By Michael Hourigan, ShoeBoxed.com
Accounting is a universal pain for most small businesses, though it doesn’t have to be. Just a basic understanding of accounting principles and a little bit of vigilance can go a long way towards making your life easier and improving your bottom line. To get started, try these simple tips:
1) Invoice early, Invoice Often.
In business, cash is king. Unfortunately, many entrepreneurs let day-to-day business operations (what’s urgent) take precedence over invoicing and collections (what’s important). To prevent running into the cash flow problems that plague so many small businesses, remember this simple edict – invoice early, invoice often. The earlier you get an invoice out, the sooner the cash will be in your pocket, and the more room you will have to grow your business.
Keep in mind; an invoice sent is not an invoice collected. Be consistent with your payment terms and make sure that your customers are adhering to them. This may mean spending 15 minutes at the beginning of every week making follow up calls for outstanding invoices, or even reissuing invoices to notoriously late payers. At the end of the day, it’s your money, and it will be time well spent.
If you’re not sure how to begin, take advantage of some great (and very affordable) tools to help you track payments and streamline your invoicing process. Two of our favorites are Harvest and Freshbooks – both of which offer free trials.
2) Make Use of Financial Statements
Chances are, if you’re running a small business, you have at least a basic accounting system in place and are somewhat comfortable with an income statement and a balance sheet. While it may seem daunting at first, applying just a few simple formulas will take you from reading your financial statements to understanding your financial statements.
Average Collection Period: Following up on suggestion number one, this simple ratio tells you how long, on average, it takes to collect on outstanding receivables. If your average collection period is longer than your credit terms, you will need to step up your collection efforts or risk running into serious cash flow problems in the future.
Calculation: (Accounts + Notes Receivable) / (Annual Net Credit Sales/365)
Return on Assets: While we all know it takes money to make money, there is no point in throwing money at a problem if it’s not yielding any positive results. This simple ratio will show you how efficient your company is at turning investments into profit. The higher the ROA, the more effectively you are allocating valuable resources.
Calculation: Net Income/Total Assets
If you are interested in more detailed metrics, get out your most recent financial statements and try this easy Accounting Calculator.
3) Keep Business and Personal Expenses Separate
It may seem like a hassle, but being vigilant about separating personal and business expenses will not only keep you out of trouble with the IRS, it will also save you money in the long run.
First of all, time is money – and taxes take time. Whether you do it yourself or you hire a tax accountant, the task of separating a year’s worth of expenses in April will quickly add up to a significant amount of time. Instead of paying someone to sort through and categorize miscellaneous expenses, make a habit of only using business accounts for business related expenses and personal accounts for personal expenses.
Secondly, deductions are very easy to miss – especially if you file taxes on your own. A client dinner here, new ink cartridges there; sooner or later, the time you spend picking out business transactions from a list of personal expenses will cost you more than the deductions themselves, if you catch them at all. Make it easy on yourself (or your accountant) to spot deductions by keeping all business expenses in one place.
Finally, in the case of corporations or limited liability companies, you can be held personally responsible for corporate debts if there is no clear distinction between your business and personal expenses; this is known as “Piercing the Corporate Veil.” Put simply, if your business is on the hook for any sum of money and the courts cannot find sufficient distance between your personal and professional finances, they may find you personally responsible for the debt and seize your assets to satisfy your creditors. Thankfully, a little bit of effort now will save you from a potentially devastating outcome later.
Implementing these simple strategies now (as we head into tax season) will not only give you greater insight into the financial health of your company, it will save you money and time in the long run. And if you’re in a position to do so, speaking with an accounting professional to come up with a personal accounting plan is always a sound investment.
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