A great way to make a wonderful start to 2020 is to wrap up 2019 feeling organized and on top of the world. Here’s a checklist of items that you can start on now to make your year-end close go smoother than ever before. And don’t worry if you don’t know how to do some of these tasks – that’s what we’re here for.
- Catch up on your books, especially if you do them only once a year. By doing it now, you’ll be able to get into your accountant faster this time of year and they will appreciate getting the work done ahead of their crunch time.
- Catch up on bank reconciliations in case they are not up to date. Don’t forget your savings accounts, PayPal, and any other cash equivalents. Void any old uncleared checks if needed.
- Review unpaid invoices in accounts receivable and get aggressive about collecting them, especially if you are a cash basis tax payer. Clean up any items that are incorrect so that the account reconciles.
- Write off any invoices that are no longer collectible.
- Ask employees and vendors to update their addresses in your payroll system so that W-2s and 1099s will reflect the correct addresses.
- Collect any W-9s that you don’t already have on file for contractors that will receive a 1099 form from you.
- Collect workers compensation proof of insurance certificates from contractors so you won’t have to pay workers comp on payments you have made to them.
- Collect sales tax exemption certificates from any vendor who has not paid sales tax.
- Decide if you’ll pay employee bonuses prior to year-end. Reminder: This payroll is subject to withholding taxes.
- Review employee PTO and vacation time and reset or rollover the days in your payroll system.
- After the final payroll runs, contact your payroll software company to make any W-2 adjustments necessary for things like health insurance.
- Set the date to take inventory, and once you have, make adjustments to your books as necessary.
- Write off any inventory that is unsalable. If possible, sell scrap inventory or other waste components.
- Prepare a fixed assets register, calculate depreciation, and make book adjustments as needed. Leave the calculations and adjustments to us or your tax preparer.
- Record all bills due through year-end, and reconcile your accounts payable balance to these open bills.
- Make loan adjustments to reflect interest and principal allocations.
- Perform account analysis on all other balance sheet accounts to make sure all balances are correct and current.
- Make any additional accrual entries needed, or if you’re a cash basis taxpayer, make those adjustments as needed. You can leave these entries to your tax preparer.
- Get an idea of what your profit number will be. Choose whether you want to maximize deductions to save on taxes or whether to want to reflect more income. Decide what you can defer into 2020 or what you want to have as part of your 2019 results.
- Match all transactions with their corresponding documents – receipts, bills, packing slips, etc. – to make sure you have the paper trail you need. Go paperless – digitize these documents!
- Download your bank statements and store them in a safe place.
- Download any payroll reports and store them in a safe place.
- Scan in paper documents so that they’re stored electronically.
- File any important papers such as new leases, asset purchases, employee hiring contracts and other business contracts.
- Prepare a revenue and profit plan for 2020 and enter it into your accounting system.
- Take a look at the 2020 calendar to determine which holidays you’ll close and you’re your employees a copy of the schedule.
- Review your product and service prices if this is the time of year you do that and make any changes you decide on.
- Update your payroll system for any new unemployment insurance percentages received in a letter each year.
- Update the mileage deduction rate if that rate has changed at the beginning of the year.
- Set a time with your accountant to go over 2019 results and get ideas on how to meet your financial goals in 2020.
- Review the metrics you’ve been using in 2019 and decide on the list of metrics and corresponding values that will take you through 2020.
- Celebrate the new year; it’s a wonderful time to gain perspective and be hopeful about the upcoming year.
Start 2020 with a bang and this year-end checklist, and feel free to reach out if we can help with anything.
When you pay a bill in your business, are you 100 percent comfortable that the bill payment is correct and justified? Is there ever a chance that that bill is fake or fraudulent? What about duplicates? With so many fake bills being mailed to businesses these days, it makes sense to think about controls you can put into place to reduce the risk that you might write a check out of your hard-earned profits that should never be written.
Accounts Payable Controls
In the accounting profession, the term “internal controls” refers to processes, procedures, and automations you can put into place to reduce errors. In accounts payable, there is a specific subset of rules and controls you can put into place to reduce risk in this area. Here are just a few ideas.
All bills should be approved by the appropriate level of employee in your business. Sometimes a bill gets approved that is fake or shouldn’t be approved, especially in areas where the approver doesn’t have technical knowledge of what they are buying. Be sure to read the fine print on the bill and make sure you know what you are paying for. There are ways to streamline the approvals process.
2. Segregation of duties
The person who pays the bill should be different from the person who submitted the bill. These people should be different from the one who signs the check. This reduces employee fraud.
3. Receipt confirmation
A packing slip or other confirmation of receipt of the goods or services should be matched to the bill, line item by line item.
4. Math check
A prudent step is to check a bill’s math, at least for reasonableness.
5. Duplicate payments
If a vendor emails their bill as well as mails a hard copy, controls should be put in place (usually automated) to avoid duplicate payments on the same bill.
If there are a significant number of transactions between you and a vendor, an accounts payable reconciliation should be performed each month via a statement.
7. Missing check numbers
Most systems provide a missing check numbers report that you can use to make sure all checks are accounted for.
8. Bank reconciliation
A bank reconciliation is a sure way to see exactly what checks cleared your bank account.
Coding each transaction to the correct expense account, inventory, asset, or cost of goods sold account is an essential part of the process.
10. Income statement review
Each month, a review of the balances in your expense accounts as well as a disbursements ledger review for reasonableness can provide added peace of mind.
11. Purchase order
Requiring purchase orders is another control you can add to your process. Purchase orders should be matched to packing slips and bills before payment or approvals are made.
12. In-depth knowledge of your business’s numbers
The more you get to know the numbers in your business, the greater chance you’ll have of accurate accounts payable handling.
If you’d like to discuss your accounts payable function with us and how it can be improved and streamlined, we’re happy for you to reach out any time.
One of the most important parts of managing a business is making sure there is enough cash to keep the business going. As a business owner, you probably have a very good idea how much cash you have in the bank at any time. The smaller your business is, the more likely you are to keep a close eye on cash.
Checking your cash balance is a daily function that you should be on top of. There is another often-overlooked responsibility that many business owners don’t spend enough time on, and that is managing your future cash, especially in light of unplanned situations. Looking ahead helps reduce your business risk and allows you more time to correct any upcoming dip in your cash balance.
Having enough cash is akin to having a safety net for your business. It can sometimes even mean the difference between staying in business and going out of business. To plan how much you might need for your safety net, you can use a few different methodologies.
One way to plan your safety net is to prepare for the worst-case scenario. What is your burn rate? How long would your cash hold out if no revenue were to come in but all expenses kept going out? Some questions you might ask:
- At what point will your cash run out? How many weeks or months of cash do you have?
- Do you have a line of credit you can tap at a bank?
- Do you have other loans or sources of cash that you can tap quickly in case of emergency?
- What expenses could you shut down without hurting your business if you had to?
Another way to plan your safety net is to do what the average business does: acquire the amount of cash you need for two to three months’ worth of operations and keep it on hand. Alternately, you can make a plan to liquidate that much cash on a very fast basis and only put your plan in place if it’s needed.
An easy way to get these numbers is to look at your bank statements in conjunction with your average accounts receivable and accounts payable balances. If that’s all Greek to you, no worries. Feel free to contact us and we can help you figure out a safety net number that you’ll feel comfortable with and that will keep your business risk low.
Once you have a safety net in place, you’ll gain peace of mind for your business. It’s one step in an overall disaster preparedness plan that you can make for your business.
As an entrepreneur, you likely place a high value on freedom. When the word “budget” is mentioned, you might cringe and feel like it hampers your freedom. But it’s really the opposite. Here’s why.
According to a 2019 article in Small Business Trends, “Startup Statistics – The Numbers You Need to Know,” 82 percent of businesses that fail do so because of cash flow problems. Even if your business is no longer a startup, the failure rates for businesses started in 2014 were as follows:
- 20 percent failed to make it to their second year,
- 30 percent failed to make it to their third year,
- 38 percent failed to make it to their fourth year, and
- 44 percent failed to make it to their fifth year.
Many of the reasons for business failure can be prevented with good budgeting and planning. Here are some benefits of making a budget and managing it.
- A budget helps to control spending by seeing what’s available beyond your cash balance at the time.
- Impulse spending can be curbed by avoiding spending on anything that is not budgeted for.
- If a loan is needed to finance the business, you have a better idea of how much you need and how to best schedule the loan payments.
- Your chances of business success increase with a budget.
- You can see future revenue shortfalls so that you can take proactive steps to boost sales.
- You can better manage growth.
- You have a better idea of your profit level so you can make pricing changes, tax predictions, appropriate compensation, and other strategic changes.
- You can plan for large expenditures such as asset purchases and time them better for cash flow, loan acquisition, and other considerations.
Getting started with a budget is easy. If you’ve been in business for more than one year, you can start with last year’s actual figures and then adjust for the growth and changes you want. The numbers can be input into your accounting system so that you can get reports that measure actual progress versus the budget numbers. You can then make good business decisions based on your variances.
When you take a little bit of time to create a plan, you really can enjoy the freedom of knowing you’re on track to make your numbers. If we’re not already working with you on your budget, feel free to reach out to find out more.
The account on your income statement called Cost of Goods Sold can be confusing to non-accountants. In this article, we’ll attempt to de-mystify it and explain how it works.
Cost of Goods Sold is an account in your Chart of Accounts that is a very special type of expense. It is the amount of direct costs of items that were sold by the company. It is related to inventory, and it helps to see the flow of transactions to understand the big picture.
When you purchase an inventory item for sale, it’s considered an asset (not an expense yet) in your company. When you sell an inventory item, the asset is reduced and the Cost of Goods Sold account is increased, moving the item from an asset to an expense. It’s no longer an asset once it’s sold, and the cost of the item sold reduces your profit and is expensed into the Cost of Goods Sold account.
Some accountants will abbreviate the Cost of Goods Sold account to COGS, and you might hear them call it that.
In the case of wholesale and retail businesses, the cost of goods sold is the amount that was paid for the inventory items to be sold. In the case of a manufacturer, the costs can include the cost of raw materials, labor to produce the item, and sometimes additional allocations of other related costs. Construction businesses may have a Cost of Construction account or Contract Costs instead of COGS. Service businesses will typically not have a balance in the Cost of Goods Sold account. If they do have direct costs, the costs are often coded to a Supplies account under expenses or they have direct labor costs.
At any point in time, the cost of items you purchase are in two different accounts:
- The unsold items are reflected in the asset account, Inventory, on your Balance Sheet report.
- The sold items are reflected in the Cost of Goods Sold account, on your Income Statement report.
It’s important that the Cost of Goods Sold balance is accurate, because there are many good things you can learn from it when you compare it with inventory. You can learn how fast your inventory is selling, and you can determine your gross profit margin.
If your inventory purchases have been coded correctly, you can take inventory and arrive at the correct cost of unsold items. If your physical inventory does not match your books, we can help you find out why and can make a correcting entry between Cost of Goods Sold and the Inventory account so that both of them are accurate.
If you have further questions about the Cost of Goods Sold account, feel free to reach out any time.