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Time tracking is an area that most creatives vehemently oppose.  “It’s a creative process, we don’t know how much time it will take.”  or “It depends on the person and the project.  Sometimes it’s quick and sometimes it’s not.”  These are valid arguments.  These arguments can be applied to other service based businesses as well.  I can assure you, I don’t like time tracking either and when I hire bookkeepers, some are faster than others.

Even though the argument is valid, you still have to find a way to price projects appropriately, track work in process, and measure profitability.  Like it or not, time is the best measure.  That’s not to say there aren’t other ways of estimating.  You have to figure out the easiest, best way to reasonably approximate how much effort each project takes.

In my own business, I quote similar projects a lot.  No two projects are exactly the same, so I never know exactly how long things will take or, when I use a contractor, how quick they will be.  The other big variable is the nature of my clients.  I work with creatives… I never know how much crazy is coming down the tracks.

There are many different variations in how creative firms are managed.  Some owners are pretty organized and/or have systems in place, some want to track down to the littlest detail (often out of fear of not seeing something…that’s a different article), and some have absolutely no processes or systems and are resistant to putting them in place.  So even if the project looks exactly the same, there could be an entirely different amount of cargo on that Crazy Train.

By tracking time and costs to each project and using my experience to scope out projects and understand the business in question, I can get a better handle on pricing the next similar project.  If you don’t collect information on each project, you’ll never be as good at pricing and understanding what’s coming down the tracks as you could be.  Of course, that can lead to lost profits.  How do you estimate how much cargo is on the next Crazy Train?

At this time of year, a lot of my conversations revolve around tax saving strategies. I’ve spoken with several CPAs recently and the advice for cash basis tax payers is consistent. If you are showing a net profit for the year, here are the top 3 strategies for reducing your 2010 tax bill:

1. Defer income – If you can, push income into 2011. Delay the invoicing, ask your clients to hold payment until January, and/or be less aggressive with your collection efforts.
2. Accelerate Expenses - Buy needed items before the end of the year and pay down your accounts payable. Cash basis tax payers don’t get deductions until the money is spent, so pay as many of your outstanding bills as possible. Some accountants caution that prepaid expenses (like rent) are not deductible until the period they are used. Check with your tax accountant before pre-paying regular bills.
3. Buy Needed Equipment – If you are going to need equipment next year, buy it before year end to take advantage of the Section 179 deduction.

Of course, talking with your tax accountant and reviewing your specific tax situation is advised.

Want more tips? Check out these articles:

http://kiplingercpas.wordpress.com/2010/11/26/2010-year-end-tax-planning-opportunities-for-businesses/

http://sbinformation.about.com/b/2010/12/15/year-end-tax-tips-small-business.htm

http://www.i-padgett.com/year-end-tax-planning-for-2010

http://www.kiplinger.com/businessresource/forecast/archive/end-of-year-business-tax-planning-tips-for-2010.html

http://biztaxlaw.about.com/od/businesstaxdeduction1/tp/10-For-10-Save-On-Business-Taxes-In-2010.htm

A relatively simple Microsoft Excel spreadsheet is usually the best tool for predicting cash flow.  This spreadsheet will track when you expect your revenue to hit the bank account and when your bills and payroll will leave the bank account.  The first column (each column represents a time period, usually a week) in your spreadsheet will begin with your bank account balance, then add incoming cash, subtract outgoing cash, and finally total to what you expect to have left in the bank.  That ending bank balance will be the beginning bank balance in the next column (time period)…wash, rinse, repeat.

Recently, I received this question:

The situation:

I bought inventory and pre-paid the invoice with a credit card. When I received the inventory, they said they had misquoted me and refunded me $50.00 on the order. The refund was made back to the credit card that was used to pay for the order.

The question (in two parts):

1. This is a refund on the the whole order, not just a handful of the inventory items  (i.e. I am not returning anything, I’m just getting some money back on the job overall). Do I handle that by using Bill–>Misc and entering negative $50  as the bill, which generates a return credit to me? AND
2. If I do that, I am then being asked to to apply that $50 to one of my accounts, but which one?

The answer:

Because you need to change the cost of your merchandise inventory, the best approach is to go to the original bill for the items and adjust the purchase amount to what you’re actually paying for each item.  Since this has already been paid, it will show a negative amount owing.  Then go to Purchases -> Settle Returns and Debits, select that debit and “deposit” it to your credit card.

I recently read an article in our local paper that details a pretty standard embezzlement case. In this case (Wilsonville bookkeeper gets theft conviction), the bookkeeper charged at least $17,000 of personal charges to a company credit card.  She also wrote convenience checks off the credit card to pay personal bills.  She is believed to have stolen at least $30,000.

When you don’t have any internal controls in place and you give one person access to everything, it’s easy for this to happen.  What are you doing to ensure your cash and credit is secure?  At a minimum, you should ensure bank and credit card accounts are reconciled monthly, preferably not by the person paying the bills.  The owner should also regularly review bank and credit card statements.

Read more internal controls tips on this post: Internal Controls, Protect Your Business From Embezzlement

It’s common for small business owners to measure their financial health based on their income statement or bank account balance and deem their business “fit” if the bottom line looks good.  To reveal why this approach can be deceptive, let’s apply a dieting metaphor.

Only looking at the bottom line is the equivalent of “sucking it in” when you look in the mirror.  Sure, it looks like you’ve lost some weight, but what happens when you exhale? You might appear skinny for a moment, but that version of the situation isn’t accurate.

In terms of your business’ health, the balance sheet is the “real” you.  Think of the income statement (also called the profit and loss statement) as your diet log.  It tells you how well you did in a specific time period—last week, last month, or last quarter.  We all know that there are good weeks and bad weeks on a diet.  If you only look at one week or month, are you getting a true picture of your overall health?  Of course not.

The balance sheet, on the other hand, is based on everything you’ve ever done.  In our diet metaphor, it accounts for how much you’ve exercised and what you’ve eaten over your entire lifetime.  The sum of all that information is what you see when you stop sucking it in.

To understand this metaphor, you need to understand what the balance sheet is and how it relates to the income statement. Your income statement contains information about what has occurred in the current period.  Revenue, cost of goods sold and expenses are some of the account types found on the income statement.

To get an accurate picture of what’s happening in your business, you must adhere to the matching principle.  That means you record expenses and cost of goods sold when you have earned the revenue that they are related to (if an expense is not related to revenue, you record it during the period it is used). The balance sheet accounts hold these revenue and expense items until the period in which they are earned or used.  We use accounts such as prepaid insurance, customer deposits, and accrued payroll to classify these things on the balance sheet.

Income statement accounts only reflect transactions in the current accounting period.  At the end of the period, the net profit or loss is moved to the equity section of your balance sheet (to retained earnings).  This means that the balance sheet reflects all prior period revenue, cost of goods sold, and expenses in the form of retained earnings.  The equity section also shows how much you’ve invested in and drawn out of your business.  The equity section, therefore, shows what the company is worth to you.

So, how do you know if your business is “over weight”?  Take a look at your debt to equity ratio (total liabilities divided by total equity).  Compare that to your industry average and you’ll have a pretty good indicator of your business’ weight.  Too much debt and not enough equity means your business is, in fact, overweight—even if your current period income statement looks healthy and you have money in the bank. Because everything shows up on the balance sheet, you can rely on it to depict the financial health of your business.

~Kelly

Do you manage your business by the bank balance? Many busy entrepreneurs do but what we know is that managing your business by your checkbook is like managing your personal health by the scale. While the number on the scale is a helpful indicator, it certainly doesn’t mean you’ll get a clean bill of health from your doctor. Join us to learn about other financial tools to help you see, understand, and manage your business’ financial health.

Topic: Beyond the Bank Balance – Create a Dashboard to Manage Your Business for Profit & Growth!
Date: Wednesday, June 9th
Time: 11:30am-12:30pm PDT (2:30-3:30pm EDT)

Click here for more info

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