Most of us agree that a consistent plan of healthy food, exercise, and positive support from others improves a person’s overall health.
Our bodies and brain perform more effectively when we consume food with quality ingredients and participate in a regimented exercise program. The moral support from others motivates us to push harder, make tweaks and recommend new techniques to increase our results.
The same is true of creating a healthy business. An accounting system fed consistently with quality data, recurring transactions and guidance from the accounting team will help ownership optimize results and generate profits.
How do you keep your accounting system fit? The following strategies have helped our business clients make healthy improvements to their bottom line.
F – Follow your money flow
- Reconcile your bank statements … often. Electronic banking has caused many to avoid this process altogether. Download and retain the statements. It is easier to fix mistakes when caught early. A typo on a transaction (i.e. typing 49,500 instead of 4,950) can make a huge impact on the books. Keep an eye out for transactions that have not cleared. This may alert you that one was entered twice, incorrectly, lost, etc. Don’t assume the bank is always right.
- Reconcile credit card statements in a timely fashion. Confirm transactions amounts and categories are accurate to avoid missed deductions. An expense is deductible at the time of the transaction, not the time the bill is paid.
- Keep current with transaction entry. Create a habit of scheduling time each week or month for this. Become familiar with the shortcuts that your software offers to make this task less tedious and time consuming. One shortcut is the recurring transaction feature. Taking time to set them up once reduces repetitive tasks in the future. Enter the numbers regularly and let the software do the rest.
- Record and track Accounts Receivables (A/R). Ensure all payments are received timely with no duplicate receipts. Set up your accounting software to apply finance charges.
- Keep accurate records of Accounts Payable (A/P). This provides an accurate picture of the business’ financial activities in real-time. Record retention is important if an IRS audit occurs. You’ll appreciate the time savings knowing you have copies of the invoices and documents requested by an auditor.
- Categorize expenses correctly. This streamlines preparation of the tax return.
- Don’t commingle business and personal expenses. We strongly encourage separate bank and credit accounts for business and personal use.
- Document any owner loans to/from the business.
- Keep a complete mileage log and other automobile expenditures. New apps are available to make this easier. This technology works best with well-organized accounting systems.
- Be sure your accountant is helping you record depreciation of assets or interest on loans.
- For owners operating more than one business – when there are intercompany transactions, it is critical to document them in both accounting systems. Transactions should be recorded similar to transactions with outside parties. (ex: Invoices are generated for rent, and receipts are recorded to the right categories).
I – Insight to make decisions
- Run the right reports. Identify the financial metrics you need to monitor consistently. Create a dashboard of those metrics to track your progress.
- Utilize the budgeting features. Consider creating an operating and/or cash flow budget. It helps you plan and alerts you when something is off-track. A growing business that wants to add a new profit center could create a budget and track its progress versus projections.
- Understand the story in your financial statements. Cash is one number to watch, but it rarely tells the whole story. Cash might be low, but a large A/R amount suggests others owe you money. Perhaps cash is high, but A/P shows that your bills aren’t being paid timely. A host of scenarios appear when reading these statements.
- Consider job-costing to help determine the profitability per job. This helps when estimating potential work in the future.
- Benchmark your ratios against competitors. Your accountant and industry associations have data to show where you are doing well and what improvements can be made.
- Look for hidden profits. We provide a unique service to analyze multiple years of financial statements and understand fixed and variable cost trends. Business owners can identify areas that are driving profit or losing it. Small changes may generate extra profits for the bottom line.
T – Tax impacts and strategies
- Minimize the frustration of sales and local tax (SALT). Every sale could have a different tax rate. In your software, indicate the correct percentages for the different local and state rates. The retail store operating from one location won’t find this as complex as the business conducting transactions in five different cities or in multiple states vs the online retailer, and more.
- Understand the use tax and potential for audit. Depending on your industry, it can get complicated and must be set up correctly. All industries have some exposure to use tax when purchasing from an out-of-state vendor who doesn’t charge sales tax on an item that, if purchased in your state, would incur sales tax. The burden is on the consumer to report it.
- Payroll taxes are more than just recording net pay. Your accountant can help you avoid tax penalties.
- Take advantage of tax planning. Minimize your tax liability and take advantage of tax credits. The best planning strategies are done year-round based on an accurate snapshot of your finances.
The same fitness and nutrition plans don’t work for everyone. Outside factors like genetics, lifestyle, and personal goals determine the overall success. It’s important to find a coach or adviser who can customize strategies for your own health and a long lifespan. We hope you think of your accountants and advisers as your “fitness” coaches. An adviser can assess the current business health, brainstorm potential plans, and motivate your team to implement financial strategies tailored to your business’ overall health and longevity.
Contact: Michelle Lavrenz and Melissa Carlson co-lead the accounting services division at Cummings, Keegan & Co., P.L.L.P. ml******@******pa.com; 952.345.2500; mc******@******pa.com; www.cummingskeegan.com
