Mileage Rate – Quick Tip

Happy new year!

Many of us are wrapping up the past year by closing out our books. At the same time, we’re preparing for the new year by upgrading our accounting software, reviewing new budgets, and establishing new and improved ways to grow our small business.

Be ahead of the game by making even the smallest applicable adjustments to your bookkeeping now for 2018. One change that may affect your employee expense reimbursements and your deductions at year-end is the new mileage rate of 54.5 cents per mile up from 53.5 cents in 2017.

These pennies add up!

See the following link for more info:

https://www.irs.gov/newsroom/standard-mileage-rates-for-2018-up-from-rates-for-2017

 

Where Does the Money Go? Paybacks vs. Expenses

You’ve helped your business survive the startup or difficult times and before you knew it, you’ve loaned thousands of dollars to your company and it’s finally paid off, literally. It’s payback time. Whether your company is reimbursing you in a lump sum or dribs and drabs, every dollar needs to be allocated. And, if accounting is not properly managed, it often leads to a string of misallocations on the books.

This is a common scenario: Upon receipt of the funds loaned to the company, the company will deposit and inadvertently post the transaction to an income account. The cash is then utilized for various expenses and liabilities and posted as such.

The next step – the payback. In the minds of the lender, a.k.a. owner, and the recipient, the loan’s purpose was to keep the company afloat; in other words, to pay necessary expenses to keep the doors open. More often than not, a disbursement made to reimburse the owner will then be incorrectly expensed to an account of choosing, usually miscellaneous which should be avoided as much as possible. These transactions create a domino effect of, to put it bluntly, a mess!

The loan was booked to income which not only creates a bogus gross profit but also increases the company’s tax liability. The payback was expensed which not only duplicates expenses previously recorded (roughly) but also may also lead to problems on the owner’s personal tax return.

To avoid misallocations that are time-consuming to investigate and adjust later, create a loan payable account to correctly reflect the original loan transaction. As funds are slowly paid back to the lender, the balance on this liability account will work its way down. At inception, when the funds are deposited into the checking account, the cash is treated like any other transaction when used. It’s expensed or posted to a liability account and business is run as usual.

No payments to the lender/owner are expensed whether the funds were used for phone bills, payroll, or staff lunches. These items have already been expensed in real-time and expensing again is double-dipping, (i.e., creating bogus expenses to the company’s profit and loss statement).

The aforementioned transactions need extra care and attention. They exceed basic data entry of everyday receivables and payables. Be selective in who manages your accounting and try to keep it to one person. A good practice is to have a month-end close which will provide the opportunity for reconciliations, corrections, and analysis of your financial statements.

If you stay on top of your monthly activity, your year-end will be quick and painless!

Did your Small Business Earn too Much?

When using QuickBooks, a common misconception is an income account that appears too high. In most cases, the total is twice the amount of what it should be. Upon review and a thorough reconciliation, usually at month-end, a trail of duplicate entries is discovered.

New users to QuickBooks will likely be creating unintentional duplicate postings. This involves processing two different transactions to record income on two separate occasions. In so doing, accounts receivables may also be carrying higher balances than forecasted.

The first transaction to increase the income account is in creating a customer invoice. This entry increases the customer balance (accounts receivable) while simultaneously increasing the income account. The duplicate entry arises when payment is received from the customer at a later date.

A common error is the payment will be posted directly into the bank account rather than applied to the customer’s open invoice. Typically, a debit is posted to the bank account and a credit is posted to the income account thereby creating a duplicate entry to income. While doubling up on income, the customer’s invoice is left unpaid.

To post the transaction correctly, the payment needs to be recorded directly into the customer’s ledger. And depending on how many checks will be included on the deposit slip, the user may select one of two choices in the next step of the transaction.

If you have only one check, under the “deposit” pull-down menu in the customer ledger screen, select the bank account to which the deposit will be made. This will complete the transaction. The income account will not be changed, the bank account will be increased, and accounts receivable will be decreased leaving the invoice for the customer marked paid. The transaction is complete.

If multiple checks are being prepared for the deposit slip, select “undeposited funds” from the pull-down menu. This will allow QuickBooks to calculate the final total of the deposit in the following step allowing for a more accurate bank reconciliation.

Lastly when all payments are properly applied to the corresponding customers, under the “banking” pull-down menu from the home screen, select “make deposits.” A list of all the payments entered will appear. Select all payments included on the deposit slip and collectively deposit into the proper bank account. This transaction will transfer all ‘undeposited funds” to the selected bank account and complete the transaction.

Receiving and recording payments by following the steps above leave the income account unchanged and credit the customer balance(s) providing an accurate balance of accounts receivables in the process.

The importance of a thorough month-end reconciliation can never be stressed enough as your small business progresses throughout the year. And attention to the smallest of details will ensure accuracy of your financial statements.

Get the Memo and Track your Cash

How many times have you written a check payable to cash or used cash as a form of payment? Although ill-advised due to security and tracking issues, it’s a transaction that happens more often than one would think in business practice. Whether you, a member of your staff, or an outside source is the recipient of the funds, a recording of the transaction must follow.

The reasons for a cash transaction vary and are unexplored here but it’s often simply requested by the service provider. However, the delivery of a cash payment is one of which to take note. In other words, write yourself a memo.

In all financial matters, whether using cash for your own business expense or a payment to a vendor, be sure to jot down a quick memo on the check, (or if using actual cash, a post it, or a napkin, or anything to help you remember), and record the transaction promptly. If possible, obtain a receipt and attach it to a copy of your cancelled check for proof of payment. Allocate the payment accordingly to track budgeted line items, reconciling of bank statements, and tax deductions.

Remember, your bottom line is your ultimate goal and every transaction contributes to your company’s financial statements. A quick memo will encourage you to take the transaction to completion and avoid unexplained and miscellaneous transactions in your business operations.

Keeping Your Circle Small

When establishing a small business, the owner may employ a minimal staff to wear many hats in an effort to keep the company running on a small budget. This familiar scenario often leads to individuals performing tasks outside of their capabilities. The result is too many chefs in the kitchen leading to miscommunication, innocent mistakes and costly fees to correct them.

Especially in the financial management of your business, it’s best to keep your circle small and have one designated person, whether in-house or outsourced, to maintain your basic bookkeeping. Beyond basic bookkeeping, a second individual is typically employed to reconcile books, create budgets, manage the general ledger, provide periodic financial reporting, and process year-end closings. Assigning one individual to communicate necessary information and manage financial data in order to complete these tasks will eliminate errors and protect confidentiality in your financial statements and tax filings.

When creating your budget, be sure to itemize accounting fees as it pertains to your company without skimping. A cutback on this line item may incur more of an expense than needed, not only resulting in a high budget variance but decreasing your bottom line.

Small Business Startup – Savings Tip

When starting a new small business, much of your focus is on startup costs which will consume a large portion of your first year’s budget. To name but a few: new insurance premiums such as liability, workers’ compensation and, depending on the industry, auto insurance, possibly for multiple vehicles, may require large sums. There may be security deposits if renting a location, down payments on assets required for your business, or preparing to make payments on a newly acquired small business loan.

During this startup phase, be careful to keep your operational expenses at a minimum wherever and whenever possible. Payroll will likely be one of your bigger expenses. If you’re starting small and taking on the burden of responsibilities to run your company, your payroll expense is probably already at its lowest. However, if your industry requires a staff to be out in the field, there’s a good chance your payroll expense is on the high side as you strive to make ends meet.

Review your business operations to see where you can cut back and save. One common solution among small business owners is hiring an independent contractor to “pay as you go” when the task does not need to be completed by a permanent full-time employee. Savings in payroll expenses can be reinvested in your company as you get off the ground.

And as your customer base grows, any savings will contribute to a steady paycheck for yourself.

Commingling Funds in a Small Business

When funds are scarce and liabilities are due, some business owners may be tempted to combine business and personal financial obligations. However dire the circumstances, using company funds to pay personal debt and expenses or vice versa is ill-advised.

Among the transgressions that could potentially wreak havoc on your company’s financial statements are the following transactions:

  • The deposit of business checks into a personal account.
  • The transfer of funds between business and personal accounts.
  • The disbursement of business checks to pay personal credit cards and personal expenses.
  • The use of a company credit card for personal purchases.

Of the many nightmares misuse of cash creates is the confusion to be had when filing tax returns. Explaining to the IRS the differentiation between business and personal transactions when merging them is a headache you don’t need.

Commingling funds discredits the financial profile of your company. The statement of cash flows is skewed. The balance sheet is inaccurate and discrepancies surface on the profit and loss statement. The result being inaccurate tax liabilities and a bogus bottom line.

Preventing the aforementioned scenarios is simple.

  • Have a buffer. A minimum savings of six months of expenses will suffice and continue adding to it. Keep separate savings accounts for your personal and business expenses.
  • Create a budget and stick to it. Both a business and a personal budget will keep you on track and prevent overspending.
  • Limit credit card debt and pay off balances within a short period of time.
  • Deposit business checks into your business account and pay yourself. This allows disbursement of funds from the appropriate sources of income.

Remember that commingling complicates your bookkeeping and jeopardizes the progress of your business. Business income is used to support business operations which includes your paycheck.

Abiding by this simple rule of keeping distance between your business and personal financial obligations will help ensure the stability and success of your small business.

Time Tracking

In our high-tech society, few business operations use a manual timekeeping procedure. A favorite of the entrepreneur who provides services at multiple locations for a multitude of clients is a call-in time tracking service.

This automated service has dual roles. Billable time is recorded in order to invoice the client at a later date and hourly time is tallied on a timecard for payroll processing. An employee will call a designated phone number from any location to “punch in.” Upon completion of a job, a second call allows the employee to “punch out” thereby closing out the assignment. However, this system isn’t without its drawbacks; one of which is its lack of employee supervision.

On the occasion that a timecard appears to have exceeded the allotted time for an assignment, a business is confronted with a dilemma. The actual cost to the client will show a discrepancy in the proposed cost and the payroll will be over budget. A solution to the problem may be to provide a more accurate estimate of time in future proposals. However, a common problem is an employee failing to follow the proper procedure in reporting time.

A disobedient employee may pad his/her time by calling in with a cell phone before reaching the destination and after leaving the location thus increasing his paycheck as well as the client’s billable time. A benefit to using an automated time tracking system is its ability to reveal the source of a call.

A thorough of review of timecards in addition to enforcing a policy to have all employees call in from a landline at the location where the work is taking place will ensure that company time is tracked properly and honestly.

Ultimately, clients will be satisfied and payroll expenses will be on budget.

Employee Spending

Preventing misuse of employee company credit cards and monitoring employee spending could be a major component in cutting costs if abuse of your reimbursement policy is present. Verify receipts are actual company expenses and collect reimbursement forms at scheduled intervals rather than random requests from employees.

Was that dinner on Friday night business related? Was the last toll over the bridge en route to a business meeting? However small reimbursements may be, multiple offenses could damage your bottom line.

Consider setting credit limits on company cards and track expenses diligently. Adhering to this policy and procedure may reveal where attention is required without having to make budget cuts.

The Weekend Challenge

Taking two days out of your week to refrain from frivolous spending is a challenge worth every penny. Doing this on a monthly basis will surely increase your savings if you put the cash away. Spending it later defeats the purpose.

Before starting any challenge it’s important to be mentally prepared. Once you’ve decided to commit, prepare for moments of weakness triggered by boredom, temptation, and restlessness. Having a plan will help and below are a few tips.

  1. Plan ahead and make it your mission not to spend any money over the next two days (except for essentials like fuel and groceries). No coffee runs, impulse snacks from the 7-11, or random shopping trips. Tell friends and family so that they don’t tempt you into attending costly social events. Plan free activities to keep yourself busy.
  1. Work on that home project you’ve been putting off for months or give your house a thorough cleaning. Not up for work? Relax. Garden or lounge in the backyard and enjoy the fresh air.
  1. If you’re a social butterfly, you don’t have to convert to being a hermit. If you skip Saturday night out, invite your friends over for Sunday brunch. Make it a potluck where each guest contributes a food item. You’ll save on groceries and time and still enjoy your friends. Or just invite them over for coffee and chit-chat.
  1. Living simply doesn’t equate to confinement. There are plenty of outdoor activities free of charge. To name a few, take your dog to the park, go to the beach, hike, exercise, or volunteer.
  1. Reconnect with your loved ones or enjoy quiet time on your own. Take up a hobby, prepare home-cooked meals, or fire up the grill and cook whatever is on hand. Use the opportunity to clear out your fridge.
  1. Contemplate the past week and plan to make room for self-improvement where needed in the coming week.
  1. Unplug and take a nap.
  1. Focus on the end result. On Monday morning you’ll know that you’ve saved money and, perhaps, started the process to correct a destructive overspending habit.

After completing this challenge, you’ll have practiced self-discipline; a useful skill for any healthy habit you’re trying to achieve.