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!

One Entity – Multiple Bank Accounts

New small business owners who are gearing up to get organized and put their best foot forward in a new business venture encounter many daunting tasks in the first few months of business operations. Once settled in, most are ready to dive into an official method of accounting rather than a handwritten check register with an envelope full of receipts to serve as backup for future tax returns. However, some are unfamiliar with the basics of setting up their accounting system and common questions prior to taking on the task are, “What if I have two checking accounts? Do I need to split things up for my tax filings?”

Many business owners opt for two (or more) checking accounts and, perhaps, a savings or reserve account. Reasons for this vary and are the prerogative of the owner. But a common choice is utilizing a second checking account for payroll expenses only.

The business entity may have multiple bank accounts listed as assets on its balance sheet. And all cash transactions will run through one set of financial statements. These transactions will contribute to tax filings under one tax identification number. Therefore, there is no need to “split things up.” One entity is accruing all income and expenses regardless of the number of bank accounts holding funds.

Multiple bank accounts do not equate to a more complicated accounting process nor do they complicate your tax filings. What may seem superfluous for one, may simplify the process for another. The best choice is to fund your business in a way that works efficiently for you.

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.

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.

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.

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.