(415) 418-0020 info@proteafinancial.com
Tips To Avoid A Cash Crunch: 3 Ideas For Cash Flow Management

Tips To Avoid A Cash Crunch: 3 Ideas For Cash Flow Management

Cash flow is an important element of any small business. To effectively manage your cash flow, you need to be aware of all the aspects that can affect it and how they impact your business. The best way to achieve this is by understanding what might cause fluctuations in cash flow and coming up with solutions ahead of time for each negative event so as not to be caught off guard if one occurs. This article will discuss some common factors that may reduce or increase your company’s cash flow and provide tips on how to handle crunches when they arise.

What is Cash Flow?

In quite simple terms, cash flow is the money flowing in and out of your business each month. Small businesses need to strike a balance between accounts payable and accounts receivable to ensure that more money comes in than goes out each month. Although cash flow is related to net income, they have some key differences. 

Net income refers to the earnings of a business during a period after considering all expenses incurred during the period. Net income includes sales recognized but not collected until subsequent months. In addition, net income likely includes a monthly depreciation charge which is a non-cash item. These are important to consider when comparing net income to your operating cash flow.

Why is Cash Flow Important?

Understanding how your business generates and uses cash can help you better navigate the growth of your company. Analyzing your cash flow helps you see how well your business is performing and how much liquidity your business has. 

Having cash on hand puts you in a better financial position, adds stability, and gives you better purchasing power. Your cash flow determines how quickly you can expand your business. Additionally, having positive cash flow that leads to a surplus makes you a worthwhile investment for banks or investors. 

maximize cash flow

Tips for Boosting Your Business’ Cash Flow

There are so many things you can do to keep your business running smoothly.

You should have a plan for every day; when the unexpected happens, you should be able to react. There are three areas to focus on for boosting cash flow.

Increase Revenues

  • Keep an eye on customer retention rates, customers are the backbone of any business, and if you have a low customer retention rate, it is time to look at what is going on. Customers are the lifeblood of any company. They provide the revenue that funds your business, and they keep you in business. 
  • Find out what is lacking in the market and offer new products and categories to augment your current offerings. You may be able to charge a higher price for new or improving on existing items.

Decrease Expenses

  • Reach out to new suppliers or renegotiate prices with an existing vendor. Even offering to pay early could result in getting a small discount, which is almost always worth taking.
  • Find ways to automate, or even outsource, parts of your operations. 
  • Find less expensive suppliers that have nothing to do with the product you sell. You do not want to sacrifice product quality for a lower price since this affects your image and reputation in the market. Focus on costs such as office supplies or a less expensive insurance provider. 

Operational Efficiency

  • Be open about what your cash flow is like with your team. They will need to know what is going on if cash flow is already tight or if it becomes tight. They can help your business quickly find ways to cut expenses or reinvest profits into projects with high rates of return.
  • Find ways to increase your return on assets. Smart business owners track their return on assets because it reveals how effectively you are investing in your business.
  • Manage inventories through buying more efficiently or increasing inventory turnover. When you buy efficiently your customer is the focal point, which makes it easier to make more sales.

 

An interesting observation by the Italian economist Vilfredo Pareto helps explain how best to manage cash flow. He noticed that 80 percent of the land in Italy was owned by 20 percent of the population. He further noticed that it happened in nature in that 80 percent of the peas in his garden were produced from 20 percent of the pods.

What does this have to do with cash flow management? Look at your business: it is likely that the Pareto Principle, also known as the 80/20 rule, is in play. Do 80 percent of your sales come from 20 percent of you customers? If so, it might make sense to cut out some of your more high-maintenance, low profitability clients. Your ratios may be different but understanding roughly 80 percent of an output results from almost 20 percent of an input gives you a competitive advantage on where to look to focus your effort and resources. 

By keeping an eye on your expenses, income, and operational efficiency you can predict when you might need a little extra cash coming in or going out. You can even use a budgeting tool to help with this process. You will see how much money is coming in each month and where all the money is going out each month, so it is easy for you to make changes if needed.

Accounting Software: Control Your Finances With Confidence and Ease

Accounting Software: Control Your Finances With Confidence and Ease

An accounting software system is a valuable tool for any business. It allows for more accurate record keeping, which in turn means less work and lower risk of mistakes. It enables you to automate labor-intensive accounting tasks and accelerates tax preparation. There are many benefits to using an accounting system, so it is important to explore them before making the decision on what type of software will best suit your needs. In this post we will review some popular features offered by accounting software systems and the costs associated with each one. We hope that after reading this you will have a better idea of how an accounting system can help you grow your business!

 

What is an accounting software system?

An accounting software system enables a company to keep track of all the various transactions that happen in a business. Transactions vary depending on the company and the industry, but most likely include sales, invoicing, accounts receivable, purchases, accounts payable, taxes, and payroll. All these transactions can be summarized, which provides valuable data for creating charts and predicting future performance.

There are three main types of accounting software systems. First, open-source accounting software is free and can be customized to the needs of the business. The downside is that open-source software may have hidden costs such as compatibility issues, support costs, training, and setup costs.

Second, canned accounting software (or desktop software) runs on your laptop or desktop. The data is also stored on the machine it is installed on. This is a great solution if you live in a rural community with a slow internet connection. It is also easy to use, costs less than other systems, and secure when you are not connected to the internet.

Last, cloud accounting software is stored online. With everyone being hacked these days you may wonder whether your data will truly be safe. The good news is you will not have to lie awake at night wondering if you many years of hard work will one day come crashing down. You are protected—many cloud-based solutions use bank-level encryption, so your finances are as secure as the money in your bank. In addition to security, no installation is required, no updates, backups are automatic, and you can access your data from multiple devices.

 

What are the benefits?

Using an accounting software system will save your company time and prevent avoidable human errors. Instead of tracking everything in a spreadsheet or a paper system, you have all your transactions in one place. It is easy to see what was spent or how much cash is coming into the business. You always know exactly where to find this information.

Accounting software automates some of the most boring accounting tasks, which dramatically increases the accuracy of your data. For example, you can set up so when a sale is made an invoice is sent to the customer set up on credit. The longer you wait, the harder it is to collect. By automating the process, you increase the likelihood of collecting. Furthermore, you can track your unpaid invoices and offer discounts for early payments.

Another benefit of an accounting system is the ability to track cash flow. Just like you can automate your accounts receivable, you can also automate other areas of accounting such as cash flow analysis. By connecting the accounting software to your bank accounts, you can easily reconcile your bank balance to your book balance in real time. No more waiting until the end of the month to find out where you stand financially.

One commonly overlooked area that is a huge win for businesses using accounting software is staying in compliance with taxes. Without good software, it can be difficult and keep track of taxes owed. A good software will calculate the sales tax and prepare the form for you.

If you opt for a cloud-based system (which I highly recommend), you have access to your accounting software system anytime you want. Literally, access to your business is at your fingertips. You can login anywhere you have a connection. So can your accountant, which makes it easy on everyone. Especially at tax time. Your accountant has everything he or she needs to file a complete and accurate return on your behalf.

 

Leveraging an Accounting System

New technologies continue to disrupt the role that accountants play in the marketplace. This is good news because accountants are well-positioned to provide the highest value to their clients. Because accountants are trained to see the big picture, they can further develop an accounting system to tailor to the needs of their clients. As a result, your accountant can be an invaluable source of analytics, insights, and best practices.

Gone are the days of the one-size-fits-all approach. Online accounting systems are compatible with hundreds of third-party applications that extend the usability of their platforms. Take QuickBooks Online, for example. There is a reason why QuickBooks has an 80 percent market share. Not only do they offer one of the most affordable accounting software packages, but they also have one of the most versatile accounting software systems. At the time this article was written, QuickBooks simple plan is $25, their Essentials plan is $40, their Plus plan is $70, and their Advanced plan is $150. All plans include QuickBooks mobile apps, support, and app integration.

What sets QuickBooks apart from their competitors is the software integrates well with third-party services, which make your financial management easier. As your business grows, you can add apps for spend management, billing and invoicing, eCommerce, time tracking, analytics, and inventory management. With over 650 apps to choose from, you are bound to find one that addresses any problems your business needs solved.

There are many advantages to using accounting software for your business. With QuickBooks Online you can use an online solution that is tailored specifically to you and your company’s needs. The benefits of a system like this will outweigh any potential risks associated with not having one in place. There are some great opportunities when choosing between different types of systems as well. We know how difficult it can be to choose which type of software works best for you, so please feel free to contact us if you have any questions.

 

 

Get a Full Picture of Your Business with Accrual Accounting

Get a Full Picture of Your Business with Accrual Accounting

The cash basis of accounting is the method of recording revenue when cash is received and recording expenses when cash has been paid out. This method is easy and enables the business to legally manipulate taxable income. Paying less in taxes is as easy as spending more money.

The cash basis is common for small businesses that are not yet established. However, the Internal Revenue Service requires businesses to use the accrual method for inventories. As a result, some businesses adopt a hybrid basis where they use both the cash basis and the accrual basis. This is referred to as the modified cash basis of accounting.

Because there are so many advantages to using the accrual method, it makes sense to just commit to using the accrual method of accounting. We will explore what the accrual method is and why it makes sense to use it.

What is accrual accounting?

Accrual accounting is a method of accounting that records revenues when they are earned and record expenses when they are incurred, regardless of whether money has changed hands. The goal is to recognize related revenues and expenses in the same period. Accountants refer to this as the matching principle.

A quick example will better illustrate what this means. Your top salesman had a stellar month in January and sold $750,000 worth of merchandise, earning himself a commission of $7,500. Everyone hustled and it shipped by the end of January. The salesman was paid February 1. Under the accrual method the commission expense should be recorded in January, since the commission was for the sale generated in January.

What are the benefits of accrual accounting?

There are four major benefits to accrual accounting. First, the ability to match revenue with the related costs enables you to track profitability and better understand cash flow. As you track profitability, patterns will arise that will enable you to make better decisions. 

Second, it provides a more accurate picture of the state of your business than cash-based methods. The accrual method makes it easier to anticipate your expenses and predict sales. Being able to predict and budget are essential skills to be able to anticipate the needs of your business.

Because the accrual method of accounting provides a clearer picture of your business, many banks require financial statements to be prepared accordingly. This makes it easier to obtain credit and expand your business to meet market demands.

Third, it is compliant with Generally Acceptable Accounting Principles (GAAP). GAAP is a collection of accounting standards and industry practice that have been developed over many years. This one is huge because it puts everyone on the same page. Accounting is commonly referred to as the language of business. GAAP ensures that everyone is speaking the same language.

Last, GAAP makes it easy to answer the question “How are we doing?” Because GAAP creates one standard for everyone it makes it easy to compare the current period to past periods.

Even more, you can compare how you are doing to how others in the industry are doing. For example, pretend you are a producer of red wines. You can look up publicly traded wineries like Vintage Wine Estates ($VWE) or Willamette Valley Vineyards ($WVVI), which are both listed on the NASDAQ. Look up their statistics on Yahoo! Finance to get an idea of what how they are performing. Knowing how others in the industry are performing gives you an idea of what your numbers should be. 

Creating metrics to gauge your financial performance is a whole other—but exciting—conversation. To show you what is possible, $WVVI, who started publicly trading in 1994 enjoys a 10.28% profit margin. Whereas $VWE, who recently started publicly trading only enjoys a 4.52% profit margin. What does $WVVI know about wine making that $VWE is missing, as illustrated in the stark differences in profit margins?

 

Accrual Accounting and Protea Financial

Although accrual accounting takes more time because it can be complicated, the advantages outweigh the disadvantages. It enables you to track profitability and better understand cash flow, which provides a more accurate picture of your financial position. In addition to being compliant with GAAP, it also provides useful information for making business decisions about inventory purchases, investment opportunities, and financing needs.

Accrual accounting is more than cash transactions; it provides information about assets, liabilities, and earnings. Accrual accounting provides a better view of your overall financial position. Because the accrual accounting method is consistent with GAAP, the rules to prepare financial reports of both public and private companies are oftentimes a more accurate method for most companies.

For more information about accrual accounting or other business accounting basics subscribe to our blog for updates. 

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

Outsourcing Accounting Services: Increase Your Bottom Line

Outsourcing Accounting Services: Increase Your Bottom Line

Outsourcing accounting services is a great way to save time, money, and your sanity. It can be difficult for many business owners to find the time or expertise necessary to keep up with all the paperwork that comes from running a successful company. We will examine how outsourcing accounting services can help you improve your efficiency and your bottom line.

 

You will have access to a team of experts

Accounting is one of the most difficult professions to master. Most accountants have many years of education, training, and experience. Many accountants work toward one or multiple certifications—Chartered Accountant, Certified Public Accountant, Certified Managerial Accountant, Enrolled Agent, or others.

Each certification is useful depending on whether the accountant wants to focus on financial accounting, taxes, auditing, or general business. Each certification has rigorous requirements that require many hours of study, experience, and testing.

In most cases, the requirements for certification are overkill for what is used in daily business life. So, if your accountant is not certified, it will likely not have an impact on their ability to have a drastic effect on the long-term success of your company. What it reveals is how serious the accounting industry is about producing talented accountants.

Also, accountants work with many businesses daily. By outsourcing your accounting, you gain the benefit of avoiding the mistakes that other businesses have made that your accountant has already solved. Accounting can be frustrating, so your accountant has had many wins in their career.  This shows that your accountant has the moxie and resolve to ensure the continued success of your business.

 

You can avoid the headache of hiring and training employees

For most small and medium-sized businesses, hiring and training a quality accounting team can be an expensive and resource-intensive process. Even retaining the best talent can be a headache. Because the needs of a business can change throughout the year, it is easy to adjust an accounting team through the outsourcing company.

By outsourcing your accounting, you are passing on headaches that would otherwise be yours and instead hand them off to an expert who specializes in accounting. This frees your time up to focus on core business functions that add value to your company. You are free to do what you are best at… while they do what they are best at—adding to your bottom line.

 

You will save money and time

They say that a penny saved is a penny earned. First, you will save on the large amount of money that goes into office facilities, software, office machines, and supplies. As briefly mentioned, not only will you bypass the headache of maintaining a staff, but you will also save on the salaries and payroll taxes of in-house accountants. By outsourcing, you will have access to the latest technologies and innovations without additional costs.

They will find money you did not even know you had. Did you know that when the coronavirus hit, congress passed several laws aimed at helping businesses survive the anticipated economic impact? If you did not know, your accountant did and already had several strategies on how to help you benefit.

Additionally, the tax laws change every year. By outsourcing your accounting, you will partner with accountants who are on top of these changes and help you get access to help and tax deductions that will enable you to thrive—especially during difficult times.

 

You will be up to date on your financial position

For simplicity, many small- and medium-sized businesses choose the cash basis of accounting. In essence, revenues are recognized when cash is received; expenses are recognized when cash is paid out. Although it saves time, you lose out on what your true financial position is. For example, if you prepaid some expenses—such as rent or insurance—you may have more cash available than you think you do.

An outsourced accounting team is likely to prefer to use accrual accounting because it gives insights into the financial health of a company. Accrual accounting recognizes and records transactions when they occur. For example, you buy a $20,000 distribution truck to be used for the next 10 years. Under the cash basis you expense $20,000 when purchased. This makes one year look bad and all the other years look good. Under the accrual basis, you would depreciate it as it is being used—over the next 120 months. As you are using the asset, you are likely generating a profit from using the asset.

An outsourced accounting team can create accurate and timely financial reports so you can predict future revenues and costs. This will help you make well-informed decisions for the long-term success of your business. With the accrual method all sorts of metrics are now available to tell you exactly how you are doing. Where performance is measured, performance improves.

 

Outsourcing your accounting services to a team of experts is a wise investment for your business. The right partner can help you increase your bottom line and avoid the headache of hiring employees. They will give you guidance on how to best manage risk in each area of business so that nothing falls through the cracks. You will be able to save time by not having to worry about staying up to date with technology and billing cycles.

Having an expert staff who has years of experience in the industry who is always looking out for ways to improve efficiency and reduce cost is one of the best ways to give your business a competitive edge. Having access to a team of professionals dedicated solely to handling all matters related to finance and taxes on behalf of your organization means you are better positioned not only from a risk management standpoint but also having funds available for other pressing needs within your company.

How to understand your balance sheet: A beginner’s guide

How to understand your balance sheet: A beginner’s guide

A balance sheet is a financial statement that provides an overview of the company’s assets, liabilities, and equity at a specific point in time. It is important to know what each one means in order to understand how well you’re doing. It can be difficult to understand all the information on this document, but there are ways to break it down into more manageable pieces.

 

What is a balance sheet?

The balance sheet is a financial statement that provides information about the assets, liabilities, and equity of a company.

The first section of the balance sheet lists the assets on hand. Assets are anything that can be turned into cash. Assets include cash, accounts receivable (money owed to you), inventory (goods waiting to be sold), and prepaid expenses (e.g., insurance that is paid annually in advance). Assets are usually broken up into short-term (less than one year) and long-term (one year and longer)

The second part lists liabilities, which are things you owe money for. Liabilities include loans payable or due for goods purchased on credit. Like assets, liabilities are usually broken up into short-term and long-term.

Finally, equity is calculated by subtracting what you owe from what you own. This is also referred to as net worth or the net value of the business.

 

The importance of the balance sheet

Balance sheets are a snapshot of what a company’s assets, liabilities, and equity look like at any given point in time. A balance sheet is a tool that can be used to find out if a company has enough money to cover its obligations and stay afloat or enough assets to cover its long term obligations.

The balance sheet can also be used to determine how a company is financing its operations. A company that is generating enough net income will have higher retained earnings from one year to the next. A company that is financed through debt will have an increase in long-term liabilities year-over-year.

 

How to read a balance sheet

Below is an example of a balance sheet.

balance sheet

We already explained assets, liabilities, and stockholder’s equity. The balance sheet must always “balance” because assets equal liabilities plus equity (known as the accounting equation). Understanding this equation helps you understand a company’s position. If the company has more liabilities than assets, then it will have negative equity, which is a potential major red flag especially with mature businesses.

Investors and creditors like to determine a company’s financial health using something called ratio analysis. To determine how liquid a company is, divide current assets by current liabilities. In the example above, 67,500 / 34,200 = 1.92. Whether that is good or bad depends on the industry. In general, anything near or over 2.00 is acceptable.

Other performance indicators include solvency ratios (also called financial leverage ratios), profitability ratios, efficiency ratios, and coverage ratios. Corporations also have market prospect ratios which are used to predict performance, which is imperative when valuing a company’s stock price.

 

How to use information from the balance sheet to improve your finances

Did you know the information found on a balance sheet can also be used to measure your company’s vulnerability to risk? A complete balance sheet includes key pieces of information like cash on hand, accounts receivable and inventory. By analyzing these numbers, you will be able to see where your business is strong or weak in relation to other companies in similar industries. If there are any areas for improvement (i.e., too much debt), it will allow you time to prepare so that when the unexpected happens.

If you want to take control of your finances and improve them, the balance sheet is a good place to start. Understanding what it includes and how to read one will provide insight into where you can make changes in order to get more money for yourself or avoid unnecessary expenses that are taking too much from your paycheck.

The best way to use this information is by comparing two different months side-by-side on paper so that you have everything at hand. Once you have done this, focus on adjusting only those areas which seem most important – like lowering debt payments or reducing inventory on hand – and see if there is an impact in your bottom line!

The balance sheet is a powerful financial tool that can be used to improve your finances. It’s important for you to understand how the information on the balance sheet works and what it means in order to make informed decisions about improving your money management skills. Let us know if we can help! Contact our team of experts today and let them show you how they have helped others grow their wealth with remarkably simple math.