Are You Prepared to Manage Your Business’ Money

Are You Prepared to Manage Your Business’ Money

by Bill Brautigam

The primary challenge for a new business is to do business after the doors are open. I have found that many first time entrepreneurs become fixated on increasing sales and ensuring there is an adequate supply of goods and services to satisfy customers needs. The new business must find a way to attract customers away from existing supply or service sources at an attractive and profitable price while offering consistent outstanding quality. If you are fortunate enough to achieve all of this, do not think your success and more importantly your survival, is assured. Making money is simply not good enough. You have to make some, keep some for growth and most importantly make sure you always have enough available cash to pay the bills.

It might be nice if everyone in business was an accountant. My 30 plus years of corporate finance and accounting experience has shown me that accountants, I am one, do not make great entrepreneurs as by nature they are not risk takers and usually not dreamers. This article is written with the non-accounting oriented, first-time entrepreneur in mind. The following tips and explanations can help save your business and yourself from financial ruin.

To begin, make sure to start with some basic and mandatory internal controls, such as:

1. Balance your checkbook within 24 hours of bank statement receipt.

2. Obtain a simple to use credit application form from your local stationary store. Have all customers seeking credit fill it out.

3. Make bank deposits daily.

4. Open a business checking account; do not use your personal account. Being penny wise to save money here is really pound-foolish.

5. Pay employees via check. If you have more than 45 employees consider using the service of either a local payroll service bureau (who will furnish tax reports) or your local bank. Shop around for this service as prices may vary widely.

6. Use your suppliers’ credit plans if they are free.

7. Pay yourself as an employee even if you are a sole-proprietor. This will ensure your coverage under workmen’s compensation and force you to make timely tax deposits; avoiding penalty and interest.

8. Do not buy supplies you will not use within the next 30 days. A bargain purchase you don’t currently need can make you insolvent tomorrow.

9. Do not loan or advance employees money. This is an easy habit to get into, especially for the first time business owner. It may make you feel good, but can cause problems later on and perpetuate an employee’s spending problems.

10. Perform the next sections tasks every month.

Control of your business will be enhanced through familiarization with basic accounting terms and ways they can be used to increase the knowledge and control of your business. Accrual accounting is a concept that recognizes and/or estimates obligations due now or in the future. In some cases, quarterly tax payments, e.g. can only be estimated as to the amount due in the future. Help in ascertaining expense amounts to be accrued can be gotten from taxing agencies, insurance companies and trade organizations. Set up unpaid bill folders for amounts by the month due and one folder for estimated and accrued obligations.

Measure your business’s financial progress, solvency and integrity every month. Start by doing the following:

1. Make sure your business is solvent. Make sure you have more cash on hand than you need to pay bills due within the next 30 days.

2. Calculate your business’s financial (accounting) quick current ratio. This is referred to as the acid test. Divide the sum of cash on hand, cash in the bank and accounts receivable (only money anticipated to be collected within 30 days) by accounts payable and accrued expenses (due within 30 days). If the answer is less than unit 1:1, you are headed toward solvency problems. Reducing inventory levels, working harder on accelerating accounts receivable collections and/or tightening credit-granting policies are ways to help alleviate this problem. Increasing sales, reducing overhead or reducing payroll is often the only way out of this. Try increasing sales by 10 percent while reducing expenditures for overhead by 10%.

3. Make sure you are accruing estimated amounts for recurring cyclical expenses, such as payroll and business taxes, insurance expenses, fees and licenses. If double-entry books are not being maintained open a second checking account and make deposits in anticipation of the date when you will have to pay the accrued expenses.

4. Retail businesses should not keep more than 60 days worth of inventory on hand, unless you are in a seasonal demand business. Take a physical inventory quarterly and price it out. Based on your average monthly purchases your inventory should turnover every 90 days. Calculate this by dividing your inventory value by your last month’s purchases. You want an answer of .4 or greater; less than this and it is time to consider reducing your level of inventory. Keep valuable items secured.

5. A startup business can appear much more profitable than it really is. A healthy checkbook balance can be the result of taking in cash and using readily valuable commercial credit. The effect of this disappears when the bills start coming due. Ratios discussed in numbers one and two above will dispel this myth of cash richness.

Learning how to use the financial information your business routinely generates is the most important, single thing you can do to keep in business. Seek competent help when you can afford it; make it a priority and you’ll rest easier at night.