If you’re bogged down with accounts, not able to track or trace transactions or torn between running your business and managing your finances, chances are you’re going to face sleepless nights when tax season arrives. Usually, small businesses face scenarios like these as they believe that financial services can be managed with a DIY approach or can be done at the last minute.
Unfortunately, this mindset leads to financial mismanagement, dwindling profits and in the worst case – financial ruin. However, by working with a professional bookkeeping and accounting services company, you can address your financial woes and gain a strong-hold over your finances.
At Harris CPA & Associates, we understand the importance of financial management, and to help small businesses make correct decisions and avoid some expensive errors, we have put together a list of the most common mistakes made by small businesses.
1. Relying solely on your bank statements to gauge your financial affairs during the course of the year.
Many customers tend to consider only their bank statements to gauge their financial affairs because they are untrained in the practice of bookkeeping or they don’t record daily, weekly or monthly transactions on an ongoing basis accurately and methodically. These customers also don’t feel that they need to worry about the practice of only relying on their bank statements because they believe that what matters is their money in the bank. Unfortunately, this line of thought can force a person or company into a difficult place, quite quickly. At many junctures during a project, when the invoices received or sent out are significant, the cash in the bank doesn’t matter nearly as much as the bills in the mail.
This problem can be solved simply by bookkeeping. If the principal owner does not want to do this, it will be necessary to get someone, preferably a bookkeeper or accountant to assist by keeping ongoing records during each week or month of the year. At the very least, having someone assist you or doing some simple record keeping on your own provided you have the necessary knowledge, can make a significant difference in reconciling financial records at the end of the year.
One of the best methods of ensuring that you have a positive profit at the end of the year is to keep track of the cash and the monthly results of the work you are doing. This can easily be done by first, finding someone to keep track of accounting for you during the year and the good news is that it does not cost too much even though it’s absolutely necessary. A proficient bookkeeper will not only keep track of your monthly cash flow but watches the financials related to your jobs on an ongoing basis.
If your financials get out of control, your bookkeeper will tell you when and what to watch. This simple step can not only keep you in business but also makes your business more enjoyable. It keeps you focused on work, and you don’t have to get bogged down by numbers because you have a bookkeeper. It’s the responsibility of the bookkeeper to alert you to any upcoming issue. Ensuring that the bookkeeper hired by you is competent and proactively informs you of your financial affairs is extremely important.
2. Ignoring your cash flows and profits.
Some clients who get very busy start to spin and swirl at too many issues and they do not ensure the correct answers related to the “cash flows and profits” are reached, or these metrics are even being tracked. While it’s essential to ensure the work you are doing for your client is correct and on time, it’s also vital to ensure you know the profit being created in your work. If you lose track of your profits, all the work done by you can be wasted as you did not gain any or enough profit at the end of each job.
A highly recommended approach to keep track of your cash flow and profits is to first begin by estimating the scope of each job. It consists of creating your best guess of the items or equipment that you will need and what they will cost. You will also need to estimate the wage costs of employees or sub-contractors that you will need to complete this job. Estimating the costs of items, equipment and manpower can be tricky, but with knowledge and practice, you can get better.
The second step is to determine the billing rate, and it must be set at a certain higher percentage. Most people will have an idea of what the gross profit or the profit before their own ‘other’ expenses to run their operation would be. For businesses, it will be in the range of twenty percent, thirty percent or forty percent or more as a gross profit. This is the profit after all the ‘job’ expenses are finished. An individual or business will also have ‘other’ expenses which are not part of the calculation of ‘gross profit.’ The exceeded part after calculation of ‘gross profit’ and deduction of ‘other’ expenses is known as the ‘company or net profit.’
Therefore, it is critical to know what your ‘other’ expenses will be during the year to compute your ‘company or net’ profit. These expenses are mostly fixed or certain or guaranteed and they will have to be paid during the year. Once you know your ‘other’ expenses estimate, you can hopefully estimate how much your gross profit will be, based of course on the number of jobs you will have during the year.
As a business owner, your first job is to be sure that you are watching the overall profit estimates before or at the same time you are watching each job. This will help you to ensure the work you are doing is enough to make a corporate or net profit for you with respect to each of your jobs in every month or year depending on how you want to track it.
3. Not documenting day to day transactions.
Often, clients tend to make this mistake because they believe that their real ‘work’ involves buying and selling but recording the related transactions is a minor, secondary part. The hard fact is that until a transaction is recorded, there isn’t any transaction to note. There are many instances in which the CRA estimates the income of a company based solely upon estimated costs and projected sales revenue, because of unavailability of records to accurately arrive at actual cost, sales, and other expenses.
With this approach, the income estimate by the CRA is often much higher than the ‘actual’ income of a company which leads to the company having to pay higher taxes than they should have. Trying to bring down the estimated income to a realistic figure takes time and involves back and forth communication with the CRA. The consequent costs can be quite high compared to what it would have been to calculate actual sales.
The best option to avoid inflated costs, loss of time and frustration is to have an accounting professional the owner trusts come in and prepare a much more reasonable income estimate number, based upon costs and revenues.
For best in class financial services that meet your accounting needs within a budget, reach out to Harris CPA & Associates.
Our trusted advisors provide accounting and consulting services in Peterborough, ON. We help you to look at your needs not only through the lens of an accountant but also that of a business financial advisor. Our experts provide insights about year-end statements or tax requirements and arrive at accurate, up-to-date financial information which is essential to identifying trends, insights, and financial comparison to industry standards.
For a complete list of our services, please click here. If you have questions or need guidance on your financial needs related to business accounting, tax preparation, income tax, and other services, please contact us by clicking here.