No matter how expertly you manage your budget, you can confidently project a surplus at the end of the year and still not have enough cash at some point during your fiscal year. That’s because money doesn’t always come in and go out smoothly from day to day or month to month. In order to weather the ups and downs properly or, more importantly, so you don’t end up in hot water, it’s important to project and plan your cashflow management.
Let’s explore that, shall we? First, it’s important to understand the difference between your cash flow and your budget. Know that they are both critical to understanding your overall financial picture. Your budget is a plan for how you will earn money and spend money. Your cash flow is a record of when money comes in to and goes out of your organisation. In order to have cash when you need it, you’ll need to create a cash flow projection system that works for you.
Planning a cashflow is different from budgeting in a few key ways. Cash flow does not relate to calendar or fiscal years. And just because you have a cash shortfall at some point during the year doesn’t necessarily mean your budget is in trouble. Your cash flow projection does not include non-cash income and expenses such as in-kind contributions or depreciation. Most importantly, cash flow does include all the money that comes in and out, including transfers, loan payments, and sales of investments. Cash flow planning begins with a realistic budget. It’s important to understand what types of income you have, when income will come in, and when expenses will be paid. And you’ll need to make accurate assumptions about your cash flow over the course of the year.
Plan for things such as seasonal needs, payroll, benefit plan payments, discretionary repairs, capital purchases, or for the timing of when grants or contracts will be received. Then be prepared for cash shortfalls, those times of the month or year when cash isn’t coming in, but the bills are. And monitor and respond to cash shortfalls in a timely manner. If you find yourself with a cash shortfall on the horizon, here are a few tips.
Consider if you have the ability to bring money into your organisation faster. One way to do this is to build relationships with customer’s financial controllers, major donors, and contract managers and ask if payments can be made earlier in the year. You might also consider changing the time of your annual campaign or special events. And review invoicing and collections practices to see if you can bring in money faster. Another tip is to send out money slower. To do this, consider the timing of payroll and benefit plan payments ahead of time. Discuss payment options with service providers and negotiate instalment payments or request longer payment terms. Plan the timing of discretionary repairs or capital purchases for the year. And, find other sources of cash such as a line of credit or use your reserves as an internal line of credit.
There are reports which when generated on a regular basis will help cashflow management. These include periodic financial statements, quarterly or monthly management accounts and periodic cashflow statements. Admittedly, if a business does not have an internal accountant or bookkeeper, it will cost extra to prepare these reports. However, most bookkeeping software these days can generate these reports at the push of a button or two. So, if your current accounting software is not equipped to generate management reports easily, then perhaps its time to look at alternative accounting or bookkeeping software.
By planning, preparing, responding, and understanding cash flow you can ensure the financial health for your organisation 365 days a year.]]>
Understanding small business accounting vocabulary is an important first step in learning how accounting really works. So let’s look at some key terms in financial accounting and their meanings. The Journal, sometimes call the Book of Original Entry or more commonly the General Journal, is how transactions are entered into accounting records. It is a chronological list of the company’s transactions.
An account is a basic summary device used in business accounting. All of the related transactions to a particular account are recorded in that account. For example, all the transactions affecting cash would be recorded in the cash account.
Accounts are grouped into 5 broad categories which include assets, liabilities, equity, revenues, and expenses. We will learn how Financial Data moves from the journal into the account later. In an academic setting the account is often expressed as a T-Account. Two additional terms that are very important in accounting are debit and credit. Debit, which is sometimes abbreviated DR, means left side of an account and credit, which is sometimes abbreviated CR, means right side of an account and that is it.
Debits and credits are how different accounts are increased or decreased but they don’t mean increase or decrease because it depends on which account they effect. Each transaction must affect two or more accounts to keep the accounting equation balance. This is known as double-entry bookkeeping. So every transaction must include at least two accounts. One account that is debited and one account that is credited. There can be more than two accounts but there can never be less and debits must always equal credits or the accounting equation would be out of balance. Account balances are either debit balances or credit balances. There are no negative balances in accounting. Balances are calculated by totalling the debit side of an account and totalling the credit side of the account. Then we subtract the smaller side from the larger. This is the balance on the larger side.
An account can only have one balance. For example, we have a T Account where debits are 20,000 and credits are 9,000. So the balance in this account is $11,000 debit balance. In another example, debits are 15,000 and credits are 17,000. So the balance of this account is a $2000 credit balance.
The ledger sometimes known as the general ledger is a collection of all the company’s accounts. So all of the asset, liability, equity, revenue and expense accounts are located in the ledger. Before we end this short article on accounting terms, I would like to revisit some terms and define the accounts a little better. Assets are economic resources, which means they are something of value, that are owned or controlled by a business and will provide benefit into the future. The key when trying to determine if something is an asset is that assets will provide future benefits. Supplies is an asset because we haven’t used them yet.
When we do they will become an expense – supplies expense to be exact. And they will become a past benefit not a future benefit any more. Accounts receivable is for money that is owed to us from our customers. If we perform service on account, we would use accounts receivable in recording that transaction. Prepaid expenses are like supplies, they will become a past benefit, but until they do they are an asset. Liabilities are claims on our assets from external parties like creditors.
Accounts payable is for money that we owe to our vendors or suppliers. Accrued liabilities, sometimes call accrued expenses, are amounts that we owe for our bills related two our operations. For example, utility bills received but not yet paid is a type of accrued liability. Equity is the claim on assets from internal parties like owners. It is sometimes called net worth or net assets because it’s the value of the assets that remains after our liabilities are paid off or settled. You can see the accounting equation can be manipulated to be assets minus liabilities equals equity, or net worth, or net assets. Retained earnings or the amount of earnings the company has retained rather than paid out to shareholders in the form of dividends. Dividends are the amount of earnings the company has paid out to the shareholders as a return on investment.
Revenues are inflows from operations. They are the benefit a company receives from their business operations. Recall that they increase equity, but are not technically equity accounts. Service revenue is earned by performing service. Sales revenue is earned by selling goods. Expenses are outflows from operations. They are the cost companies incur from their business operations. The account costs of goods sold is not obvious that it is an expense account. For retailers and manufacturers it is often their largest expense. It is titled exactly what it means. It is the cost of the goods sold. And that concludes this short article introducing some foundational accounting terms and a more in depth look at some specific accounts.]]>
If you happen to manage a small business for which you are registered for Value added tax, then its important that whenever you supply goods or services to anyone else you must issue him or her a VAT invoice. Being a registered business enterprise, you’ll be able to reclaim Value added tax on purchases made for your company if you have a valid VAT invoice for your transaction.
A sales receipt is an important document, that is given to a customer as a written record for the services or goods provided to them. These days they could either be produced on conventional paper and mailed in the post or produced as a digital document. An invoice is usually given to the client after the conclusion of a service or following the supply of goods. An invoice generally comprises of two copies, one of which is given to the customer and the supplier retains the second copy.
Value added tax is a consumption tax assessed by the state on most goods and services and is usually worked out as a proportion of sale price invoiced by the vendor to the purchaser. It is compulsory for a Value added tax registered vendor to provide a VAT invoice to their customers. A ‘typical VAT invoice’ can be divided into 3 separate sections.
The back of an invoice can also be used to detail the terms and conditions of the sale and can normally include any special clauses applicable to the sale such as return conditions, refund policy and so on. Alternatively, you can use the back of an invoice to advertise new products and services, show special promotions or to display any other information that may be useful to the seller.
Since an invoice is a legal document, the copy invoice or what accountants like to call file copy, should be kept in a safe place where you should be able to access them should the need arises. The seller should also maintain a sales daybook in order to record the details of all invoices issued. This is important since, HMRC officers may need to see those invoices and daybooks should you ever become subject to a tax investigation. Your accountant may also require these information in other to accurately prepare the business accounts.
Seeing that VAT is a tax that is ultimately passed on to the consumer from the manufacturer or distributor, it is the right of every customer to request a VAT invoice if not automatically given one by the seller.
If, as a VAT registered business, you either fail to issue a VAT invoice when you should, or worse still, issue an inappropriate VAT invoice, you could be opening yourself up to financial penalties. Consequently, it is essential to know when you should and when you shouldn’t issue a VAT invoice. It is also important to get the information it contains right.]]>
Errors in your accounting or neglecting to comply with statutory requirements can have significant consequences for a start up business and most small business. For example not knowing when to register for VAT or PAYE can result in serious penalties for suspected income tax and VAT avoidance. For a sizeable corporation, this can hurt both the funding as well as the reputation of the company. When it comes to a small business, especially a business start up, it can have a significant effect and quite possibly even lead the business to fail, in the event that there is not enough funds to pay off the penalties.
Every business need the expert services of accountants to keep the company from financial difficulties. Of course, the majority of us know that lack of financial advice is the biggest killer of many start up business. That’s the reason why entrepreneurs need to have accountants for their business, even as a start up business. Anyone starting a new business should have an accountant to help them with their start up business for the following reasons:
An Accountants for startup can help you figure out which legal structure will be ideal for your type of business start up. They can advise you when it comes to making a choice between sole proprietorship, a Limited Liability Company or to a partnership. That is how you initially arrive at the name for your business startup. It is just after that decision that legal professionals are going to be required to complete the documents in order to legalise the business enterprise.
An Accountant who knows the requirements of start up businesses will work closely with you to prepare your first year accounts and tax return. That’s how they help your enterprise to pay the minimum tax allowable and to keep you within boundaries of tax legislations. Tax rules all over the world are rather complex and tough to understand by the inexperienced. It is accountants who fully understand the language of taxes and exactly how to manage an enterprise without running foul of tax laws and regulations.
Small business accountants help to assess the integrity of a start up business as a going-concern every so often. An accountant can identify what is making money for the business and what is costing the company money. Their expertise will enable them to see when your company is vulnerable to financial difficulties, specially when confronted with increasing bills and problematic financial situations.
An accountant can suggest the type of banking products and services your start up business require and also the insurance cover that will be most beneficial for your business. When you have to get a business loan, it is your accountants who will write a business plan and cash flow forecast in the format that lenders prefer thus significantly enhancing your prospects of getting the business loan.
A good small business accountant can help you to manage your payroll and overhead in order to keep your company going. Furthermore, a good start up accountant will act as your representative or agent as it is officially known when it comes to dealing with HM Revenue and Customs. That representation can help to greatly reduce the likelihood that the tax authorities will reject your company accounts or start an investigation into your company accounts. Having a good accountant for your start up business will also ensure that you meet all the filing deadline and prevent you from incurring late filing penalties.
Managing a start up business is a highly challenging and troublesome project. Using experts, especially accountants drastically helps a company to navigate through the elaborate financial maze that normally affects virtually any business enterprise. Granted you may be required to pay fees to accounting firms to obtain their services. That’s alright. These service fees pale into insignificance if you take into consideration the amount of money good accountants are capable of generating for you or saving you. That is why it really is unavoidable, that as a business owner, you have to learn to make use of the knowledge and services of a competent accountant if you want your enterprise to become successful and make money for you.
Running a small business is tough work at the best of times. It is wise to get the best help on the market that you can afford. With regard to accountancy services there are many alternatives for one to select from. If you are looking for guidance, try us out. We have many satisfied clients who have been with us for years. We offer a friendly, professional and effective start up business accounting at competitive rates. Contact us for more details on how we can help your business start up to prosper.]]>
Debtors are monetary claims against others. Debtors are acquired mainly by selling goods and services, or by lending money. Managing trade debtors is an important part of the businesses cash management proccesses. The three most common type to debtors are: accounts receivable or trade debtors, notes receivable and all other types of receivable which we’ll just call other debtors. Let’s learn a little bit more about each of these in detail.
Trade debtors or Accounts receivable are the amount owed by customer’s that result from the sale of goods and services. Most professional accountants in UK refer to this is referred to as trade debtors because it arises from transactions with our trade customers. (Meaning our ordinary course of business customers). These are usually current assets. Current assets are assets that are expected to be turned into cash within a short period of time. Usually less than twelve months. The ratio of current assets value to long term assets value in a business is normally used to measure the liquidity of that business.
Notes receivable are claims for which formal instruments of credit are issued as proof of debt-usually a promissory note. Often these arise from lending money or selling Capital Equipment. These could be either current or long-term assets depending on the nature of the agreement.
Other debtors are usually non-trade related trade debtors, meaning they don’t arise from transactions with our customers. Some good examples of non trade debtors are interest receivable, loans to related companies, employee loans, Value added tax recoverable and dividend receivable. These could be current or long-term assets, depending again on the nature of the agreement. Most companies have two records of accounts receivable. They have the general ledger accounts receivable account Which presents the amount owed to a company from all of its customers.
Often this is known in the bookkeeping trade as the control account. They also have subsidiary accounts that track the amount owed by each individual customer. The total of all the subsidiary accounts needs to equal the general ledger control account balance. Here is an example of that. The total amount of accounts receivable is £50,000. Here you can see that the customer subsidiary ledgers add up to that amount.
Companies sell on credit to increase sales revenue. How many would buy a new car, if all car sales had to be in cash? Not many for sure. But selling on credit comes with risks as well, primarily that we will sell to someone who won’t pay us back. This cost is known by a number of different account names depending on the textbook you’re using or the company that you’re working for. Bad debt expense is probably the most common term, but sometimes uncollectible account expense, or doubtful account expense might be used. Again, these terms are all interchangeable. The key is the word expense.]]>