Articles Archive

Articles by Frances Schagen

1) How can I do my bookkeeping when I spend all my time doing my business?

2) Why I should do my bookkeeping more than once a year?

3) Should I register for HST and how do I keep track of it?

4) Hidden Treasures

5) How Do I Use my Financial Statements to Improve my Business?

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Running your business is why you are in business, but if you don't take care of your business you may not have it for long or worse, you could end up working hard and not getting all you deserve for it. "It’s hard to make it a priority."  You should realize how important the information you get is.  Good bookkeeping will not only tell you how you have done, but it will show you areas where you can save money and areas you can improve.

"How do I get motivated?"  Believe me when I tell you I know how tedious bookkeeping can be, boy do I know!  What helps me is to think of it in terms of the information I am handling.  I think about systems of gathering and storing the receipts; I think about how the information is gathered and how it can be improved; I think about what the information is telling me.  I frame the work as information management rather than mindless entering of many numbers.  Failing that, I put on CBC radio (when there isn’t a work stoppage).  I find it just engaging enough that I can work on the basic tasks and I am able to tune it out when I need to concentrate on the task at hand.

"It’s so hard to get started."  Make a ritual for your bookkeeping start.  Brew up a cup of tea or coffee, put on some nice music, get your comfy duds on and think of it as relaxing time.  Most of the work is pretty straight forward and allows you to get into a groove.  Maybe it’s just me, but I find time disappears while I’m bookkeeping.

"Once I’m ready, I’m not sure where to begin."  I always start with the bank account.  Bank statements are usually correct so I use it as a jumping off place to enter cheque stubs, deposits, debit purchases and automatic payments (you can set up a memorized cheque in Quick Books to automatically enter recurring payments).  Just remember to enter the actual amount going into or out of the bank.  For instance, if you bought office supplies and kid’s school supplies at Chisholm’s enter the actual amount of the purchase on your cheque and allocate the appropriate amounts to office supplies, HST and owner equity or withdrawal.  Once that work is done, your pile is pretty much gone.

"Sometimes I get hung up on questions and I don’t know who to ask."  When I get stuck, I make a note of it, then move on and sometimes the answer presents itself as I work through the information.  Revenue Canada can be helpful.  Their business line number is 1-800-959-5525.  I invite you to email me with your questions.  I’m happy to answer.  If it is something that will take some time to work through I offer 1:1 training.

I would be remiss if I didn’t encourage you to delegate this task.  It makes much more sense for you to spend your time on high value work.  I don’t want to blow my own horn, but it's my party, so I will.  We can often take care of this chore for you faster than you can worry about it. 

As I told one business owner (who was visibly relieved to hear this), "You don’t have to know how to do bookkeeping you only have to know how to get and use the information."

While bookkeeping isn’t rocket science and anyone can do it, it's another one of those tasks best left to the people who do it.  Things like oil changes, hair cuts and bread making.  We can do them, but why would we?

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You are required to do your books in order to report your taxes: once a year for income tax and usually more often for HST (It can be annually, quarterly or monthly).  But the most important reasons for doing your books are to find out how you are doing and to continually improve your business.

The most successful business owners I deal with check their numbers at least once a month.  They look for specific numbers based on the specific aspects of their business they are trying to improve.  Let me give you a few examples:

Let's suppose you want to take a trip in a few months.  You need to get a few dollars ahead to pay for the trip and to cover your ongoing costs while you are away.  There are several strategies you can use.

1. You can decrease your spending and save up the difference.  You would watch your bank account to see that it is increasing to match your plan.  This is a question of cash flow, so there would be a mix of decreased spending, deferral of spending (watch out that you can pay as the bills come due) and keeping your cash in the bank.
2. You can increase revenues by working extra hard for the months leading up to the trip.  You would watch for overall sales, sales per customer and accounts receivable to see that your invoices are being paid in a timely matter (again, this is alot about cash flow).
3. You can set up a few subcontractors to carry on for you while you are away.  You'd watch profit per project, interim billings and their payments.  This is a strategy that you would have to have used in the past because it is not something to start just before leaving town.  Possibly a good long-term move.

Let's suppose you want to figure out whether or not to buy some new equipment.  Here are some considerations and how you would answer them:

1. Will it pay for itself?  Watch for what it costs you to do the work the equipment will do when you get it.  Will the cost of the equipment be less than that?
2. Does it make sense?  Looking at that aspect of your business, is it profitable on its own, is it growing, is it aligned with your core business?  You can find the answers to the first 2 questions if your bookkeeping supports that information separate from your total business.  You can track that information for a few months by analyzing your income sources and your production costs.
3. Can I afford it?  Will your current profit cover the increased operating costs and the monthly payments or the outright purchase. Or will the increased revenue and/or decreased expenses cover the new costs.  Again, history will help you make that decision.
4. Is it a good move?  Using a combination of past information and educated forward thinking, you will know when the time is right.

Business owners who know what to track, watch these things and they know not only whether to do it or not, but when.  And they align their business (and cash or credit) to be ready.

I would be remiss if I didn’t encourage you to delegate this task, too.  It helps to have a fresh outside eye looking at your possibilities. A good advisor has information about your industry and how you are doing relative to others, which will show you areas for improvement.  And they will have a broader perspective of other industries to share a wider variety of best practices.

I have worked in many industries (including food service, agriculture, construction and business services) and with many business owners over the past 25 years helping them grow their businesses.  I am often asked to work on a project basis; taking on a CFO type of role.  Whether it is expanding into a new location or exploring new alliance opportunities, it helps to have someone else on your side. 

What are you working on and how can I, and everyone I work with, help you?  Call today for a free, no obligation chat.  I love to hear what's going on.

I'm not going to make $30,000 this year.

You have to register once you have sales of $30,000 over any four consecutive quarters or $30,000 in any one quarter.  But you can register at any time even if your sales are under these thresholds. The advantage is that once you are registered, you get back all the HST you pay on business expenses.  Remember though, once you are registered you have to collect HST on all sales,and file regular HST returns to the government.

But won't I have to send in a cheque? That just means I'm sending more money to the government.
Any money you send to the government is money you have collected from your customers, less the money you spent on HST for business expenses.  Now you can get the HST you paid out back.  It is important to make sure you can pay the money you collected when it comes due.  Some people set up a separate bank account and move the collected HST into it.  Or maintain a current cash flow so they can plan to have the money when it is due.  You do have a current cash flow don't you?

What if I spend more than I collect?
When you file your HST return, you enter the amount of HST you collected on line 101 and the HST you paid out on line 105.   Sometimes when you subtract line 105 from line 101, you get a negative number ( you paid more in HST than you collected), in which case the government will send you a cheque for the difference.

How often do I have to file?
When you register you are assigned a reporting period of yearly, quarterly or monthly.  You have some leeway if you want a specific period.  For instance, if you sell a zero rated product like food or you sell alot out of country, you are likely to get a refund every time and you may want to file more often.  It does mean you have to maintain your books more often, too.  Monthly returns are due by the 15th of the following month; Quarterly returns are due the end of the following month and Annual returns are due June 15th - although any money owing is due by May 1.

Is it hard to keep track of it?
If you are doing your own books, you can set up your accounting program to track your HST as you do your books.  Look under preferences to answer yes to HST.  You report the HST paid on all business expenses.  Commonly overlooked expenses include the business use of home portion of heat, power, phone, maintenance and the business use of automobile expenses such as gas and repairs.  As you enter your sales, the pre tax amount is allocated to the correct income account and the HST amount is allocated to an HST liability account (because you owe that money to the government).  The same for your purchases: the actual purchase amount is allocated to the appropriate expense account and the HST amount is allocated to the same HST liability account.  HST on sales increases your liability and HST on purchases decreases your liability.  If you are using any sort of double entry bookkeeping system, and they are all designed that way these days, the HST should be properly handled.

Notes: I would be remiss if I didn’t encourage you to delegate this task, too.  I have never had a business owner, yet, who could create an accurate HST report on their own.  They always miss things such as the GST or HST paid on printed cheques bought through your bank.  While doing sales tax returns isn’t rocket science, it’s another one of those tasks best left to the people who do it.   Things like oil changes and hair cuts.  We can do them, but why would we?

Revenue
Understand which aspects of your business make the most money and concentrate on them.  Remember the 20/80 rule.  Eighty percent of your effort is expended to create twenty percent of your revenue.  Conversely, 20% of your energy is used to make 80% of your revenue.  It makes sense to concentrate on the upper 20% of your customers.  Figure out who they are and what they want and go after more like them.  I know it seems counterintuitive to lose customers, but if they are the ones at the bottom- it may make sense to not waste time with them.  Some customers just cost you money.

Increases of small increments can result in big outcomes.  Make contact with more people in a week.  Work hard to increase revenue from each customer. 

Decrease Bad Debt
Have a credit policy and state your expectations on your invoices.  Make sure you charge interest.  Send statements to keep your bill fresh.  Try e-mailing your invoices to save money.

At some point your bad debts are lost money, so pass them to a collection agency that pays on a success-fee basis.  You may be able to realize a windfall.

Expenses
Think of expenses as investments and spend your money where it makes the most sense.

You should audit your major expense categories on a regular basis.  Phone service products change almost daily.  Delivery methods should be checked periodically and any other large expense you have should be checked to see if there is a less expensive way to do it.  Be careful, you don’t want to chip away at your business.  "You can't shrink your way to greatness."

Sometimes memberships such as a golf club membership can be sold.  You must examine if the money now is worth more than the possible money to be made at
some future time.  Perhaps you can entertain your clients some other way.

Examine your lease.  If lease rates have gone up and you have time left on your lease, you may be able to have the landlord buy you out.  She'll get the opportunity to lease out at a higher rate and you get some cash in your pocket.

What to Pay
Pay when it is due. 
Renegotiate terms based on past volume.
If you are having problems, talk to your suppliers.  They have an interest in keeping you in business.

Cash Flow
Cash flow is important to manage growth and plan for lean times.  Arrange financing before you need it.  Properly managed you can reduce your borrowing costs.  Use your money when you have it.

Assets
Do you have assets on your books that  you are sure  won’t be used in the future? Perhaps you can sell them.  This applies to trademarks and patents as well.

Obsolete inventory and old equipment can be sold at a flea market or to a jobber or liquidator for at least a portion of its original value ( 5-50%).  Don't pay to store things you won’t use again.

Liabilities
Are there any assets on the books that are undervalued?
If so you can get them reappraised to be used as security on a lower cost loan.

Make sure any borrowing you do is at the best possible rate for you.  Move money to the loans with the lowest interest.  Look for unusual sources of money such as family, suppliers and customers.  Use equity to inject money.

Taxes

• If you are not registered for GST you are losing all the money you pay out.
• Keep and itemize all receipts.
• Pay your family a wage to spread out the tax bill.
• Business loans are tax deductible.
• Write off bad debt expense.  Include it if they pay later.
• Get all your office deductions- see Business and Professional Income book from CCRA.

Financial Statements

I divide financial statements into 3 categories:

1) Historical documents like Income and Expense Statement and Balance Sheet.  These both tell you how you did.

2) Future documents like an Income and Expense Projection tell you how you think you will do.

3) Working documents like a Cash Flow help you manage your cash in the present and near future.

A Budget uses historical data to project into the future how much you think you will spend and should be used regularly to help you manage your expenses in the present.

When reading your financial statements, pick out the information you want to follow relating to the parts of your business you want to manage now.  I know some people read the newspaper cover to cover, but most turn to specific sections depending on their current interests.  You may read a different section now and then if it contains something important you want to follow.

Compare
The value in your numbers comes from comparing them to last time, or to how you thought they would turn out or to how they change as compared to other numbers.

For instance, if you want to lower your telephone costs, you would look at that line on the Income and Expense statement to see if it has gone down this month compared to last month. 

If you budgeted $X for phone, you will read your statements to see if you are higher or lower than that.

If you know that the more long distance calls you make, the higher your sales you might want to work on lowering your phone cost per sale.

The reason you should use your financial statements to follow this information and not your bills is that your financial statements will contain all your costs.  For instance, you may have bills from your basic phone service, long distance carrier, internet, cell phones, phone cards, or make calls from hotel rooms or other places.

Use the Information
Once you have seen how you are doing, use the information to adjust what you are doing.  Work to continually improve your business

This is the essence of my Financial SMARTS program. Read your..

Statements for specific...
Measurements so you can...
Assess how you are doing.  Use the information to...
Re-examine your business practices and come up with new ideas to...
Tackle and this will lead you to...
Success.

If you want more information about how you can use this program to improve your business performance, contact me.