Recording Payroll and the Importance of Time

A small business will often employ an outside payroll service to execute their payroll and all that it encompasses including filing the required federal and state payroll reports and making tax payments. If your business opts for an outside service, you may be familiar with the reports submitted to you upon completion of your periodic payroll. But, as you know, the procedure doesn’t stop there. Accounting must then be completed.

The reports contain all details for each paycheck, tax liabilities, and payroll fees for the period; all of which become part of the company’s financial statements. However, a common occurrence for the busy owner who wears many hats is just giving the reports a quick glance to confirm the operating fund has the cash requirements to cover the scheduled deductions. The reports are then set aside for a thorough review at a later date. The problem that arises is just that – the later date.

A frequent mistake when recording the payroll out of period is taking a shortcut by making a lump sum entry and ignoring individual paychecks and their actual dates. This is especially true when a company consists of a high number of employees as doing so will save time in bookkeeping tasks that have already fallen behind. Unfortunately, this method will not only create a headache when reconciling your bank statement, but will also create inaccurate tax liabilities and expenses which will lead to bigger issues at year-end.

Reconciling to the payroll reports each pay period is crucial for expenses and liabilities to be 100% accurate. To accomplish this, record actual gross wages and accrue tax liabilities in real time. In so doing, data will be contributed for processing of annual tax returns throughout the year.

This is a bookkeeping task that needs prompt attention and one more way to save money. Your tax accountant will earn more billable time with other clients!

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.

Keeping Your Small Business Secure – Starting with the Basics

We all tend to small security risks on a daily basis such as locking our doors when leaving for work in the morning or making sure we park our car in a well-lit area if returning after dark, but the small business owner needs to take extra care throughout the day when working to keep his/her business safe.

The convenience of technology has desensitized us from risky transactions that could potentially turn a business upside down. But carelessness could also play a role in detrimental errors. The simple step of neglecting to log out of your account after online banking can wreak havoc in your finances. Likewise, walking out of your office with an open file cabinet containing employee records can result in the identity theft of unsuspecting individuals.

If you’re in the process of establishing your small business, train yourself to think like a business owner. Putting aside marketing and networking, consider the small details and practice basic daily habits erring on the side of caution. This is especially important if you have office staff or outside contractors who provide their service off business hours such as cleaning or elevator maintenance. Protect your office and its contents as you would your home with your personal belongings.

If your location has a busy common area where passers-by can easily enter your space, be cautious of leaving laptops unattended. Remember to secure blank checks, file away bank and credit card statements, have your accounting programs password protected, lock up personnel information, and shut down your computers before leaving for the evening.

These simple steps will not only save you thousands of dollars and provide security to your staff, they’ll also prevent countless sleepless nights.

Bank Reconciliations – Keeping Your Cash Flowing

A stack of untouched bank statements on the corner of a desk buried in a “pending” file not only keeps one ill-informed of cash activity but also fails to keep financial statements current. If you run your business on a cash basis with minimal bookkeeping such as opting out of entering bills and processing customer invoices, the problem complicates issues further.

Relying on cash disbursements to allocate expenses and recording deposits directly to an income account rather than accounts receivable is all the more reason to promptly process bank reconciliations and its importance shouldn’t be underestimated. Human error, omitted transactions due to forgetfulness, unrecorded bank fees, and the rare bank error will throw off your check register and create future problems in your daily activities.

Data entry on a daily basis is recommended. However, if you save up your data entry tasks on a monthly basis relying on bank statements to record cash transactions, be diligent in this task. Keeping bank reconciliations up-to-date will provide an accurate analysis of your financial statements and knowing your current cash availability will empower you to make good business decisions. Lastly, you’ll protect your credit and possibly save a small fortune in bank fees to boot.

Off the Payroll – Quick Tip

Many sole proprietors and small business owners choose to pay themselves off the payroll. When making drawings from your company or receiving compensation in the form of a payment from a client, accounting for income tax deductions is often overlooked. Falling behind with bookkeeping or failing to file proper paperwork with federal and state tax agencies is easy to do when busy schedules don’t allow for processing of these tasks.

To avoid accruing penalties and interest on unpaid taxes, estimated state (if applicable) and federal income taxes need to be paid on a quarterly basis and filed with the appropriate form. By adhering to the designated due dates and staying up-to-date throughout the year, annual tax liabilities will be kept at a minimum.

The end result – no surprises and less stress in the following year.

https://www.irs.gov/pub/irs-pdf/f1040es.pdf

http://www.mass.gov/dor/docs/dor/forms/inctax15/addl/1-es-instructions.pdf

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.

Overspending

If you keep a household budget, the story of your life can be read in its line items. Mortgage, rent, utilities, insurance, groceries, savings, etc., are itemized to guide you through the year prudently. The problem arises when temptation creeps in. Suddenly your budget is buried in “miscellaneous” purchases. These are impulse purchases and the goal is to avoid these splurges and keep your money in your pocket.

There are telltale signs of overspending. Your credit cards are maxed out to compensate for the negative cash flow. You can only afford the minimum payment on credit card balances. Your spending habits leave little cash to pay your monthly expenses. And a big one, the stress of it all is damaging your health, mentally and physically. The financial and emotional damages are reversible. Here are a few simple steps to save your credit score and put you well on your way to financial freedom.

If you haven’t already, create a budget. If you have one, take some time to make improvements if it’s not working. Take one month to analyze where your money is going. In addition to your monthly expenses, track every purchase. Be sure to include take-out dinners, social events, and your daily coffee run.

Compare the actual costs to your budgeted line items and assess the variances. You may find you need to cut back on entertainment to make bigger payments on credit card balances. Knowledge is power; utilize your budget to improve your spending habits.

Use the cash-only method. Pay yourself a fixed amount in cash on a weekly basis. This is your spending money to be stretched as far is it could go over a seven-day period. Each payday, fund just enough to your checking account to cover your expenses, including necessities such as fuel and groceries. Use your debit card to pay for these items. You’ll know what you need from your budget. Every dollar should be allocated to an expense.

Your goal is to get your checking account down to zero (or as low as you can without accruing bank fees) until the next payday. At the end of the month, if a surplus is left after paying your bills, transfer it to your savings. The goal is to spend only what you need. If there’s no cash available, you won’t spend it.

Consider leaving credit cards at home. You’ll find once your credit card balances are paid off, you’ll have the freedom to make cash purchases. You’ll also see your savings grow at a faster pace.

Practice delayed gratification. Small rewards at scheduled intervals will help motivate you to keep your new spending habits going strong. If you have your eye on that new lawn mower, work it into your budget. Break down the cost into monthly installments over a short period of time. Saving this way will allow you to make the purchase in cash while paying down your debt. You can work any future purchases into a budget be it next year’s vacation, dining out once a month, or a day at the spa.

A little planning, self-discipline, and structured spending will go a long way. When you review your budget at the end of the year, you’ll notice a significant savings and a decrease in debt. Your actual totals, with a slight increase, will be your budget for the following year. The difference being, you’ll have already conquered your habit of overspending.