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!

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.

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.