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.

Audit – Quick Tip

A small business may, on occasion, receive an official request from a state or federal agency to review the company’s books. But one agency that is often overlooked when it comes to audits is the insurance agency.

Your workers’ compensation provider will likely request a payroll audit upon each annual renewal or new premium application. In addition to the basics, such as the total gross payroll and number of employees, copies of quarterly payroll reports will need to be provided. The missing documents that often send the preparer of an audit scrambling are certificates of insurance from subcontractors.

To stay ahead of the game, request and receive certificates from subs prior to the start of a job. Track policy expiration dates of all subcontractors if their services are used repeatedly. Including certificates of insurance from outside service providers in your audit will save your company a considerable amount of money.

Preparing for a payroll audit doesn’t need to be a source of stress. Keeping a filing system throughout the year to document all labor disbursements, employee and non-employee alike, will help you sail through a smooth audit. And before you know it, you’ll complete the next one without a hitch!

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

The Condominium Association and Self-Management

Many condominium associations choose to self-manage. Instead of hiring an outside party to maintain the property and its funds, the board of managers assume the entire responsibility of the operations for the association. In theory, this type of management style comes with its benefits.

First, the board is in complete control of all matters concerning the association. These include fiscal activity, insurance requirements, repairs and improvements, and ownership issues. Second, self-management saves money. All tasks are completed by the board on a volunteer basis. Board members are paid a minimal amount, if any. Duties may include anything from balancing the books to sweeping the halls.

Many condominium associations prefer self-management under the assumption that it provides for the perfect community. They’re relying on fellow owners to care for a mutual investment. However, self-management is often a recipe for disaster and even the smallest of communities may suffer its consequences.

Typically, specific tasks will be delegated to various members of the board. One will manage the bookkeeping, another may oversee exterior maintenance and employ various contractors such as landscapers and cleaners, and another may be in charge of capital improvements. The board will initiate legal action in order to collect delinquent condominium fees. They will address questions from the association, banks, and realtors among others using condominium documents to guide them. The board, essentially, rule the kingdom.

However, positive perceptions of self-management often change while one is serving his/her term. A conflict of interest invariably arises with a disgruntled owner or two. Whether it be a challenge to the cost of a weekly cleaner or inadequate insurance coverage due to poor judgement, there’s always room for debate. Board members who live on the property rarely look forward to that awkward encounter with a neighbor for whom the foreclosure on their home has been initiated. Whereas self-management seemed like a good idea at inception, it soon brews into resentment.

A management company or financial manager will take charge of all of the aforementioned tasks and more and procure qualified outside services to complete projects when necessary. While utilizing their expertise, personal involvement will not impede progress. Confrontation with an argumentative homeowner will not dissuade them from doing their job. And while they understand they can’t please everybody, elected members of the board begin to familiarize themselves with the notion, self-managing is a “thankless job” and hostility presents itself at monthly meetings.

Whatever type of management the condominium association chooses, a utopian community is just a fairytale. No management style is without its flaws but each has its unique benefits. The objective is to maintain the property and its funds while providing peace of mind for the Board and the majority of the community; a community in which one will enjoy calling home.

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.