By Octavia Conner
Being a business owner is a very exciting experience! As a business owner you have the freedom to be flexible, control your future and leave a legacy for many years to come. Now imagine going out of business. This is a dream killer!
That is exactly what I have witness occur when the 4 items below are overlooked. Take a moment and read the article and begin setting up procedures in your business to prevent GOING OUT OF BUSINESS!
FAILING TO MONITOR CASH FLOW
Do you have an accounting system that will help you track your receivables, payables, and expenses plus more?
Many business owners use their monthly bank statements to monitor their expenses and to determine how much cash is available. However the bank statement does not show the business’s outstanding checks or customer payments in route. Successful cash management places your business in the position to propel to the next level. This allows you as the owner to understand the health of the business, and then use this information to make wise and informed business decisions.
Cash flow is the money that is moving in and out of your business during a certain period of time. Failure to properly monitor the flow of your cash can be detrimental to the success of the business. The simple way to monitor your cash flow is by subtracting the amount of cash available at the beginning of a period from the amount of cash available at the end of the period. A negative cash flow is when the amount of cash available at the end of the period is lower than the amount of cash at the beginning of the period. Positive cash flow is the opposite.
Even though cash flow can be monitored on a quarterly and yearly basis, I recommend monitoring your cash flow on a monthly or weekly basis. If you monitor your cash closely you are sure to catch and prevent costly errors and mistakes or gaps between outgoing and incoming cash. Reviewing the business bank statements does not clearly identify how much cash is truly available. Having an accurate accounting system in place will assist you in monitoring your cash flow. Not having a system in place will open the door for you to spend until there is nothing left.
CONFUSING CASH AVAILABLE WITH PROFIT
Confusing cash with profit is a very common and deadly mistake for businesses! Profit is the money left over after the company has subtracted the revenue from the expenses. What is left will give you a net profit (more revenue received then expenses) or a net loss (more expenses paid them revenue). This is the income statement also known as the Profit & Loss (P&L) statement, which provides you with this information within a certain period of time. Your cash is the amount of money remaining after you have subtracted the beginning cash from the ending cash.
Cash Flow Formula As you can see Profit is the money left after the expenses are paid. Cash flow is what has happen between the beginning amount and the ending amount. When determining cash flow you will also factor in any accounts receivables (invoices that have not been paid yet), inventory and depreciation expense.
If you are reviewing your Profit & Loss statement and you see that your net cash is a high amount this does not translate to the amount of money you currently have to operate(spend) in your business. Do not make the mistake of either looking at the bank statement or this report and start spending money. This will lead to serious cash flow problems.
NO INTERNAL CONTROLS PROCEDURES
Internal Controls are procedures put in place to help achieve the objectives of a company. These objectives could be related to financial success, business operation, and customer satisfaction. Having internal controls for a business encourages efficiency; eliminates potential fraud and abuse, and compliance with the company and industry laws and regulations.
Understanding internal controls and how they can protect the small business is very important. Strong internal controls focus on addressing and preventing future problems. Regardless of how small the business may be fraud and theft can occur. Strong internal controls will act as firewalls against theft and fraud; saving the owner money, time, and costly headaches.
An experienced accountant will play a great role in setting up sound internal controls. Most business owners have little to no accounting background; therefore the accountant will be a key advisory on designing and implementing the right kind and amount of internal control for the business.
As a small business, the impact of theft can be deadly. Most small businesses do not have a great deal of money to support the company therefore theft can cause serious problems. Payroll and vendors not being paid, penalties with the bank and overall cash flow challenges can be the results of internal theft. If the amount of theft or fraud is extremely high it can even cause a business to close their doors permanently.
NOT RELYING ON EXPERT HELP
Most small business owners are not experts in business law and accounting. Relying on the help of an expert could mean the difference between success and failure. For example a business attorney could advise a business owner on how to properly write a contract. An accountant could advise a business owner on how to save and use their money wisely. Business owners should not waste time completing these expert duties when they could be focus on more productive business growth activities.
In the accounting industry I have witness business owners that purchase QuickBooks and unknowingly set-up and operate the system incorrectly. They later discover via high tax bills, IRS penalties and lots of wasted time and money that the system needs to be rebuilt. It is my recommendation that a smart business owner retain an experienced small business attorney and accountant from the beginning of the business’s birth.
This will allow them to prevent costly problems, build the company effectively and increase their chance for maximum success.
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