By Franka Winchester
Franka Winchester is co-founder and General Partner at Pacific Crest Group (www.pcg-services.com) a San Francisco Bay Area consulting firm that specializes in turning back-office operations into strategic resources with accounting, HR, and IT services. E-mail her at firstname.lastname@example.org.
Small business owners are great to work with because they are dedicated, hard-working, and will assess risks in light of potential rewards. However, where small business owners and entrepreneurs tend to fail is in creating back-office infrastructures to actually run the business. It’s surprising how many small business owners get bogged down managing routine back-office processes, such as payroll and accounting. The minutia of running the business gets in the way of focusing on building the business, so business owners tend to either take short-cuts or ignore processes altogether.
For any small business, cash is king, and if you don’t put in the right accounting protocols, it can have an impact on your cash flow. We see three common problems among small businesses that affect cash flow:
1.Failing to pay payroll taxes on time. Penalties on late filings can be substantial — 10 percent or more — and while it might seem attractive to delay paying payroll taxes to improve cash flow, it will cost you more in the long run. If you have to, borrow money from the bank of take out a line of credit to pay your payroll taxes. It will be less expensive to pay 5 percent or less for a loan than it will be to pay the penalties. And the easiest way to avoid being late with your payroll is to establish checklists and have someone reliable to manage the process. If you don’t have a full-time bookkeeper, find an agency or service to handle if for you.
2.Miscategorizing expenses. You wouldn’t think this would have much impact on cash flow, but it does. A common mistake that small business owners make, especially when they run an S corporation, is taking money out of the business and miscategorizing the expense. This will wreak havoc with your P&L. When the time comes to reconcile your books you will have to move your expenses into the right columns, which may result in fewer expenses so you show increased profits. This means higher income taxes. The way to avoid this is educating yourself about understand the rules of distribution versus payroll, and categorize your expenses properly. You also should review your P&L balance sheet regularly so you know where you stand.
3.Amortize capital expenses. The third most common problem is when business owners buy an asset, like a new computer server or office equipment, using cash and consider it an expense rather than an amortized purchase. This not only reduces your available cash but will also result in your having to report higher profits and pay more taxes. You will use up needed cash for the capital purchase and still have to depreciate it over time. For large assets, it’s usually better to take a short term loan or use a line of credit to preserve your cash. You also can use a low-interest credit card if you can pay it off within a few months. Leasing may also be an option, especially if the equipment needs to be upgraded regularly, such as computer hardware or office equipment, or if you only need it for a short time, such as office furniture that you may only need for a short time until you move.
Failing to set up proper accounting procedures at the outset only creates a problem you will have to deal with later. You not only need solid bookkeeping to manage your cash flow, but to give you the business intelligence you need to stay on track. A smart financial executive or even a talented bookkeeper can make sure you have your records in order, are filing the proper paperwork with the proper agencies on time, and help you set up business-critical processes so you don’t get off on the wrong foot. So even if you can’t put a full-time bookkeeper on the payroll, there are plenty of services available that can help you set up efficient accounting processes from the outset. It’s smarter than trying to clean up a financial mess later on.