The first step in the process of determining your bad debt write-offs for the year is to print an accounts receivable aging report. You will want to determine which of the invoices that you have listed as past due have little or no chance of ever being collected. These will generally be invoices with clients that are a year old or more, that have failed to respond to all your attempts at collection.

The invoices that you are going to write-off as uncollectible should be clearly detailed in the supporting documentation for the adjusting entry that you will make to the Bad Debt Write-off expense account on the income statement. You will want to maintain your complete files on these bad debts showing all your billing and attempts at collection, should they ever be required by the IRS.

For most small companies, the adjusting entry that is made should credit your accounts receivable account on your balance sheet and debit your bad debts expense account on your income statement, decreasing your net income for the year.

Companies with larger receivables may follow a different procedure. Some of these companies will often create a ‘Bad Debt Allowance’ account on their balance sheet. This account is used to record the ‘estimated’ amount of bad debts expected rather than the specific individual bad debt write-offs. These estimated amounts should then be reviewed, at least quarterly, to adjust them to true expectations, which may move up or down. Actually write-offs of specific invoices will still occur, the accounting steps related to this type of accounting are just a little more complicated than the direct write-off method.

Those who handle finances on a daily basis, like accountants, bankers, investors, will generally advise you that you’ll need a minimum of 90 days of operating capital in order to legitimately start your business. Keep in mind that the 90-day figure is quite skeletal and that these same folks would prefer to see enough in your starting coffers to last six months–to a year’s worth of personal capital. Included in this capital reserve would be: rent (if any), salaries (including you), office supplies, utilities, vehicle costs, legal and accounting fees, to name a few. You need to approach this budget as if you will not see one, solitary dollar for 90 days and the reserve will be there to comfortably attend to your obligations while you focus on growing your business. These funds are never to be used for anything other than those obligations which you have defined in your business plan for your first years’ operation; and it is unwise to leverage these funds against potential income, via receivables, as income is not real unless it is in your bank account.

When developing your start-up budget, be generous and cautious when assigning a figure to each obligation; and don’t factor-in any discounts or ‘deals’ into your expense plan. Once you get started, it’s important to be fastidious and frugal with your capital. Challenge yourself to beat your own budget and keep all ‘saved’ monies in the business and working for you. Any astute business person will tell you the importance of having the planned capital for something that you never planned for.  Once self-sustaining revenues begin, then it’s time to treat yourself to a good cup of coffee, but not before!

It’s important to do a bit of research on local banks prior to turning on the ‘OPEN’ sign of your new business. Find out which local, community bank has a solid commercial presence and establish your new business accounts there. A banker, who’s going to be asked to invest in your business, will want and need you to invest in his, or her, business as well; and as a potential commercial depositor, you are showing good faith that this is your intention.

Bear in mind that a banker is not a single investor who is looking for a return on an investment. A banker represents thousands of investors (depositors); and he, or she, is committed to creating a return for this ‘group’ with a minimal risk potential of loss. Given this fact, a banker, by nature and title, is hesitant and ultra-conservative with dispensing other peoples’ money. It is imperative that you have, and adeptly communicate, a comprehensive business plan. A banker enters the discussion with distrust and doesn’t necessarily share your vision. It is vital that you are able to communicate and illustrate your expertise in handling the responsibility of the business as well as understanding the trust rendered to you, by the banker, in lieu of the bank’s investment in your business. This is especially critical when seeking supplemental start-up capital.

It may seem contradictory, but the best time to begin discussions with a banker is when you are not in need or, at least, not in a desperate state of affairs. The banker perceives this gesture as a very positive, secure interaction as the risk seems minimal. It indicates, once again, that you have a sound forward vision as well as having control of the occupation and are proactive in your financial management. The banker may never completely share your enthusiasm but if you are able to allay the fears associated with venture investments, you will have sold the bank.

As the name implies, this is simply a report that projects the cash you are anticipating to come into, and flow out of, your company in the future months. It won’t predict the future for you, but it will help you to plan and develop the strategies necessary to keep your business running smoothly

A cash flow projection begins with looking at your current cash position: cash on hand, accounts receivable and accounts payable. The next step is to develop a projected timeline for the collection of those receivables and payment of the payables. This is the most basic form of a cash flow projection. However, it doesn’t let you look very far into the future. To do that, you need to go on to the next step.

The next step is to add ‘anticipated’ cash flow projections into your timeline. Based off of your current sales and anticipated future sales, add in amounts that you expect to be depositing in the future and correlating expenses. These projections should be on the conservative side, not from the ‘best-case scenario’ view. You don’t want to fool yourself by being overly optimistic. Make sure you don’t overlook things like your annual insurance audit, employee pay increases or bonuses and other expenses that aren’t a part of your regular monthly routine.

Mapping these numbers out on a timeline that shows the expected hills and valleys of your cash flow for the next 6 months can help you develop advertising and promotional strategies. It can also prevent you from spending too much during a peak in cash flow since you will have the anticipated valleys clearly mapped out before you.

Don’t let the highs and lows of your cash flow take you by surprise. Take the time to develop a cash flow report to help you peer into the future. We’d be happy to help you lay out the numbers and learn how to read the map.

In cash basis accounting, deposits from sales or services are recorded as revenue. Checks and other forms of outgoing cash are recorded either as cost of goods sold or operating overhead expense. The net results determines the company’s profit or loss. A very simple system, as stated above.

However, the profit and loss statement provided by cash basis accounting does not necessarily show you the full picture of a company’s financial position. There are some missing numbers from the picture presented to you by these financial statements. These ‘missing numbers’ remain vital to understanding the true profitability of a company.

1. Uncollected receivables. If a company has a significant amount of current and collectable receivables, these receivables are potential revenue that simply haven’t been realized at the point in time the financial statements are closed.
2. Unpaid payables. This is a very critical number to be aware of. These are vendor invoices that are still outstanding and needing to be paid. They relate to expenses that have not yet been recorded since they haven’t been paid.

The preferred relationship of these two items would be that your uncollected receivables would be greater than your unpaid payables. Receivable items are considered current assets, just as your bank accounts are. At the very least, your current cash balance added to your current receivables should be greater than the total unpaid vendor bills. If they do not, you are operating in a negative cash position which means you are in desperate need of increased revenue to keep the cash flow positive.

There are a few other items that are not ‘missing numbers’ but are simply listed on your balance sheet rather than on your profit and loss statement. Those items are your cash balances, the value of your fixed assets (equipment, property, vehicles etc.), loan balances and owner contributions. These numbers also make a contribution to the financial picture of a company.

If the owners of the company have had to contribute additional cash throughout the year to maintain cash flow or have had to borrow funds in order to do so, this is important to note. It could indicate that the company’s revenue is not keeping pace with expenses.

Just because the above figures are not on your profit and loss statements does not mean they are not an important part of the financial picture of a company. When dealing with cash basis financial statements, always take the ‘missing numbers’ into consideration as well.

This is a true account and not a hypothetical situation of what can happen when your day to day transactions are not recorded correctly.

Businessman A decides to purchase Business B. Businessman A looks carefully at the previous year’s financial statements and tax returns. He sees a very profitable business. Businessman A has been maintaining his own books (which are minimal) in Quickbooks.  So has Business B. The two owners come to an agreement in May for the merger of the two companies. In November, Businessman A hires a bookkeeper to handle the increased accounting functions required by the merger. The books from Business B have continued to be kept in their separate Quickbooks file from Business A since the merger. Businessman A has not looked at the books of Business B since the merger. This is what the bookkeeper finds:

The cash account of Business B listed a NEGATIVE $200,000, even though there was plenty of cash in the bank. The receivables account was also sitting at a negative of over $60,000. There was a long list of items sitting in an expense account with the title “Don’t Know”. In spite of all this, the former owner of the company was sure that he knew exactly where his business stood without the numbers to back it up. After several weeks of going back through every single transaction in the prior ten months of the year and attempting to record them correctly (dependent on the owner’s recollection at times), the bookkeeper determined that Business B had lost money that year rather than making the large profit expected by Businessman A.

What could have Businessman A done differently to avoid this costly mistake?

1. Have his accountant review the Quickbooks files of Business B before purchase rather than just the financial statements.
2. Assuming that the purchase went through anyways, the accountant should have been enlisted to  combine the two Quickbooks files at the time of the merger.
3. The bookkeeper should have also been hired at the time of the merger rather than six months later.

Your accountant is the one you should turn to for interpretation of your accounting data. However, as seen in this example, the interpretation of that data is only as good the input of that data. If you truly don’t feel a bookkeeper is needed or fits into your budget at this time, you should be (at the very least) sending your Quickbooks file to your accountant for review on a monthly basis.

Okay, I might be incurring the wrath of bookkeepers everywhere, so let me explain myself before an angry mob of them come knocking on my door with torches, pitchforks, pencils, and calculators.

Bookkeepers ARE valuable to have a in a business. But the function of bookkeepers is largely administrative. They may manage your receivables and payables; they may manage your income statement and balance sheet; they may manage your payroll… and without those functions, your business would not run.

But here’s why I suggest that you fire them:  Smooth-running administration is important but if you want your business to grow, you need to understand how to leverage your strengths and assets while minimizing your weaknesses. In other words, you don’t just want a number-cruncher to do the administrative financial work; rather, you want someone who can help you take your numbers and interpret them for you. You want someone who can provide you with insight based on your numbers. That’s the function of an accountant!

Your accountant will take your numbers and turn them into measurement devices, benchmarks, and goals. Your accountant can make sure that your business is fine-tuned from a financial perspective to remain healthy for the long haul. Your accountant can transform simple digits into meaningful ideas.

A bookkeeper is like a good map. An accountant is like having someone in the car who knows exactly where you need to go. A bookkeeper is like a weigh scale. An accountant is like a fitness trainer.

Don’t get me wrong: Bookkeepers really are a valuable resource to have in your business. (I may have been exaggerating a bit with the title of this blog)! Many businesses have them, and if your business is just starting out and you need someone to help you with keeping your books in order and your employees paid on time, a bookkeeper is perfect to have. And, you’ll find that a bookkeeper and an accountant can work hand-in-hand.

But if you’re ready to grow, one of the first things you’ll need to do is hire an accountant – someone who can help you interpret your numbers to give you a financial edge and to help you achieve a healthy business that can really grow effectively.

Businesses that face financial problems typically face them from 3 specific areas. In this blog post we’ll outline what they are and in the next blog post we’ll give you some ideas to manage them.

Financial challenge #1:  Not enough cash
The saying is true: “It takes money to make money”. You need money to pay for inventory and pay-roll and marketing… and you often need to spend all of that long before you can even hang out your “open for business” sign. Funding is a perennially challenging issue for many businesses, not only because start-up is so expensive but because you often need money on an ongoing basis to operate even though customers may not pay until a week or two after they get their invoice! If you are struggling to pay your vendors and employees week after week, this could be an issue for you.

Financial challenge #2:  Excessive credit
If your customers paid in cash, up-front for every purchase, that might be okay. But it rarely works that way anymore. Businesses have been forced to extend credit in various ways to customers and sometimes it can come back to haunt those businesses. Not all customers feel the same urge to pay you even though they have long since used the product or service you offered. By granting long repayment terms with little or no interest can mean more people buy… but it can also mean more people buy but don’t pay. If sales are good but your cash flow is weak, or if you have a lot of receivables, this is probably an issue you face.

Financial challenge # 3:  Out-of-control expenses
We mentioned earlier that it takes money to make money. While this is true, it also opens you up to the third challenge: Over-spending. Running a business means taking on some expenses but there comes a point when those expenses get out of control and the value you receive from the investment is no longer equivalent to the costs of principal plus interest you owe as a result. The problem is, how do you know what you should be paying for and what you don’t need? If income is good but profit is low, this is likely the challenge you face.

Many businesses have struggled – and even failed – because of these three challenges. Does your business face one or more of these challenges? Check back next week to see some of our solutions.

In spite of your best efforts, these receivables end up getting older and older and you realize that you will never collect from them. Everyday people might call this “hopeless” but in accounting lingo, it’s called “bad debt“.

It’s tempting to just ignore your bad debt. (Hey, no business owner wants to be reminded of a customer who pulled a fast one on them). Unfortunately, doing that will artificially inflate the assets on your balance sheet while also misstating your profit.

But you do need to do something with these numbers! Here’s what to do:

1.   On the asset side of your balance sheet, reduce your accounts receivable by the amount of the bad debt.

“But something’s not right!” you say. “The two sides of the balance sheet are supposed to be equal! If I reduce my assets by the amount of the bad debt, they won’t be equal anymore!”

Good point! So here’s the other thing you need to do:

2.   In your income statement, add a bad debt expense (just make sure that you add it into the same time period that the sale was made).

Here’s what happens as a result: The profit in your income statement will be reduced by the amount of the bad debt and it will be reflected back into your balance sheet.

Here’s a simple example to illustrate:

Mary’s company has a balance sheet that looks like this:

Assets
Stock: $50
Receivables: $20
Cash: $10
TOTAL: $80

Liabilities
Loan: $20
Payables: $40
Capital: $20
TOTAL: $80

If Mary has a $5 bad debt, here’s what she will do:

• First, she will reduce the receivables in the assets column of her balance sheet by $5.

• Second, she will add an expense of $5 in her income statement, which will reduce her profit by $5.

• Third, she will go back to her balance sheet, this time to the liabilities column of her balance sheet (where profit is part of capital), and she will reduce that by $5.

Bad debt is no fun and there are many things you can do to avoid it. However, if you do get it (and you probably will at some point), this is how you make the adjustment in your financial statements.

QuickBooks is an accounting application and FreshBooks is an invoicing application. They are two different things, but in the end to have your data matching in both, there could be a ton of double entry resulting in valuable time consumed and strenuous effort.

You can have your data accurate in both, while not matching in both. Matching and accuracy are two different things. For all of the numbers to match up, it is a matter of accuracy. To have all of the details such as sales items etc. it would be a matter of matching.

In this blog post, I will begin to show you ways to get accurate data from FreshBooks into QuickBooks.

This blog post is Part 3, if you have not read the previous posts, I suggest that you do:

Part 1: Methods 1 & 2 to getting FreshBooks Income into QuickBooks

Part 2: Method 3 to getting FreshBooks Income into QuickBooks

Also useful, is my post: Handling Credit Card and PayPal Processing Fees in QuickBooks, which has a short segment relating to FreshBooks as well.

On to the good stuff!

So, you have your income or receivables in QuickBooks, you may have even taken out your PayPal or Merchant Processing Fees. However, you don’t have your sales tax anywhere, as a matter of fact, it is showing as an Income and we all know your Sales Tax is NOT an income.

Well let’s correct that, shall we?

Just to recap… if you charge sales tax, your sales tax is included in the numbers that you entered from FreshBooks, so it is very important that you remove your sales tax from your revenue/income accounts and allocate it to your sales tax payable account.

1. Go into your FreshBooks Account

2. Click on the Reports Tab

3. Click on the Tax Summary Report in the first column

4. Select the month in Question that you want to enter.

5. In the Revenue section, you have to pick either Billed (Accrual) or Collected (Cash Based) – the choice you pick will be determined by the income entering method you have elected to use (based on previous posts). If you selected Methods 1 or 2 where you are accounting for your receivables you will select the Billed (Accrual) method. If you selected Method 3 where you are only accounting for your payments received you will select the Collected (Cash Based) method.

6. Once you have the amount/totals from your report (sorry I can’t give you a screen shot, I don’t have sales tax inside of my company) go into QuickBooks, select Company from the file menu and Make Journal Entries.

7. Enter the end date of the month you have pulled your sales tax details for.

8. In the first row from the account drop down box, pick your Income Account (mine is IAC Professionals Service Revenue), tab over to the debit column and enter the total of your sales tax from your sales tax report.

9. In the second row from the account drop down box, pick your Sales Tax Payable account (this should always be Sales Tax Payable) and in the credit column enter the total of your sales tax from your sales tax report. In this row you will also need to enter the name of your Taxing Agency in the Name Column. If it is not yet in your Vendor List, click Add New and create it. For example, mine would be State of Florida Sales Tax Department.

10. Press Save and Close

This has removed the actual sales tax portion of your revenue, out of your revenue and into your sales tax liability account, enabling you to use the ‘Pay Sales Tax’ feature inside of QuickBooks.

Do you have any questions or specific circumstances that I did not help you with? Feel free to comment on the post with your question(s) and I will respond personally!