What Exactly Is Bookkeeping And Why Is It Important?

We have been told time and again about the importance of bookkeeping, but we always find ourselves procrastinating because it is the job we always have a love-hate relationship with. Bookkeeping is defined as the storing, recording and retrieving of financial transactions of an organisation. It includes tasks such as sales, receipts, payments and purchases. There are several methods involved in bookkeeping, but one thing is for sure, we cannot maintain the finances without bookkeeping.

It helps you manage your cash wisely.

Part of operating your business is to manage customer and supplier accounts. With bookkeeping, you will be able to create a business player, track deposits and monitor payments. You will also know how to make sure that every dollar spent is intended for your business. When you update your books, you will know the financial state of your business. If you have an outstanding bill, income information, unpaid invoices or payroll estimation, you can gain access to these by simply looking at your financial statement.

It helps you make a decision

Thinking about expanding or growing your business? It will not be easy without knowing your financial performance. Banks will not trust you if you have unpaid bills and delinquent accounts. If your records show that you have the ability to pay a loan, the bank will not have any second thoughts of approving your loan application. However, if your records indicate that you are running low on capital, it will be difficult for you to take out a loan.

It protects your small business.

Can you imagine operating your business without hiring a qualified person to take care of your books on a daily basis? Can you be confident that your business is on the right track if no one ensures that your checks will not bounce and you have enough capital for expansion? Will you be able to have a good night’s sleep knowing that you are falling behind your payment schedule as you do not have a bookkeeper to remind you when your payment is due? Not having up-to-date records will run you the risk of losing money. Business growth opportunities are missed and payments will not be made in a timely manner.

Bookkeeping should not be underestimated as it is an integral part of every business regardless of the size. If ever you find yourself ignoring bookkeeping, think about its repercussions. Without bookkeeping, your business will suffer from the lack of financial stability for sure.

4 Reasons Your Small Business Failed To Grow

Most small business owners have big hopes and dreams about growing their business, but only a small fraction of entrepreneurs reach the peak of success. Too many of these businesses fail. It is a sad fact that 60% of small businesses could barely operate within the first three years of starting according to the Australian Bureau of Statistics. Sole proprietors have much lower survival rate than other types of business ownership.

Since there are only a few businesses that flourish, what does it take to survive and thrive? Successful business owners have a set of best practices that they regularly follow: investing in the right business tools, setting goals, planning for business growth and the list goes on.

In cases where business fails to grow, there are top 4 reasons they could not survive:

1. Lack of systems and process

Small businesses have to keep track of every transaction especially if it involves money. Having systems and processes in place ensures products and services are consistently managed. Small business owners are responsible for inventory management, accounts payable, accounts receivable, marketing, payroll and more. Unlike large companies that can already afford to hire people to do these jobs, small businesses have to juggle these tasks at the same time. There are three things that failed small businesses fail to implement: comprehensive bookkeeping process, customer relationship management system and inventory management system.

2. Not having enough funds

It is difficult for business owners to open doors to new customers without sufficient funds. Most businesses fail because they underestimate the amount of cash it takes to maintaing a business. Financing supports inventory purchases, business expansion, startup costs and business improvements. It is imperative that you plan the amount of capital that starting a small business requires. This way you can anticipate other expenses without breaking the bank.

3. Failure to adapt

Even if your small business has savored its initial success, it does not guarantee continued success. When you fail to monitor industry trends and changes, this is when you start falling behind your competitors. It is not uncommon for small business owners to wear many different hats and struggling with managing their time. This is why preparing for the changes becomes takes a backseat. When one area becomes obsolete, all aspects of the business become affected. Small businesses must be prepared to beat the competition by staying ahead of market trends.

4. Not using modern technology

When it comes to marketing your products and services, taking advantage of modern technology is necessary. It is difficult for small businesses to compete with big company because they do not have data-driven marketing. Even a simple task such as creating a website matters when it comes to keeping your product available to prospects. If your business does not have a mobile-friendly website, it will be difficult for you to keep up wth the giants in the business industry.

The Steps To Proper Cash Flow Management

There are many challenges associated with managing a small business. Aside from following best practices to keep your business on its feet, you also need to make sure that your cash flow is properly monitored. Cash flow management is more than just ensuring that you have enough money for future business endeavors. For your business to survive, you have to manage accounts, collect and reconcile payments and send invoices. For seasoned business owners, these tasks are considered a breeze. However, if you are managing a fledgling company, each task is deemed daunting and challenging.

Even if you have a bookkeeper to take care of your finances, you still need to monitor business activities. Although bookkeepers make each task easier by ensuring you are stress-free around BAS time, being keen on the information on your financial report is essential.

Since many small businesses consider using bookkeeping software a better way to deal with numbers, why not use this practice to your advantage? As these programs provide features that enable you to capture information on receipts, track invoices and even generate reports in an instant, managing your cash flow will not be a difficult task.

Here is how you can work side by side with your bookkeeper in managing your cash flow:

Plan Accordingly

You need to have enough cash for a rainy day. Just because your business is generating a decent profit does not necessarily mean you should be complacent. It is important to anticipate needs by planning accordingly. Ask your bookkeeper if you have saved enough money for monthly expenses, taxes and other financial obligation.

Stay on top of bookkeeping game

Do not let bookkeeping stress you despite the fact that it is an insurmountable task. No matter how busy you are, you have to dedicate at least 30 minutes for the bookkeeping task. This way, you will know if there are some areas that badly need your attention. It prevents problems associated with BAS. Never allow these small problems to grow into a huge task.

Provide incentives to customers who pay on time

Chasing customers is not an easy task. If you have customers who pay in a timely manner, giving discounts or incentives will motivate them to pay on time. Incentives are more cost-effective as compared with spending months following up on customers who do not pay.

Pay more attention to cash flow than profit

There are businesses that are focused on profits, but the fact that profits naturally flow, you will never notice whether or not you still have enough cash for investments and expenses. It is important to pay attention to cash flow because without it, you will not be able to make future plans for your business.

Bad Bookkeeping Habits And Their Impact On Your Business

Habitual neglect of bookkeeping duties eventually affect the overall performance and condition of your business. One neglect can form into a habit, which triggers red flag.

1. Not Setting Due Dates and Deadlines

Every business needs to get detailed information about monthly reports. If your bookkeeping is late and inaccurate, the negative result will no longer come as a surprise because you failed to set due dates and deadlines. You need to know when reports will be delivered. You do not want to take a wild guess which direction your business is going don’t you? Plus, ATO can chase you for all your late payments.

2. Not Organising Receipts

A piece of paper can turn into one of your worst nightmares when the ATO comes knocking on your door. It is highly recommended that you organise and keep receipts for up to 5 years. If you have stacks of invoices on your desk, not knowing what to make of them, you need to start including ‘organise’ in your vocabulary.

3. Not Managing Payroll Taxes

The world of payroll management can be complicated that you might find yourself completely alienated by the process. Get someone to manage your payroll taxes to spare yourself form the headache of dealing with it. However, do not go totally hands-off as you still need to check if your bookkeeper is doing things right.

4. Skipping Regular Bookkeeping Training

The only thing constant in this world is change and keeping up with the changes in technology is the only way to stay relevant. Your bookkeeper may still be spending hours burying their heads in stacks of papers when there are easier and faster techniques to run a report. It could have been done better, had you thought about giving your bookkeeper a regular training on the latest bookkeeping regulations and cloud software.

5. Not Integrating Data

What better way to manage data than utilising cloud technology? Business owners are plagued by financial reports because the process that running them entails can be quite tiring. This is where data synchronisation becomes necessary because it reduces error and even improve your time management. What’s not to love?

6. Not Standardising Monthly Financial Reports

The reason for standardising your financial report processes every month is to ensure that you run the same report  on a monthly basis. Standardised reports ensure you track your financial data effectively.

7. Not Keeping Track of the Invoices You Sent

Your business may generate profit, but without a steady flow of cash, the money in your business is still not enough to shoulder monthly expenses. You should know when you will get paid because monthly expenses do not have a ‘pause’ button. You will continue to pay for them regardless of your financial condition.

Basic Bookkeeping Tasks With Powerful Impact On Your Business

If your business is taking shape, the next thing to think about to ensure that the business is in the right direction, is to keep records accurate and up-to-date.

Not only are these considered a legal requirement, but one of the good practices to follow so you can manage your business effectively. You should keep track of your expenses, sales, salaries and bank transactions. While this may really sound complicated for those who are starting a new business, it can be quite manageable once you develop good bookkeeping habits.

Should you hire a bookkeeper or do the tasks yourself?

It might be tempting to do simple bookkeeping tasks yourself as this enables you to save money. However, if you want to achieve your long-term goals, it will be much wiser to consider hiring a bookkeeper.

There are bookkeeping tasks that can get more complicated than you think especially if it involves tax deductions. The ATO is very particular with the figures and inaccurate details can result in incurring penalties. If you are concerned about the cost of hiring a bookkeeping professional, think about the benefits.

The benefits of hiring a bookkeeper

You may not appreciate it at first , but as your business grows, you become busy as well taking care of other aspects of your business. This results in losing track of the financial aspect of your business. A bookkeeper ensures that your financials are in good shape by doing the following:

Checks your cash position
A bookkeeper checks if you have enough cash to grow your business or invest. They provide you a summary of your expenses so you will know whether or not you have enough to spend.

Prepares and sends invoices
Preparing invoices can take a large chunk of your time. Since it is a time-consuming process, you need someone to do these tasks for you so a steady flow of cash will come into your business.

Records your transactions
A bookkeeper is also responsible for recording transactions using bookkeeping software or an Excel. The transactions include money coming in from clients and money paid to suppliers, employees and others.

Review your cash flow
It is also important to check your cash flow position to ensure that you still have enough cash for the coming weeks or months. A bookkeeper takes care of this task.

A bookkeeper takes care of reviewing payment due dates, filing documents and receipts running your payroll, reviewing your incoming payments, checking your bank statements and much more. Hiring a bookkeeper creates peace of mind to business owners  by allowing you to focus on other areas of your business.

4 Tips About Reading Financial Report You Can’t Afford To Miss

Reading a financial report provides you information on the financial performance and condition of your business.

Just the thought of preparing a financial report is a challenging job let alone reading it. If you do not have any sound knowledge of bookkeeping, the numbers you see on the financial report will surely be foreign to you.

If you want to grow your business, you need to make sure that it is ready for the transformation. What better way to determine the financial health of your business than to read the financial report. Here are five tips to consider when reading a business financial report.

Decide what you are going to read

When you are reading a financial report, the first thing you want to know is how your business is doing. As the report contains lots of information, it can be very difficult to identify the section you should pay attention to. The report shows you the trend charts, financial statements, historical summaries and much more.

If you do not have the luxury of time to read the entire section, look for the highlights section. This section will give you a summary of the main developments of your business. You will also know the steps to take to improve your business.

Gain a basic understanding of accounting

While it is the job of your bookkeeper and accountant to prepare your financial report, this does not mean that you are no longer required to read the financial statements. You will still need to make a conscious effort to interpret these reports because they can play a big role in helping you decide of the direction your business will be taking.

Know your profit performance

There are many ways your business earns profit such as making sales and keeping expenses less than your sales revenue. You will be able to analyze profit performance by checking your sales revenue. Is it higher than the previous years? Do you know the gross margin ratio of your business? You will also have to keep in mind that judging profit performance should be based on general economic conditions.

Check your cash flow

Cash flow is important to business owners. Even if you are making a profit, this does not necessarily translate to having a steady cash flow. There are various ways a business can obtain cash, such as  selling off some assets, borrowing money or getting shareowners to put more money in the company.

What To Do With These Financial Statement Red Flags

As a business owner, you need to take the time to review your financial statement. While you may not possess an uncanny ability to spot red flags in an instant, gaining a basic understanding of your financial statements is enough. This way, you will easily identify any discrepancy that can create a negative effect on the financial health of your business.

Incomes that are non-operating

If you want to earn the trust of your creditors and investors, they need to see consistent income in your financial statement. The income must be from continuing operations. However, if income is obtained from other sources such as one-off sales, gains from the sale of investment and gains from the sale of fixed assets, this should be a cause for concern.

These revenues are considered non-operating and may not be valuable because the possibility that this revenue will not reoccur is strong. You can identify non-operating income as it is stated separately from operating income. It is found on the income statement. If the operating income decreases, this only means you should double your efforts into revenue sources that will not disappear.

Low Cash Flow Patterns

A profitable business does not mean having enough cash. A company needs to make sure that the cash is also flowing into the business to gain the confidence of investors. If you are falling behind your loan repayments or not collecting receivables quickly, it only means that you have poor cash flow patterns. When it comes to spotting cash flow patterns, pay attention to net income. If the net cash flow is low compared to net income, this can be another sign of a financial crunch.

Fixed Assets Disposal

It might be necessary to sell equipment every once in a while especially when it is not performing well, but if you used the cash for short-term expenses or to pay your debts, this can be a warning sign. The only exception is when the proceeds are reinvested into the business. Disposals of fixed assets can be an obstacle to your operating revenue. Disposals are found on the balance sheet. It is necessary for a business owner to be aware of the reason for selling the fixed assets. The disposals need to be significant and that said, an explanation of the reason for selling the fixed assets must be prepared.

Increasing Inventory

An increasing inventory may mean two things: you are expanding your offerings or you have products that are not selling. If the latter is the reason for the increasing inventory, there is a higher risk of spoilage. Make sure your inventory percentage is not higher than the prior years as this only denotes that you still have some inventory sitting on your shelf.

What You Need To Know About Cash Flow

Even the most profitable companies can go broke if they fail to manage cash wisely. In running a business, cash is critical and it is not about generating profits. When you think about how much it would cost to make the product and what the company can sell it for, profits will surely come to mind. Profits are not tantamount to cash as  you do not spend them in a business. You spend cash. If you do not have enough cash to pay your expenses, you can put your business at great risk. Your working capital determines your business health. It is important that you have a proper business plan that enables you to become well-prepared in managing your cash and profits.

1. Sales do not determine a steady cash flow.

Even if you are making the sales, it does not necessarily mean that you have the money to pay the expenses you incurred. If you incur the expense, assuming that you have already made a payment for them can get your business into trouble. Inventory is often bought, paid and stored until customers purchase it hence it becomes the cost of sales.

2. Generating profits do not mean you have enough cash.

Bills cannot be paid with profits. Even if you regularly pay your bills and your customers don’t, it can still take its toll on your business. Even if you are making profits, you still cannot make any money from it.

3. Inventory can hurt your cash.

It is important to note that you need to build or buy your product before you can even consider selling it. Even if your products sit on your shelves, the suppliers are still expecting to get paid. This means the dollar you have in inventory is a dollar you do not have in cash.

4. Bankers do not like surprises.

It is necessary for you to plan ahead so you are well-prepared if a problem arises. If you go to the bank armed with a realistic plan and chart, the bank will have an idea of the financial health of your business. If ever you intend to take out a loan, the bankers will use the reports as basis for their decision. `With a steady cash flow, it will not be impossible for you to get an approval from the bank.

Being aware of these cash flow rules will enable you to make room for business growth. Due to the nature of cash flow, you will not grow complacent even if your business is generating profits.

What Does Your Financial Health Look Like?

It is not enough that you run a profitable business as you have to make sure that you keep an eye on your business’s financial health. There are some key questions that you need to answer for you to verify if it is time to make some changes to your current business strategies. Your business may be doing well, but without a financial statement to give you an idea of your financial standing will still result in business losses.

Do you accomplish your monthly goals?

One indicator that you are on the right track is when you hit your monthly targets. You can determine if you are ahead or behind your monthly goals by comparing your month-to-date sales. Your expenses with your end-of-month goals are also worth checking because they also play an important role in your business. This technique can be used for you to find out if it wise to grow your business.

Are you falling behind your payment schedule?

Your accounts payable and cash balance must also be taken into consideration and a profitable business does not give you an assurance that you have nothing to worry about. Keep in mind that a profitable company also runs out of cash, but you can still prevent problems with payment schedule by ensuring that you keep your monthly burn rate and major payables in check. With this technique, you will be able to pay your bills on a regular basis.

Do you have a steady cash flow?

If your business always faces problems with cash flow, this is a cause for alarm because a negative cash flow can greatly affect your business. Problems with cash flow indicate that you are not regularly monitoring your expenses. You can prevent issues with cash flow by tracking monthly ongoing expenses and making a comparison of last month’s actuals to your projections. Make sure you involve your bookkeeper in your discussion so you will have an idea if there are still some parts of your business that needs improvement.

Is your cash enough to keep the business on its feet?

Having enough to get to break-even is also essential because this is deemed as a major milestone where adjustment and regular monitor are required. Your net profit and business plan projections must be checked regular as these can give you a better picture of your financial health. A bookkeeper should prepare a financial statement for you to review. If you do not have enough cash, cutting your expenses is one way to raise additional cash.

Know The Difference Between Profit And Cash Flow

When going through a financial report, business owners take a look at cash flow and profit. As a bookkeeper, it is important to distinguish profit from cash flow.  Just because a business is making profit does not mean that cash flow is higher than the bottom-line profit.  Another surprising fact about cash flow and profit is that you can have a negative cash flow when earning a profit and a positive cash flow when you have a loss.

Cash flow refers to the difference between the actual cash used and the actual cash received. This means that the company receives and pays a certain amount of cash. Cash flow is a good guide for determining how your business is doing.

On the other hand, profit is revenue from sales of products and services. They can either be payment in the form of cash. The cash may or may have not been received yet and minus all expenses such as the expenses paid in cash, the expenses to be paid in cash at a much later date and the expenses and the expenses accounted for using other means.
It is necessary to find out whether your company is earning income by taking a look at the profit you are making.  Another way to know if your company is earning income is by tracking transactions including profits, sales and expenses.

Operating cash flow versus non-operating cash flow

Operating cash flow refers to the result of any cash activity taking place in a business operation regardless of whether the cash transaction generates earned revenue or incurs expenses when the transaction was made. A good example is when customers make advanced payments for their future purchases. With advanced payments, the company’s cash holding will have no effect on its current profitability. Another example is when a company choose to prepay future obligations. Prepaying future expenses reduce the company’s cash holdings without necessarily lowering the reported profitability when the cash transaction was made.

Not all cash flows come from the company’s operating activities as they can also be from financing and investing activities. When companies obtain funds or sell and investment from financing, an increase in cash positions will be reported. However, the financing proceeds and investment sale are not considered revenues. Using cash for repayments and investments are not considered expenses, thus they have no effect on the company’s profitability.

Business owners must assess short-term and long-term objectives to identify whether to focus on profits or cash. A company that has a strong current cash position should concentrate on driving more sales. If the company needs additional cash for covering short-term expenses, the profits need to take a backseat.