Clarity Accounting Blog

My way or the highway

May Chu — Fri, 06 Nov 2009 00:17:20 +0000

These are the words I thought I would love to say when I became a boss. Once I was having an argument with my mother and she told me that the only reason why I would want to hire people is that I can tell them what to do and order them around.

My first 3 employees were nannies to my baby. As an employer, I told them how to take care of my baby and showed them how I wanted things done. I showed them my way of doing things. The first one left because my husband told her he didn’t like her cooking, the second one left because I asked her to clean up the bathroom.

Then came the third nanny. She walked into the house the first day and took charge of my house and my baby. She knew more about taking care of babies than me. I soon realized my way was not always the best way. I let go of my desire to train my nanny to be exactly like me and parenting became more fun as my nanny teaches my baby new tricks he can show me when I spend time with him after work.

Now we are growing our organization — bringing on 5 new employees in witin a span of 2 months. When the first employee came on board I really wanted to train him to do everything the same way it has always been done — my way. As more people came on board, I quickly came to the realization that we are not paying our employees big bucks so that they can be just like me. In fact, they are here to help transform this organization to something more than what it used to be when I ran things my way. As a founder, I worked hard to hire people who are smarter and more capable than I am. I pay them more than I would ever pay myself. Hiring smart people and trusting them may very well be the secret to building a successful business.

In the mean time, maybe the person who really should be hitting the highway is ME! With all these capable hands on board, it is time for me to take a vacation!

Next Steps

Resources for working capital

Pamela Hilliard Owens — Wed, 04 Nov 2009 16:00:44 +0000

There are three stages in the life of an active business: 1) startup, 2) operating, and 3) growth. Each of these stages has needs for capital (cash) and appropriate sources for available funds are different for each stage. Having a sound strategy for obtaining and maintaining your cash position is the key to having a financially healthy business.

Sources for Startup Funding

Personal savings is the best foundation source for the startup of your business. Many people fail to plan far enough ahead for their companies to save at least part of the necessary funds. However, using your personal money for startup funding allows you to lengthen the desired return on investment and also signals to lenders that you are willing to have some personal risk. The important thing is to keep a balance between the amount of personal savings for yourself and your family, how much of the personal funds are allocated for your business, and the solvency of both your personal life and your business.
Family and friends are often a source for startup funding. It is recommended that all business loans from family or friends be treated as such.
Outside investors can help to fund your business depending on the business structure you have set up. Again, the pro-forma statements and your business plan will help your investors with their decision. Many companies are able to find venture capitalists or “angel investors”; but it is often a very long process.
Personal lines of credit such as credit cards and personal loans can be much more risky and very expensive. Additionally, these methods of raising cash require a much quicker payback, which can strain your cash reserves and reflect on your personal credit rating. Keep in mind the worldwide home equity crisis of the past few years and avoid home equity loans to finance your business.
Bank loans for startup businesses are usually quite difficult to obtain because there is no financial track record for the business, and may actually be considered personal loans, at least at the beginning.

Once your business is up and running, there are still needs for cash outside of the working capital for day-to-day operations. The best source of cash for your business is from your “retained earnings” or your net income after taxes. Borrowing additional funds and sales of equity and/or non-performing assets are also options for raising cash, but these activities can have effects on your profitability levels. Continued adherence to your business plan and the reporting schedules generated by your business accounting software will give you the best assessment of the financial position and the steps to take at a particular time.

Cash requirements for growth opportunities most often are met through using retained earnings or borrowed funds. Two important keys for success in managing cash for growth is to borrow enough the first time and to match the payback schedules with the projected future profits.

A comprehensive business accounting software package will generate the real-time profit and loss reports and pro forma statements that you will need to make the best financial decisions for raising cash during all stages of your company.

Next Steps

Business Cash Cycle

Pamela Hilliard Owens — Tue, 03 Nov 2009 04:28:19 +0000

Complete and up-to-date records for your business finances are imperative to keep your business solvent and profitable. Understanding your finances and utilizing the accurate reports generated by your comprehensive business accounting application should be your primary focus. Your business will be at risk if your capital, which is the fuel that runs your business, runs low or runs out. The basic cash flow cycle for your business is actually rather simple to learn.

Income for your business is created by the startup capital, operating capital (from sales of your products or services), or outside sources such as loans and investments. The business income is then used for expenses to actually operate your business.

The balance sheet of your accounting program will show your assets, including your accounts receivable and your inventory; while the profit and loss statement will show how the revenue is managed. Profits will be counted as equity on the asset side of your balance sheet and losses will be recorded on the liability side of the balance sheet.

Your accountant is your best resource for interpreting your financial reports. Your business can have a positive cash yet still be losing money. Your business can also be profitable while have a negative cash flow; especially during a growth period. The goal is to balance incoming and outgoing cash over and above the working capital.

Learning to use the information from your financial reports will help you to make the important decisions about when to borrow or when to sell assets is a key financial skill that will keep your business financially healthy.

Building up and keeping up your cash reserves protects you and your business from the negative effects of the inevitable losses. Losses during the startup and growth phases are expected and can be planned. However, operating losses are difficult to sustain and almost impossible to finance. It is better to intervene in the early stages of operating losses by taking the necessary action steps to generate the positive cash flow to re-prime the pumps of your company.

The best responses to a down cycle in your business are to generate profits, accurately time the borrowing rounds for growth, and building up a cash cushion. Working with your accountant and regularly working with your financial reports will put you and your company in the optimum position for management of cash and other essential capital requirements for continued profitability.

Next Steps

Cash is still king

Pamela Hilliard Owens — Thu, 29 Oct 2009 16:49:22 +0000

In today’s electronic age, unless your business is primarily retail, you may rarely see actual “cash money”. Most service or information businesses and all online businesses conduct their transactions entirely through the Internet. The bookkeeping, accounting, and invoicing functions are performed with an online accounting software, and most other files and documents are kept within other Web 2.0 applications. However, no matter the type of business, there are still four important areas where the business owner needs to have “cash” available for normal operations-either electronic funds or actual highly liquid (easily accessible) paper money.

There are three active stages of your company; and for all of these phases, you will need to have cash availability. In the startup phase on your business, the one-time purchases for equipment, inventory, branding, furniture, office space, and so on are used to establish the business and keep it operating until it is at a profit level. Once your company is up and operating, cash needs to flow through the business on an on-going basis. “Working capital” is generated by the revenue from sales of products or services and is considered the internal cash flow. Profits and earnings are posted in the books of your business accounting software as “excess cash” and are managed separately. The last stage to be considered is the growth stage where additional assets need to be purchased and managed.

On a day-to-day basis, you need to know the cash requirements needed to keep your business operating profitably.

The need to purchase assets: For the short-term, a company may need to purchase inventory that will be sold for an immediate payback in accounts receivable or cash. More long-term, machinery, equipment, land, vehicles, and other tangible assets necessitate having cash on hand.

Debt repayment: The principal payments for all forms of debt should be paid with funds outside of the working capital of your company. Otherwise, you are risking your business’ liquidity. Accounts payable are managed with cash from the profits of your company.

Equity repurchase or redemption: Any investors in your company, even you, have the right to withdraw some or all of their funds at any time. These repayments cannot come from your working capital; they must come from your profits and earnings. Keeping updated with the reports from your business accounting software, along with your regular meetings with your accountant, will help you to stay aware of your cash position.

Business losses: No one plans for their business to have losses, but it may happen-often causing the largest cash drain on the company. Again, maintaining the discipline of running financial reports as often as necessary can help to buck the trend early on; allowing you time to make the important and difficult changes necessary to replenish your cash flow.

On the positive side, it can be exciting when the time comes to grow your business. But with growth comes additional major cash needs, including the purchase of additional inventory, larger office space, more land, more equipment, additional employees; the list goes on. Because these investments take a longer time to return your investment, they must be carefully planned for. The growth stage almost always involves at least a short-term cash shortage even for profitable companies. It is imperative that your cash position is managed efficiently to preserve the solvency of your company and avoid over expansion.

Next Steps

Personal vs Business Finances

Pamela Hilliard Owens — Sat, 24 Oct 2009 16:00:28 +0000

As a small business owner, you should ensure that your personal accounts are kept separate from your business accounts. At the start-up of your business, you will need to set aside six to twelve months of income to keep your family solvent while your business becomes profitable. Depending on your business structure, the way you compensate yourself can be configured in your business accounting software. There are several issues that you should always keep in the forefront of your calculations.

Household Budget: Be very conservative in your planning budget; a strain on your personal finances will surely strain your business finances.

Your Personal Credit Rating: Many business owners mistakenly think that their personal and business credit ratings are totally separate; but your business credit is built on your personal credit. If you are just starting out, your personal credit history will be the sole determining factor with your potential lenders and suppliers. In the U.S., you can and should obtain a copy of your credit report from each of the three major credit bureaus. (The reports are free once a year.)

Before submitting a credit application for your business, make sure to also check your business credit, even if your company is brand new. Check with a business credit reporting agency such as Dunn & Bradstreet eUpdate. Make sure that you have established your business as a separate entity in order to establish a separate business credit profile. When potential vendors and financial partners run a credit report, both your personal and your business credit files will be reported.

Research your lenders’ requirements: As you begin to establish your business credit profile, knowing what standards you will be expected to meet will be valuable knowledge.

Review your business credit rating once or twice a year at a minimum: Errors do occur, and you want to make sure that all of your information is accurate. An accurate and positive credit rating will assist you in getting business credit at a reasonable rate.

Next Steps

Are you an accidental entrepreneur?

Pamela Hilliard Owens — Fri, 23 Oct 2009 23:15:57 +0000

In today’s challenging economic environment of companies downsizing or closing and retirement accounts decimated, many people find themselves deciding to start a business. For many, becoming an entrepreneur was the farthest thing from their minds, but with shrinking employment options, some people feel they have no choice. Whether you always wanted to own your own business, or you “accidentally” became an entrepreneur, proper management of your business finances is one way to ensure success.

There are many real and perceived advantages of being self-employed, especially if you are a SOHO (Small Office Home Office) business:

The freedom to work on what really interests you while you wear whatever you want.
The opportunity to make all of the business decisions yourself.
The chance to be your own boss.
A very short commute.
No cubicles.
The ability to play the music you like as loud as you want; or work in complete silence without hearing everyone else’s cell phone conversations.

However, as we all know, with freedom and choice comes responsibility, and since you’re the boss, you are also responsible for the financial health of your business.

When you were an employee, it was enough of a shock when you looked at the “gross” amount on your paycheck and then saw the “net amount”. (Remember that very first paycheck-such short-lived excitement!) But other than that, you didn’t have to think about taxes, and financial reports, and withholding. Now you do.

The best way to start, grow, and sustain a profitable business is to “outsource” those necessary financial tasks to a comprehensive business accounting software package. In a short amount of time, you can set up your accounts and begin keeping the accurate and real-time records that you need. It is still a smart idea to contract with an accountant, especially one who specializes in businesses in your industry. But working with your accountant can be made easier when your accounting software is online; the best online accounting applications offer the capability for your accountant to log on from his or her office to check your reports and interpret your data.

You may have become an entrepreneur “accidentally”, but with a good online accounting software program and a good accountant, at least you can spend the majority of your time running your business and less of your time “balancing the books”. You will still come out ahead.

Next Steps

Fall into good accounting practices

Pamela Hilliard Owens — Wed, 21 Oct 2009 17:34:21 +0000

Of course keeping up with your business accounting tasks is FUN-isn’t it? Well OK, with a little regular “financial discipline” and regular use of your business accounting software, it can certainly be less “not fun”! Consistent completion of smaller tasks can keep you from having one big task (and headache) at the end of each financial reporting period. The changing of seasons to autumn is a good time to “fall into” good accounting habits.

Daily Bookkeeping Tasks:

Invoice your customers or clients as soon as the sale or service completed.
Make cash deposits every day; record both your cash and electronic payments in the proper journal section at the end of each day.
Run a daily cash flow report to keep yourself informed and ready to make any needed adjustments.
Make sure that your data is backed up.

Weekly Bookkeeping Tasks:

Schedule time on your calendar to ensure that your data entries and filing are complete and up-to-date.
Run a weekly cash flow report as above.
Run your accounts payable and accounts receivable reports and make sure that all bills are paid on time to protect your credit rating. Check for any overdue accounts receivable and send a reminder to the client/customer if necessary.

Monthly Accounting Responsibilities:

Send out monthly statements to your clients/customers. Add “reminder statements” for those that are overdue.
Refine your collection policies to coordinate with your aged Accounts Receivable reports.
Meet with your bookkeeper and/or accountant (even if those people are both you!) for your monthly financial review.
Make sure you have a redundant back-up source for your financial files. Many online accounting software programs have secure data storage functionality already incorporated into their applications.

Quarterly Accounting Responsibilities:

Work with your accountant to prepare and file your quarterly taxes, depending on the requirements of your taxing jurisdiction.
File all reports on time for sales tax, employee payroll taxes, GST (Canada) or FICA (USA), etc. Timely filing will avoid late penalties.
If your company has inventory and equipment, complete an inventory of all relevant items.
Do a test “restore” of your financial records from your data storage service.

Annual Accounting Responsibilities:

Your end-of-the-year financial responsibilities will be so much easier if your daily, weekly, monthly and quarterly tasks are completed correctly. By faithfully keeping your bookkeeping and accounting tasks current, and optimizing the functionalities of your business accounting software, the year-end preparations and filings will almost be fun!

Next Steps

Bookkeeper or Accountant

Pamela Hilliard Owens — Fri, 16 Oct 2009 16:00:49 +0000

Bookkeeper or Accountant? What’s the difference? Although many of the tasks of a bookkeeper are done by an accountant and vice versa, technically, there are differences between bookkeeping and accounting. The bookkeeper is the person who actually records the transactions while the accountant analyzes, verifies, and reports the results. The accountant has traditionally also been the person to initially set up the accounts into which the transactions are entered. Today, with your comprehensive business accounting software, the tediousness of “keeping the books” has been eased. One person-usually you if you are a very small business owner-can enter the transactions and generate the necessary reports. Green shades and inkwells are no longer necessary; these days, everything can be done electronically.

The required bookkeeping tasks are the same, however:

Transactions must be entered into the journal.
Any necessary adjustments must be made.
Reports must be generated.
All sales must be entered into the proper account.
All payments from clients or customers must be recorded.
All payments to vendors must be recorded.
All bank accounts must be reconciled.
The data for the general ledger must be compiled.
All financial statements must be prepared.

Today, your online accounting software will automate many of these bookkeeping tasks; including sending out invoices and recording payments and downloading your bank and credit card statements.

So then what is “Accounting” if you are using “accounting software“? Actually, accounting comes before and after bookkeeping: “accounting” is the initial setup of all of your accounts in your software. Depending on the size and complexity of your business, you can quickly do this yourself, or your may need the assistance of a *real* accountant. After the initial setup, the bookkeeping tasks are then done on a regular basis-daily, weekly, or monthly.

Monitoring and interpreting your financial reports is where “accounting” again comes into play. Even if you are acting as your own accountant with the implementation of your business accounting software, it is prudent to meet with a *real* accountant at least quarterly to go over your reports and your business plan.

Lastly, you may want to work with a professional tax preparation specialist; especially one who is familiar with your chosen industry. When your records are kept up-to-date and accurate, working with financial specialists is easier and less expensive for the solo practitioner-you may save money and stress in the long run.

Bookkeeping or Accounting? Although these terms are often interchanged, the tasks are different. Take the time to learn the difference, avail yourself of the best business accounting software, and consult the professionals on a regular basis and you will find yourself with a financially healthy business.

Next Steps

It’s What You GET

Pamela Hilliard Owens — Thu, 15 Oct 2009 16:00:47 +0000

You’ve heard it before: “It’s not what you make, it’s what you keep!” While that is certainly true, when you are a SOHO (Small Office Home Office), it is also “It’s not just what you make, it’s what you GET!” In other words, working hard for yourself is useless if you don’t get paid!

Make sure that your invoices have been received! Especially if you send invoices by email, there is nothing wrong with sending a follow-up email (especially to new clients) to make sure that the invoice was “lost in cyberspace”-hey, it happens! Make sure that your invoice is correct before you send it out.

Send out invoices as soon as the project or sale is completed. This is the best time for your client to remember how valuable your product or service has been, and also the best time to take care of any problems that may crop up. Being proactive rather than reactive will surely yield better results.

Depending on your business and the timeliness of your clients, send automatic “reminders” that invoices are due in 5 - 7 business days. It will remind your clients that you know their accounts are coming due; they may “forget” to pay someone else, but not you! Make that you have late payment penalties in your invoice; but discounts for early payments work too.

Stay on top of your accounts receivable. Have you ever received a little note from your utility company (or worse, your mortgage holder) that they were still not-so-patiently waiting for your payment, but if your payment has already been made, thanks and ignore this notice? How will you pay them if you don’t get paid? You can send out the same kinds of reminders; the invoicing capability of your business accounting software can help you to know who still owes you money. The longer the bill remains unpaid, the harder it becomes to collect.

Be your own collections agency. No, it is not pleasant, but it is necessary. It is YOUR money-don’t worry about pestering your clients. Delegate someone in your company to work on Accounts Receivable on a monthly basis; that person just may be you. First, try to work something out with your client, but if your records show Client A is 60 - 90 days past due, it may be time to really get serious and fire your client call your attorney.

Next Steps

October 15 will soon arrive…

Pamela Hilliard Owens — Mon, 12 Oct 2009 04:50:19 +0000

October 15 will soon be here! It will be October 15 or 15 October all over the world, but if you are in the United States, October 15 means Quarterly Tax Time! If you have been consistent about keeping track of your finances with your business accounting software, AND you have been diligently depositing your estimated taxes in the proper account, then October 15 will be stress-free for you! Of course, you will still have to send that check to the Internal Revenue Service (or better yet, send your remittance electronically), but at least you know how much you owe and you will reduce your year-end obligations by that amount.

If you have not yet started preparing for the end-of -the-year tax reporting, or if you need a little nudge in the right direction, here are some important tips (for U.S. businesses, only):

At the end of every accounting reconciliation period, set aside enough money for your income taxes. That way, you’ll have enough to pay your taxes and you will not be caught short. For solo practitioners and service-only businesses, a good rule of thumb to deposit 30% (ouch!) of each paid invoice to cover taxes, FICA, and Medicare. It’s better to set aside too much than not enough. When you had a *real* job, your employer did this for you, but you usually ended up giving the Federal Government an interest-free loan every year. By disciplining yourself to save for your own taxes, at least you will yield the interest from your savings account for a little while.
What is “FICA” again? The Federal Insurance Contributions Act tax is not your income tax obligation, but instead a payroll tax used to fund Social Security and Medicare. When you were employed by someone else, that employer paid ½ of the amount, and you paid the other half. If you are a self-employed, unincorporated solo practitioner or partnership, you are also now responsible for “the other half” in the form of the SE or Self-Employed Contributions Tax. Ah, taxes! This is why it is SO important to use a comprehensive business accounting software package and consult your accountant or tax attorney at least quarterly! “I didn’t know” is NOT an excuse for the IRS!
Speaking of “quarterly” again…paying your taxes quarterly keeps you on track for your year-end obligations and just as importantly helps you to have a true view of your cash flow picture.
Keep track of all of your business-related expenses. “That’s tax-deductible” is a favorite phrase of the self-employed; but the IRS wants you to PROVE it. There are several easy-to-use applications that directly link to your online accounting software; take advantage of them-especially if your business keeps you on the road or out of the office on a regular basis.
Keep accurate track of your business-related vehicle or mass transit expenses. Every year the IRS changes the standard mileage rate; check the IRS website for the latest information.
Keep track of how much you are paid by your clients. They are supposed to send you a Form 1099 by February 1, but you are responsible to pay taxes on your income whether you receive a 1099 or not.
You are supposed to send a 1099 to your contractors. All contractors to whom to pay at least $600.00 per year must receive a Form 1099-Misc from you by February 1. Make sure that you have all of their current contact information including their Social Security numbers and addresses.
This is a great time to make sure that you are fully contributing to your qualified retirement plan. You have until the end of year to make your contributions for the current tax year, but the sooner, the better.
Yes, the home office deduction is still in place, even though the IRS threatens to reduce or eliminate it every year. Check with your tax advisor and start recording all of the necessary information.
Keep track of any sales or losses of business equipment or assets. Your small business accounting software will help you to record those transactions; you will need those records at year-end tax time.

By regularly and consistently taking advantage of all of the features and benefits of your accounting software and meeting with your accountant at least quarterly, you will be able to keep your business financially healthy. You will also be able to more easily pay the taxes you owe, and avoid under-payment penalties.

Next Steps