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Large and medium-size companies have internal accounting personnel and sophisticated records and systems to guide management. On the other hand, the owner of a small business usually relies primarily on a bookkeeper and an outside accounting firm to maintain the company's records and provide guidance. Therefore, the small business owner should be familiar with, and recognize the importance of, proper recordkeeping requirements and cash flow planning.
Many small business owners are very knowledgeable about their accounting procedures and quite adept in analyzing their financial records and statements. For less-sophisticated business people, this Financial Guide offers an introductory discussion of recordkeeping and cash flow planning to enhance their awareness and understanding.
Complete and accurate financial record keeping is crucial to your business success for a number of reasons:
The specific records a company needs depends on a number of factors, such as the type of business, the company's goals, management's needs and interests, and cost factors. Based on the relevant factors, your accountant can help you determine what records to keep and what information they should provide. In fact, you might want to update your record keeping procedures to reflect your current business needs. Here are just some of the questions that might be considered in assessing your record keeping needs:
It is essential that you try to determine the precise financial condition of your business. It is as critical as maintaining good customer relations.
Good recordkeeping is time-consuming and can take away from the time you need to run your business. However, as shown above, it is essential.
A basic record keeping system, whether on paper or an off-the-shelf computer software program, should be simple to use, easy to understand, reliable, accurate, consistent and designed to provide information on a timely basis. It generally needs:
Your accountant can develop the entire system most suitable for your business needs and train you in maintaining these records on a regular basis. These records will form the basis of your financial statements and tax returns.
To be competitive, small business owners must prepare for all future events and market changes. One of the most important aspects of such preparation is cash flow planning. Failure to properly plan cash flow is one of the leading causes for small business failures.
Experience has shown that many small business owners lack an understanding of basic accounting principles. Knowing the basics will help you better manage your cash flow. There are also self-instruction guides from which you can obtain a more thorough knowledge of accounting.
The operating cycle is the system through which cash flows, from the purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash. If your operating cycle from the purchase of supplies through the collection of receivables totals 180 days, this is the amount of time which you must finance.
Since capital providers, such as lenders, require a return on their investment, this financing will, of course, bear interest. The longer your operating cycle, the higher your financing cost will be. It is important to analyze your operating cycle and forecast your cash needs to minimize the amount which must be financed without running short of cash.
Cash flow analysis should show whether your daily operations generate enough cash to meet your obligations and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. Any significant changes over time will also appear. Understanding this will lead to better control of your cash flows and will allow adequate time to plan and prepare for the growth of your business.
It is best to have enough cash on hand each month to pay the cash obligations of the following month. A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months.
When cash-flow deficiencies are found, business financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.
To achieve a positive cash flow, you must have a sound plan. Your business can increase cash reserves in a number of ways:
You should always keep enough cash on hand to cover expenses and as an added cushion for security. However, it is unwise to keep more money on hand than is necessary. Excess cash should be invested in an accessible, interest-bearing, low-risk account, such as a savings account, short-term certificate of deposit or Treasury bill. Keeping excess cash on hand limits both your growth and the return on your investment.
Projections, as well as good accounting records, are important tools for a small business. They will help answer important questions about the company's financial future and provide direction. The failure to make proper projections, even if only informally, reduces the potential for long-term success.
The computer makes it easy to develop cash-flow projections and many other useful financial-planning tools. A good financial-management package will enable you to review projected inflows and outflows of cash from month to month or year to year. By analyzing these projections, you can see the fluctuations in cash flow and create management policies to avoid potential shortfalls.
There are numerous computer programs for making projections and keeping records. Programs range from basic bookkeeping and "what if" analysis to inventory control or market-demand projections.
Books And Other Publications
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