Are You In Balance?

My business is named In Balance Bookkeeping because I’m an accountant, and when the debits equal the credits, as they must, the books are said to be “in balance”. That’s all. And I thought it had a nice ring.

As it happens, I live in a very cosmic area of Northern California, and I was surprised at how many business owners called me because they liked the name. They didn’t know much about the debits and the credits, but they thought with a name like that, I must have achieved serenity and emotional harmony. It was my introduction to the concept of one’s life being “in balance”.

What a worthy goal that is! And as business owners, family members, friends, community members and hobbyists, we know how hard it can be to keep all those roles balanced. One or the other always seems to be consuming way more of our time, attention and resources than it deserves.

I personally think it’s impossible to get all the roles and responsibilities we have to be in perfect balance all the time. The best we can do is try to achieve “overall” balance, where no one area of our life consumes all our attention all the time. If you find that happening, it’s time to step back and consider what’s really important in your life, and to take some time out to get rebalanced.

Cowboy is In Balance--are you?

My personal balancing activity is spending time with my horse Cowboy. Animals are great balancers in that they just “are”.  They will let you know what they think and give you immediate feedback if they think you are out of line. You better be balanced or your relationship with your critters will suffer! I’m involved in a natural horsemanship program where participants are encouraged to achieve “physical, mental and emotional fitness” to develop the ultimate partnership with their equine buddies. Now that’s a great definition of “balance”!

Of course, since I make my living helping others manage their finances, I tend to get a bit “money-centric”.  But even I need to step away from the calculator often and touch bases with a living being, be it friend, family, feline or equine. It’s all part of being “In Balance”.

To Budget or Not To Budget: That is the Question

A question came up today on one of my discussion groups—do most small businesses have a budget? I had to reply that most of my clients don't, but I think it’s a great idea!

There is a saying that “if you don’t know where you’re going, you’ll never get there”. If you haven’t spelled out your business’ financial goals, and how you are going to achieve them, how do you plan to have your business become a success? How will you even know if it HAS become a success?

Even for an accounting type like me, budgeting is about as much fun as a root canal. (Unless, of course, you’re Richard Branson--I’d like to have his budgeting woes for a change!) But researching costs and pricing strategies, getting those numbers down on paper and doing the math can be an eye-opening experience. It can head you off from disaster as well as highlight opportunities for improvement. Doing a monthly check to see how you’re doing compared to the budget can keep you on track to meet your financial goals and let you know if you need to make a course correction.  A budget can also be used for scenario planning—seeing what effect a change in your operations or your pricing will have on the bottom line

How do you get started on preparing a budget? If you’ve been in business for a while, you can use your actual results as a starting point. QuickBooks, for example, will let you create a budget based on your prior year’s results, and then you can modify it for anything that you know will be different. This is the easiest way to create a budget, but it has some drawbacks. You may have some inefficiencies that won’t be identified this way, they will just roll forward. The process doesn’t force you to really look at the underlying activity behind the line item amounts.

If you’re just starting your business, or if you want to take an in-depth look at your finances, you will probably create a budget from scratch. You will project your income, your cost of sales, and your expenses in detail to create your budget. This is more time-consuming but forces you to really take a look at how they money is coming in and going out.

Preparing a budget for your income statement is the most common form of budget. In addition, it’s a good idea to prepare a capital budget to plan for purchases of equipment, and a cash flow projection to tie it all together.

While very few people will consider budgeting to be the most fun part of running their business, it can be one of the most instrumental tools for achieving financial stability and success.

If you’re a small business owner, please leave your comments on what type of budget process you use to project your financial results.

Time Management Rules from a Scofflaw

I am just about two weeks into this blog, and that’s how long it took for the schedule to slip. My goal, my DIRECTIVE, was to post on Tuesdays and Thursdays. Without fail. My first post was on a Friday, but that was just to get started. Then I posted on Tuesday, Thursday, Tuesday…..and now it’s coming up on Friday. And why am I late? Because I ran out of time.

It’s not that I don’t know how to manage my time. I’ve read all the articles and even gone to classes. I know the traditional strategies and rules. Some of them I can follow:

-Plan each day with a to-do list, and prioritize that list.

-Break large tasks into smaller tasks.

-Say no to nonessential tasks.

But there are a few rules that I just can’t seem to make stick:

-Limit distractions. I suspect that means things like checking e-mail every 10 minutes, ditto for Facebook. Also playing with the cat (I work mostly at home).

-Get plenty of sleep, eat a healthy diet and exercise regularly. You’re kidding, right? Who’s got time for that?

-Evaluate how you’re spending your time by keeping a diary of everything you do for three days. Honestly, I just don’t want to face that one. I think I know the results, and they aren’t pretty.

 

If I can get a grip on those last three items, I’m sure this blog will be filled with uplifting, informative and educational content, posted in a timely manner, going forward. I promise.

Wait, what’s that cat up to now? Hey kitty kitty…..

Where Did My Money Go?

How can your income statement show a profit when you don’t have any money in the bank? That’s a question most business owners ask at some point. The answer lies in the difference between profit and cash flow.

“Profit” is the difference between your income and your expenses (if your income is more than your expenses, that is—otherwise it’s a loss). There are a lot of things that can cause your statements to show a profit even if the cash balance is going down.

The first thing that can happen is that your books are being kept on the accrual basis. That means that you recognize income when it earned (even if you haven’t received the money) and your expenses when they are incurred (even if you haven’t paid the bill). So if you make more sales on account in a given month than you receive in payments, you will show revenue even though you haven’t gotten the money.

Seeing your reports on the cash basis takes care of that problem. But there are still items that affect that cash flow that aren’t reflected on the Profit and Loss (as well as items on the Profit and Loss that don’t affect cash flow). Those items will be reflected on the Balance Sheet instead, a financial statement that many small business owners don’t pay much attention to. If you are making loan payments, the interest portion will be on the profit and loss, but the principal portion (the part that reduces the amount you owe) will not—it will show up on the balance sheet. If you buy a new piece of equipment, it is usually capitalized, meaning that it will show up on the Balance Sheet as a fixed asset that will be depreciated over time. The depreciation expense will then show up on the Profit and Loss and will be offset by an increase in Accumulated Depreciation on the Balance Sheet.  If you pull money out of the bank account that isn’t payroll, it will reduce your cash but won’t affect your Profit and Loss—it will show up on the Balance Sheet (it could be a shareholder loan, distribution, or dividend if you’re incorporated, or a draw if you’re a sole proprietor).

The financial statement that explains cash flow is the Cash Flow Statement. This report typically starts with the Profit and Loss (P&L), and then starts adding and subtracting items that are either on the P&L but don’t affect cash flow, or that affect cash flow but aren’t on the P&L. These will include changes to Accounts Receivable and Accounts Payable, increases and decreases in loan balances, depreciation expense, owner draws, etc. So if you want to understand what happened to your money, you will need to run both a Profit and Loss and a Cash Flow Statement to get the whole picture.

The Profit and Loss Statement tells you how well your business is performing. The Cash Flow Statement gives you an indication of how well you are managing the cash. You should have goals and strategies in place to manage both in order to gauge how well you are doing when you review these statements.

What’s your biggest challenge in understanding your business’ cash flow?

Bookkeeper or Accountant? Which Do You Need?

Does a business need an accountant or a bookkeeper? And what’s the difference, anyway?

The definition of an accountant is “One that keeps, audits, and inspects the financial records of individuals or business concerns and prepares financial and tax reports”. A bookkeeper is “someone who records the transactions of a business”. Most businesses need the services of both, and they should work as a team.

An accountant (usually a CPA, or Certified Public Accountant) is the one who analyzes the financial statements, makes adjustments, prepares income tax returns, and provides strategic and planning assistance. They usually have at least a 4-year degree and have passed a rigorous certification exam. Because of their level of expertise and their professional liability, their hourly rates can be quite high.

A bookkeeper is the person who records the financial transactions of a business, reconciles accounts, and probably prepares monthly financial reports for management purposes. They may track accounts payable and receivable and manage payroll. While there are educational programs and private certification programs for bookkeepers, they are not required, and anybody can call themselves a bookkeeper. Bookkeepers usually charge less than accountants, but the well-qualified and experienced ones will command a higher fee.

A business would use a bookkeeper on a regular and ongoing basis to keep the books up to date. 

 Periodically (at least annually), these records will be taken to the accountant to review, finalize, and prepare the income tax return. If the accountant and the bookkeeper work as a team (meaning that they have had enough contact to be in agreement on how the books should be maintained), this process can go quite smoothly. A bookkeeper who knows how to work with your accountant can save money on the accountant’s fees by providing a set of books that does not need a lot of scrutiny and adjustment.

The line between the two duties can be fuzzy sometimes and different businesses may assign different responsibilities to each of the two roles. But generally, a bookkeeper does the day-to-day transaction recording and the accountant inspects the books from a tax and strategic standpoint and provides higher-level guidance to the business owner.

Do you need both? If you are in business, you should almost certainly seek the services of a good accountant. They can save you more in taxes than you will pay for their fees. If your business is very small, you may be able to handle the bookkeeping yourself. But if you have a lot of transactions, your business is has any complexity, or you just don’t like to do the recordkeeping, you probably need a bookkeeper as well.

Fear of Finance

I’ve been following a lot of business coaches lately, trying (like most business owners) to come up with ways to grow my business. What’s been particularly interesting to me as a bookkeeper is that these coaches all advise business owners to outsource certain tasks, particularly administrative tasks and bookkeeping. In spite of this advice, many business owners are reluctant to find help in this area, and I’m trying to figure out why this is.

Some of the reasons I have been given by new clients who are finally looking for help are:

• They tried it and had a bad experience—the person they hired never did the work, or their work was substandard or impossible to understand
• They fear the cost is going to be prohibitive
• They don’t see the value.
• They have no idea how to find a bookkeeper.
• If they do find a bookkeeper, they have no idea how to describe what they want—or they really don’t even know what they want.
• They think they are doing a great job on their own, even though their CPA (or worse yet, the IRS) has indicated otherwise.
• They don’t really want to know what their finances look like.

The fact is—bookkeepers are like everyone else. Some are good, some are bad. There is no licensing requirement, so anybody can call themselves a bookkeeper.  So a little due diligence is in order when finding a bookkeeper. 

You need to find somebody who is both competent and able to work with you comfortably. As a business owner, you have certain  areas of competency that don’t necessarily extend to the finances. You should be able to find a bookkeeper who can perform that function and relate the information to you in a timely, competent and understandable manner.

Some ways to find a reliable bookkeeper include:

• Check with your CPA. They may be able to recommend someone.
• Check with other local business owners. They may be working with somebody they are happy with.
• Check for services that are certified by the leading bookkeeping software companies, like QuickBooks, Peachtree, Accountedge and Xero, or professional organizations such as the Institute of American Institute of Professional Bookkeepers. These companies maintain databases of bookkeepers who have completed competency programs.
• Find out if the service you are interested in has Errors and Omissions Insurance (E&O Insurance).  This is not a requirement, but if the service has this, it at least means that a) they have taken the time and trouble to obtain professional liability insurance and b) their insurance company is willing to insure them against claims against their competency.

Once you have found someone to work with, be upfront with them. Describe your business and tell them why you have approached them.  Chances are, even if you don’t know exactly what you need, they have enough experience working with small business owners to suggest a plan of action. Set up a written agreement with them (usually a Letter of Engagement) that spells out exactly what they will do for you, when they will do it, and the fee agreement. They will need enough access to your financial information to do their job but you should never grant the ability to spend your money (except to pay payroll taxes and sales taxes using the taxing agencies’ electronic payment service).

Turning your bookkeeping over to a professional can not only free up valuable time for you, but you will get better information to help you manage your business, and you will probably save money in tax preparation fees.

I’d love to hear your feedback about what holds you back in seeking help in this field!