Simply filing an extension request may fill the immediate need, but keep in mind the tax bill is not delayed.

What else can a tax professional help with?

A good tax professional will become a trusted financial advisor for you and your business. So first things first: determine what issues other than tax preparation you have about your business. Do you need guidance with any of the following:

– applying for a loan?
– improving your cash flow?
– taking on a partner, or exiting the business?

What questions should I ask?

Now that you know who is taking clients, and what services you need, here are some questions to consider asking of prospective professionals:

– What degrees, certifications, or training do you have?
– What is your experience with businesses in my industry, and of my size?
– Whom will I be working with, and how quickly will they respond?
– How do you set fees?
– What expectations do you have of me?

One last thing

When you submit your financial numbers and supporting documentation to your tax preparer, you likely sign a statement that says you’re submitting information that’s accurate and true to the best of your knowledge. When your tax preparer files your taxes for you, they sign a statement that says they’ve completed the filing based on information you provided. If the professional made an honest mistake, they often will pay any penalties and interest, but you are responsible for the actual tax bill.

Why documenting your processes is important

At the beginning of my solopreneurial career, I found myself stressing out when I faced certain tasks at one or another of my bookkeeping clients. Upon leaving, I was invariably longing for wine or chocolate. Or both.

That couldn't continue if I was to be efficient and successful, not to mention healthy! So I turned to two of my experiences in the corporate world.

For my first accounting job, I transferred from another department, and started out with zero accounting classes. But they needed me and I needed them, so we made it work. You better believe I wrote down everything. Years later when changing desks, I found those notes. I hadn’t used them after the first several months, but at the time they were invaluable.

Fast forward to another departmental transfer, where I utilized both my accounting experience and classes, but in a different capacity. My company was subject to FDA regulations, so processes were documented to the nth degree in most departments, including my new one. While getting all that documentation correct and in place was no picnic, the result was very gratifying. My coworkers and I went from thinking, "How do I...?" to "What's the name of that procedure where...?", to just getting busy and accomplishing the task.

So drawing on those experiences, it made perfect sense to document processes for my clients' needs, as well as for my own business. Processes done daily or even weekly generally become second nature pretty quickly, but bookkeeping usually involves monthly financial statements, and inevitably annual financial statements; it's those processes that can seem brand new either twelve times or once a year.

I highly recommend documenting your business practices, whether on paper or electronically. Make it as detailed as needed. Make a checklist. Make a flowchart. Whatever works for you is the right way to do it. The next time you do that process, follow your checklist or worksheet to see if you documented it correctly. If you didn’t, update the checklist or flowchart. As the relevant mantra goes: Document what you do, and do what you document. If either isn't right, figure out what needs to be changed.

When I took on a client in an industry new to me this year, I have again documented the heck out of things. (If I hadn't, the wine and chocolate thing would have resurfaced.) New client, new industry, new type of accounting and reporting: process checklists and flowcharts have been a life saver!

Oh, and in case the client is subject to a formal audit, which my new one is, well documented processes followed consistently go a long way to explaining what's been done and why.

Documenting bookkeeping processes and procedures is a service I provide for my clients. In addition to helping me provide good financial reports, there may come a day when the client grows enough to hire an employee to do the bookkeeping in-house. The new person can take the documentation and use it to ease their transition into that job.

It can be a challenge to find the time to document, but it’s well worth it.

How to properly record a loan payment

If you are like many businesses, you may have one or more loans on which your business makes regular payments. Write a check, and the payment is made! But are you doing the bookkeeping side of your loan payments correctly? Let's take a look!

What I see all too often is someone making a payment on their business loan, and then either showing the entire amount as an expense, or as a reduction in the loan amount.

Either of those is definitely the wrong way to do it!

When you obtain a loan, it generally comes with a document called an amortization schedule. (If the loan paperwork doesn't come with such a document, ask for it!) Amortization refers to the process of paying off a debt over time through regular payments. The loan amount may also be called the principle.

An amortization schedule shows the details of the loan: the original loan amount, the interest rate, the term over which payments are to be made, and the amount of each payment. This payment amount is further broken down to the portion applied to the loan (principle) balance, and the portion that is interest.

Since the payment consists of two portions, is makes sense those portions are recorded differently. So choosing to show the payment as all expense or as all debt reduction would be wrong.

Instead, when making the payment, usually via writing a check, the principle amount is recorded as a reduction of the debt, and the interest is recorded as an expense.

And, since loans and their associated payments vary widely, depending on the principle amount, the interest rate, and the term, the amortization schedule shows that the principle and interest amounts change slightly with every payment. Therefore, though each payment is the same amount, the way it is divided between principle and interest changes.

By the way, at the end of your business year, compare the loan balance on the Balance Sheet with the amortization schedule's balance on the date in question. If they don't agree, a payment was probably recorded improperly. Now you know how to correct it!

Not all incoming money is income

When your business gets money in, it’s easy to go into autopilot. Most of the times that happens, it’s probably income. But that’s not always the case. You need to think about everything you enter in.

Services and Products

When you get a check in, ask yourself if it’s for a service you’ve rendered or product you’ve sold. If so, it’s pretty straight forward. It will probably go against an invoice you created because you wanted someone to pay you. So you simply have to receive the payment.

But what about other situations? Not everything matches up perfectly with an invoice. Each transaction has to be considered individually and entered correctly.

Overpayment

At some point in their business, nearly everyone gets a check back because they overpaid a vendor. Of course, you want to avoid overpayment when you can, but that’s not always possible.

Let’s say your insurance rates change and you get some money back. What are you going to do with it?

Well, why did you get it? You didn’t get it because you provided a service or product. You got it because it was an overpayment. Was the amount paid appropriate at the time? Yes, you paid the amount due. So it’s not income, because you didn’t do anything to earn it.

So what do you do with it?

It’s just a deposit. You enter it against the expense line you incurred to begin with. In this example, the refund would be a credit to your insurance expense.

You might think, “Insurance is an expense, so I can’t credit it there.” Yes, you actually can. In that specific example, you know it was really a reduction of an expense, so you credit it to that expense.

Owner Contribution

Another example is owner contributions. I’ve often seen this with companies that are just starting out. They take an owner contribution and call it income. That’s the worst thing you can do!

If it sits in income, you have to pay income tax on it! In reality, it wasn’t income. It was a contribution by the owner to keep the lights on or make payroll. You didn’t do anything to earn it, so you need to categorize it as an owner contribution.

They key is to think about each and every transaction. Often it will match up perfectly with an invoice. But not always. So don’t let yourself slip into autopilot and make a costly mistake.