If you’re a business owner you probably started your business because you had an idea or a marketable skill set, not necessarily because you understood business. And as your business has grown, your skills have improved. We see this a lot in our clients, but what we don’t always see is an improvement of understanding the accounting and financials.
Accounting is a function of your business that can be easily outsourced, but that doesn’t mean that you, as a business owner, should not be involved in the process.
I recently worked with a business owner that started his business from scratch and was at the $500,000 revenue level. He knew how to provide a great service to his clients, but he had no idea finances, how to read financial statements, or how to use the data to improve the business. We took over his accounting and began meeting with him monthly. We reviewed his monthly and year-to-date financials together, were able to answer his questions, and helped him work through whether he was able to afford to hire a new employee. The financial data we had, helped him make that decision confidentially.
Keep Business and Personal Separate
If you want to grow a successful business you must treat it as one. Stop commingling your personal transactions with your business transactions.You should have a separate business bank account. In fact, we recommend having several.
Our most successful clients have a business checking, business savings, and a tax bank account.
This helps the owner know what he has to operate with, as well as set aside funds for growth and funds for taxes.
Not only will keeping things separate simplify record-keeping, it ensures accurate financial reporting. This is going to help ensure you are looking at correct financials. They won’t be overstated with personal transactions. This will give you a much better handle on cash flow and what your true expenses are.
And if you’re like, wait, how am I going to pay my personal expenses then? Simply transfer a “draw” or “distribution” to yourself. Deposit that into your personal bank account and then pay your personal bills out of it. Successful entrepreneurs understand how important this is, so if you want to take your business to a higher level you must act like a bigger business, and that means no commingling! You can read more about the pitfalls of mixing business and personal finances here.
Financial Information You Should Review
Let’s break these down by week, month and year.
Weekly
On a weekly basis it is important for you to know how much income came in and how much expenses went out, as well as your weekly cash balance. This will give you insight into whether you’ll meet your monthly revenue (income) goal and whether you’ll have the cash flow to operate.
Having a pulse on cash flow trends over time will give you the clarity and confidence to make the best business decisions. It will help you anticipate financial needs or identify issues before they happen.
You could add other metrics but those will be dependent on what your annual goals are. For example, for a CPA firm, I may want to know how many tax returns we filed for the week. I want to know what action we took to complete our goals.
Monthly
On a monthly basis you will want to review the Balance Sheet and Profit and Loss. The Balance Sheet will tell you what assets you have, what amount you owe to others (vendors and lenders), and what is left over (your equity). The Profit and Loss will report the operations for the month. It’ll tell you the revenue you earned minus the expenses it took to generate it. It’ll also show your net profit. Use that number to set a percentage aside to move into your tax savings bank account (see below for more info).
You should also review the general ledger, or a detail of transactions. The Balance Sheet and Profit & Loss give you an overview, whereas the general ledger will show you the details. I think it’s important to review this because you can see where the money is going. As you grow this can be delegated to trusted staff or professionals.
I also think it’s extremely important to review the bank statement and credit card statements for the month. Do a brief overview of the statements so you can ensure money is going where it should. Always have your bank give you check images with the bank statement so you can review who was paid and who signed the check. This one tip could save you hundreds or thousands of dollars! This is exactly how employees can get away with theft, when they know no one is looking over their shoulder!
We suggest setting up a recurring monthly review meeting with your team. For us at Aligned CPA, we do this clients each month. It helps foster transparency and responsibility for the businesses financial health.
Are you currently reviewing these things? If not, what is holding you back?
Annually
On an annual basis you need to review your annual Profit and Loss statement. I like to review a comparative statement, meaning it will show me current year totals compared to the previous year. This will allow you to see what increased or decreased, and what line items need to be improved.
You should use this annual review as a strategic planning session for the upcoming year. You can set goals and strategic objections based on real numbers. Leverage insights from the past year’s financials to set informed goals. Also consider having your team present or your CPA. The right CPA firm will help you with strategic planning. This is what we love to help clients with because it lets us help business owners reach their goals.
You’ll also want to review your business tax return with your CPA each year. Don’t be afraid to ask questions and make sure you properly understand what you are signing.
Time Spent on Accounting
Deciding how much time to spend reviewing or overseeing your business accounting is going to be dependent on what your role is in the finance process, how small or large the business is, and what goals you’re trying to reach.
On a weekly basis you should block time to review your weekly KPIs. KPIs stands for Key Performance Metrics. These are metrics at a specific time that if met, would result in hitting your annual goals. KPIs are a powerful, yet simple tool.
A good rule of thumb is setting aside 2-4 hours per week. I like to do this on Friday and refer to it as “Finance Friday”. This gives me time to delve through all of my financial responsibilities and ensure we are on target to hit our goals.
Tax Obligations to Know
It is very important to understand what tax obligations your business has and what your role is in making sure they are met. This involves having a proactive CPA firm in your corner. You want to hire a firm that is going to communicate with you so you understand your tax obligations and deadlines.
In the IRS eyes, you, the business owner, have the ultimate responsibility to file and pay all taxes applicable. Although you are relying on a CPA, it falls to you to make sure tax returns are filed and paid on time. Never delegate this to staff, or if you do, make sure you have the evidence that it was done.
Once you understand these tax obligations, put important dates into your calendar. These are deadlines for estimated tax payments, tax filing dates, payroll tax dates, etc. Your business calendar should alert you to filing deadlines and deadlines to make tax payments. IRS interest and penalties are steep so you want to be timely!
(Not so) Fun Story
There was a recent tax court case regarding a taxpayer filing their tax return late. The taxpayer relied on their CPA firm. The CPA prepared the tax return, had the client sign Form 8879 for efiling, and then the CPA submitted the tax return to the IRS. However, the return was rejected for some reason, but the CPA never followed up on it (when you efile, the software will tell you within 24 hours if a tax return was accepted or rejected). The taxpayer thought all was well until two years later when the IRS sent out a tax notice and assessed a large penalty. The taxpayers took it to tax court and the judge ruled in favor of the IRS. They stated that even though the taxpayer did everything right on their end, they still have the responsibility of ensuring the tax return was actually filed. They could not rely on the CPA firm for that.
Now I’m sure, or at least I would hope, that the CPA firm reimbursed the client for their error, but as you can see, the obligation will always remain with you!
Using Your Accounting to Plan for Growth
The right accounting data will give you invaluable information. It’s up to you to determine how to use the information best in your business. This is also where hiring a Fractional CFO can get your business to the next level.
At Aligned CPA, we use monthly and quarterly financials to help clients make better decisions. We meet with the client and establish goals, and then each month we review the progress on achieving the goals, and what the next best steps are.
Your accounting data can help you determine what is the cost of hiring a new employee, how much cash you should keep in the bank, whether you need to raise prices, what areas are you spending money in, and so many other things that if reviewed, analyzed, and mastered, your business will be more profitable.
This data can also help you long-term. It can show you trends so you are more prepared in the future. For example, if you know that your sales decrease 25% every summer, you can create a plan to overcome it. If you want to sell your business, you can compare your results to what is needed to get top dollar when you do sell. Your accounting holds power!
These are the things we love about what we do! We get to help business owners reach their goals.
Seek Professional Advice When Needed
Don’t hesitate to consult with an accountant or financial advisor for guidance on complex accounting matters, tax planning strategies, and financial management best practices. Investing in professional advice can save time, minimize risks, and ensure compliance with regulations.
You’re not expected to be an expert in all areas. In fact, I believe you should delegate and outsource anything not in your zone of genius. This means your time needs to be spent at the highest level, not on tasks that are easier and more efficient for others to do. If you are spending time doing your accounting, when you could be spending time on sales or on mentoring your team, you will be less profitable. The most successful business owners value having professional relationships in place so they have a resource and guide to help them through business issues.
This is one of the things I love best about what we do. We get to be that guide for our small business clients. Our clients value having someone to turn to when they are making decisions. They know we will guide them through their decision making process and we’ll give our input when needed.
Having the right professionals in your corner will help you conquer your path of business ownership.
If you’re not already working with a CPA firm that is collaborative, you may want to interview other CPA firms. In today’s business climate, your CPA should be a go-to resource for your business and not just a tax preparer. The right CPA will help you understand your financial picture, give you tips on how to improve it, and advise you in stressful business decisions.
Ready to take the financial health of your business to the next level? Schedule a consultation with our expert team today, and let’s map out a strategy that aligns with your business goals. Your peace of mind is just a click away.
Joy Lutz, CPA, CTP
As the founder of Aligned CPA, Joy has built a firm that is your strategic financial partner. With a growth centric approach, we build meaningful relationships with our clients because we value their success as much as our own.
Positioning ourselves as the tax and financial strategists for your business, we help you make empowered, financial-based business decisions that lead to long term success.