From the Executive Director

Juan A. Navejar Jr

I was reading an article the other day about small businesses across America that do not survive past five years simply because of poor financial management. The article credited several key issues of simply businesses not seeking financial advice or trying to balance their assets with some sort of do-it-yourself book.

I have to credit Paul Rycroft whom was on the Chamber board who enlightened me about fiduciary responsibility as the Chamber Executive Director. Running monthly financial reports for the board of directors, we have come to learn Quickbooks as a vital tool. We are not accountants at the Chamber and had to learn the proper terminology and understand to concepts of good financial management.

Here are a few tips to help business who are managing their own funds along with some common accounting and bookkeeping errors that can be made.
 
There are two main business accounting methods: cash and accrual. Cash accounting is the simpler method because it’s based on the actual flow of cash in and out of a business. The cash method is used primarily by sole proprietors and businesses with no inventory. Accrual accounting records income and expenses as they occur, whether cash has actually changed hands or not.

As your business grows and becomes more complex, most small businesses should switch to accrual accounting, because this makes it easier to accurately match revenue to expenses. Otherwise, the business might look profitable during months with few expenses and unprofitable during months with large expenses, with no way of really knowing the difference. At the Chamber we report our monthly financial reports to the Board of Directors using the cash accounting method.

Business tip 101: It is critical that personal and business finances be kept separate at all times, regardless of a company’s size. That is why one of the first things new business owners should do is open a business checking account and deposit all business income into this account.
The next step is to work with an accountant to devise an earnings management strategy dictating how cash is removed from the business to meet personal expenses and savings goals. Your earnings management strategy will be driven by such factors as how much of your profits need to be reinvested back into the company, the timing of payments for large business expenses, your cyclical or seasonal cash flow needs, and your long-term personal financial strategy.

Payroll taxes, quarterly taxes can get tricky but in the eyes of the IRS we will look at full-time, part-time and temporary employees. For some business they may have contract labor that will receive 1099 come filing time.

The employee categories are often used to determine who is eligible for employee benefits. Full-time employees are generally eligible for all benefits offered by an employer, while part-time employees may be eligible partial share of benefits. Temps and independent contractors generally receive no benefits, and independent contractors are not covered by minimum wage, overtime, payroll tax, workers’ compensation, or unemployment compensation laws. Sounds like a lot to remember, but Quickbooks is really a great program that can assist you with this.

When your bank statements begin to arrive, it’s best to reconcile your business’ books with your business bank statement every month is one of your most fundamental accounting duties.
Account reconciliation is pretty simple: Just compare your books with your bank statement and make sure there are no discrepancies. If there are, contact your bank right away to get them resolved. Doing this on a monthly basis helps ensure that accounting errors are caught and corrected quickly before they result in major financial problems.

Since the Chamber does its own accounting, we had to learn the difference between profits and cash flow. A business can have positive cash flow in the short term but still be unprofitable; conversely, it can have negative short-term cash flow but still be profitable in the long term. The first scenario is common among small businesses because they often have to pay suppliers before they get paid by their customers. The second scenario is common among point-of-sale and cash-based businesses, such as retailers and restaurants, that pay their vendors on terms.
To have an accurate picture of your company’s true financial condition at all times, work with an accountant to produce regular financial statements. These consist of a balance sheet, income statement, and profit and loss statement, which should be produced at least quarterly.

Internal control of your finances plays a vital role in your profit and losses. If proper checks and balances aren’t implemented in a business’ accounting system, bookkeepers may have opportunities to commit fraud and embezzlement. Losses from internal fraud can significantly cripple a small business, or even lead to bankruptcy.
The best way to guard against embezzlement by a bookkeeper is to implement solid internal financial controls. This includes segregating financial duties so that no one employee has unfettered control of every aspect of the business’ finances. If it isn’t practical for you to hire more than one bookkeeper, you should personally oversee the bookkeeping work and keep tabs on it yourself. We have a checks and balance at the Chamber. All checks require two signatures. A deposit made is not delivered to the bank by the same person who made the initial deposit. All deposits are copied with all checks that coincide with that deposit. Monthly financial reports that include a balance sheet, profit and loss, aging summary report and credit/debit expenditures is presented to the board of directors for approval.

Many small business owners pride themselves on their ability to wear many hats, including the accounting and bookkeeping. However, this is one area where small business owners are usually much better off hiring a specialist rather than trying to do it themselves.
Accounting and bookkeeping can get very technical and complex. The money spent to hire a trained bookkeeper or accountant, even on a part-time or contract basis, will usually come back to the owner many times over given the time savings and all the mistakes that will be avoided.