Picture yourself with a shopping cart full of school supplies at the checkout – and you grab the wrong credit card to pay for them. Oops! You just paid for your kid’s backpack and everything that goes inside with your business credit card. Mistakes like these happen. In order to maintain the integrity of your financial statements, you need to go through a fairly painless process to adjust your accounting records. But if this school supply scenario is more than just a one-time glitch, we need to have a serious conversation.
Commingling personal and business accounts is a big no-no for any business owner, but especially if you’re operating your business as an LLC, S Corp or C Corp and not simply as a sole proprietor. (For advice about choosing a business structure, read this article link to https://www.sba.gov/business-guide/launch-your-business/choose-business-structure by the U.S. Small Business Administration.) By mixing business and personal funds, you’re acting as if you and the business are the same entity. Therefore, you put your personal bank account and assets at risk. Your business entity loses the legal liability protection that comes with its corporate structure.
Every industry has its own language and terms. These words and phrases can be confusing to anyone who is not part of the daily operations of a specific sector, and the bookkeeping business is no exception.
One of the fastest ways to decrease small business expenses is to cut overhead costs. It takes less time to optimize everyday overhead expenses than to address labor, supply and inventory issues. By definition, overhead costs are business expenses that support operations but don’t directly generate revenue. Business overhead refers to fixed costs such as utilities, interest payments, and office leases or mortgages. These expenses must be paid, regardless of a company’s sales revenue or incoming cash flow.
Overhead Costs Affect Profitability
Although overhead costs don’t generate revenue, they absolutely affect profitability. Businesses use a percentage of their sales each month to pay their overhead costs. Overhead costs aren’t based on what you make, and overly high overhead expenses will eat into profits and threaten the viability of your small business. To maintain a thriving business, companies should shoot for an overhead rate of less than 35%. Here’s how to calculate your Overhead Rate:
Anyone who buys eggs, bacon, and sweet rolls for Sunday brunch quickly realizes that inflation is hitting their pocketbook. Consumers are paying more for products and services in 2022, compared with 2021. The Consumer Price Index rose 8.3% from August 2021 to August 2022, according to the Bureau of Labor Statistics. Small businesses are not immune to inflation. Today, it costs more to borrow money, travel, rent office space, buy insurance, and pay for other business expenses. A tight labor market is pushing wages higher. How is your small business responding to inflation? Have you raised prices to cover these…
In a small business, every penny counts. Even the smallest cost-cutting strategies can positively affect a company’s profitability. Oftentimes, simple, common-sense changes can instantly boost your bottom line. Cost-reduction strategies can save you a lot of money in the long run. By reducing the average cost of one product or service, you’ll earn extra cash to get more done in your small business. Here are 7 smart ways for a small business to cut costs.
1. Cut Software License Costs
Software licenses can be a big expense for small businesses. If you can find an app that does basically the same thing as a software license, for less money, it is worth making a change. The savings go straight to the bottom line.
2. Negotiate Prices with Suppliers
If you make widgets, maybe a new supplier that sells the same raw material is willing to negotiate on the price to get your business. After you have success with one raw material, continue to look for replacements and negotiate on other materials, also. Improve your negotiation skills and learn helpful negotiation tips that can lead to an enormous pay-off.
As a small business owner, you know how you go about paying your bills or sending invoices. But do you do these bookkeeping tasks the same way every time for maximum efficiency? Do you sometimes miss a step? Can someone on your staff easily take over these bookkeeping responsibilities and get the same results as you do?
Develop a Baseline for Day-to-Day Tasks
Organization is a key component of the success of a small business. Companies that lack structure often experience problems that lead to disgruntled customers and stressed-out employees. To help their company run like a well-oiled machine, small business owners need to create a framework for operations. Standard Operating Procedures (SOPs) help to maximize efficiency and create a baseline for how to perform day-to-day tasks. Small business owners have so many responsibilities that it would be impossible to write an SOP for every business practice they complete. So, why not start with just one Standard Operating Procedure for an important bookkeeping task you perform regularly?
When starting a business, you don’t just hang a sign outside the front door and announce, “We’re open!” If only it were that simple! Entrepreneurs don’t just wake up one day and start working in their new business the next. Instead, they must carefully lay the foundation for their new enterprise – and they won’t go it alone. They need outside experts to get the business up and running. One of these experts just might be a bookkeeper … um, like me!
Unless you are running a tech startup that was designed to burn heavily through cash to grow as quickly as possible, the stream of money you have dictates how well the business is performing.
These problems happen to small and large businesses alike. They can hit us without warning or slowly drain the life out of our company. We could have customers who always pay, but they settle invoices on their own schedule. A common source of pain is slow-paying clients. It’s easy for us to overlook the problem as long as the money eventually arrives.
Here are a couple of ideas to follow to ensure your cash flow remains positive:
In my years as a professional bookkeeper, this scene played out all too often. A small business owner chooses DIY bookkeeping. That decision works if – and only if – the business owner has the know-how, time, and technology to keep accurate records. I’ve seen the alternative! A business owner gets occupied by so many other responsibilities that bookkeeping falls to the wayside. They tell themselves, “I’ll get to my bookkeeping next week,” and weeks turn into months. Stacks of invoices, expense receipts, and paperwork pile up. At tax time, they spend their weekends feverishly playing catch-up, trying to remember and recreate past financial transactions. Their procrastination leads to stress and frustration, and potentially, inaccuracies that can result in costly tax penalties and overdraft fees.
For small business owners, long-term financial success hinges on a steady cash flow. Balancing the ebb and flow of cash in an organization contributes to a business’ growth and sustainability. Learn cash flow tips by requesting our free report, 105 Ways to Speed up Cash Flow in Your Small Business. In service industries, one of the most important financial decisions that business owners make is where to set their prices. Charge too much and they’ll l lose business because clients will find cheaper services elsewhere. Charge too little and they curb cash flow, making it more difficult to remain viable in the long run.
The pricing of services tends to be a subjective task. Business owners typically base service fees on the value being provided to the client. Owners consider factors like the service provider’s education and skill that’s necessary for the job, the time involved, the client experience, and other factors. They look at the direct and indirect costs associated with their services. For more advice regarding setting prices for services, check out How to Price Your Business Services by the U.S. Chamber of Commerce.
When you run a small business, past due payments can slow your cash flow to a trickle. Stale invoices and late customer payments may make it difficult to pay employees, vendors and suppliers. No business owner looks forward to collecting late payments. Reminding clients that they’re late on their invoices is a tedious and oftentimes awkward task. Business owners walk a thin line. They respectfully request immediate payment while also trying to avoid conflicts that damage business relationships. Charging a late fee or cutting off products or service delivery puts all parties in an uncomfortable, unfortunate business situation.
To get paid faster and avoid business conflicts, business owners need a few accounts receivable strategies. One strategy that works for Prosperity Bookkeeping is to follow up with payers every week. It is perfectly acceptable to send friendly reminders to clients to ask about their invoices. Reminders aren’t just for overdue or late payments. On the contrary, reminders work great as notices that a deadline is approaching.
Help Wanted signs are everywhere! In almost every sector of the economy, companies are scrambling to find workers. In today’s tight labor market, job seekers are in the driver’s seat. The U.S. unemployment rate was just 3.6%-4% in early 2022. This equates to nearly two available jobs for every unemployed person. As a result, employers have to compete harder to attract and hire the talent they need to be fully staffed. One way to attract job seekers is to pay well.
When I was a kid, I loved to page through the toy catalogs that came in the mail at Christmastime. I made a list of every toy I wanted from Santa. Likewise, small business owners have long wish lists of items that would make life easier and the business more prosperous. Having cash on hand to turn wishes into reality requires a steady, strong cash flow. One way to improve cash flow is to increase Days Payable Outstanding. Days Payable Outstanding, commonly abbreviated as DPO, is a financial ratio that shows the average days it takes for a company to…
Let’s face it, some things are simply out of our control. Even the best-laid plans can go awry. We learned that lesson during the COVID-19 pandemic. At any moment, pandemics, wildfires, floods, and other natural disasters can wreak havoc on a business. And the list doesn’t end there. What about a cyberattack, supply chain disruption, rioting, or the sudden illness or death of a business owner or key employee? Emergencies come in all shapes and sizes, so it’s best to plan for the unexpected. The ages-old Boy Scout motto, “Be prepared” holds true for businesses, too. Cash planning is a crucial process for any small business.
I’ll never forget this candid email I received from an ever-so-thankful client: “So, I am going to sound super vulnerable right now. Thank God we started a tax savings...I went from paying nothing in taxes last year to $18,483 this year...”
Wow! It’s so humbling to hear how we helped a client overcome a financial hurdle. Her appreciation for our financial foresight made my day. But I can’t take all the credit. This client started working with us because she read the book “Profit First.” She believed the author, Mike Michalowicz, when he said, “Profit is not an event. It’s a habit.” She chose Prosperity Bookkeeping not only because I read the book but also because I successfully implemented its principles in my business and the businesses of several clients.
If you’re searching for a professional bookkeeper for your organization, hiring the right person for the role is crucial. As your bookkeeper will need to document your business transactions, the candidate you choose will be critical in helping your organization monitor its finances.
Increasing profit can be a big hill to climb for entrepreneurs. But instead of sticking to the traditional cash management formula, Sales – Expenses = Profit, consider turning the formula around, Sales – Profit = Expenses.
That’s the game-changing logic of Mike Michalowicz, author of “Profit First.” The math comes out the same, but the business approach is much different!
Simply put, Michalowicz’s business principle is to take your profit first. To do so, he advises business owners to open five different bank accounts: Income, Owners Compensation, Operating Expenses, Profit Hold, and Tax.
Managing the ebb and flow of cash in a business requires a mix of art and science. Juggling bills while waiting for customers to pay you can be a difficult balancing act.
Read more at “Why is Cash Flow Important?”
To improve cash flow overall, businesses can ask clients to pay them upfront, before any work begins or services are provided. This business technique comes with several advantages.
Manage Cash Flow
By accepting upfront payments, business owners have the extra cash on hand to cover out-of-pocket expenses associated with a project. Consequently, the business owner isn’t digging into cash reserves to fund labor, supplies,…
Financial statements may look complex and intimidating, but these accounting records actually are helpful tools. Understanding financial statements is an essential skill for business owners. Financial statements help business leaders make decisions based on the economic health of their companies, not on guesswork or gut instinct. Hard data shines a bright light on business finances, sometimes providing a much-needed reality check. By asking questions about their financial statements, business owners gain a better understanding of their financial position. The result? Smart business decisions.
