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For many business owners and bookkeepers, tax season is a nightmare. Even if you’ve done “most” of your bookkeeping for last year, there might still be some tasks you put off.
In the last post, most of the tips centered around bookkeeping. This post has a couple of bookkeeping tips but also a few tips that will help you thoughtfully develop your business in general.
Here are the next five tips:
- Keep your business and personal finances and accounts separate.Especially in owner-operated businesses, it’s common for the business owner to use their personal credit card to pay for business expenses. This is something that you want to avoid. It’s difficult to account for and keep track of.Even worse is when someone is starting their business and they don’t open a business bank account, so all of their business and personal activity is going through the same account. This is called commingling funds and it is a big no-no. Not only does it make proper bookkeeping nearly impossible, but it can also potentially put the legal liability protection afforded by setting up an LLC or Corporation in jeopardy. It’s important to set your business finances up correctly from the beginning.There is also a psychological boost that comes from this: when you open a business bank account and credit card, you are truly treating your business like a business. You are committed to it, rather than just testing the water while using your personal account for business transactions.
- Evaluate your product and service offerings.Tax season (or the new year) is a great time to take a step back and evaluate the different products or services you offer your customers.What I usually do is what’s called an 80/20 analysis. If you aren’t familiar with the 80/20 rule, you can read about it here.Basically, the 80/20 rule states that 80% of the outcomes or results come from 20% of the inputs or resources. Of course it doesn’t have to exactly be a ratio of 80/20, but the point is a disproportionately small amount of inputs provide a larger outcome.So I ask myself questions like: What 20% of my products or services are providing 80% of my revenue or profit? What 20% of my service offerings are leading to 80% of my stress or headaches?A good example of this for me was QuickBooks clean-up. During one of my annual reviews, I realized that QuickBooks clean-up projects took a ton of time and created a lot of stress. However, they weren’t very profitable.Now, I very rarely take on clean-up projects and focus instead on higher-value services that I enjoy providing. That one decision improved not only my business but also my personal quality of life.
- Evaluate your vendors.Just like with your products or services, you should evaluate the vendors that you work with.It’s important to identify what makes a thriving, successful relationship with a vendor and what makes a dysfunctional one. Clearly identify these parameters allows you to build and operate your business in a very thoughtful and functional way.You can do also do an 80/20 analysis: what 20% of my vendors cause 80% of the frustration or are late on delivering items 80% of the time?Aside from these factors, you should also consider if you’re too dependent on certain vendors. For example, if you are only able to source a product that’s a major driver of your profit from one vendor, you will be in a weak position when it comes to price negotiations and extremely vulnerable if that vendor goes out of business.
- Evaluate your customers.The same analyses that you do on your vendors should be done on your customers:What is the profile of your ideal customer or client?What 20% of your customers provide 80% of the profits? Are you focusing the correct amount of energy on them, or are you spending most of your time and energy trying to keep lower-value customers happy?Are you overly dependent on one client or customer? What would happen if they stopped doing business with you?
- Review open invoices.Coming back to bookkeeping, you should review your open customer invoices, also known as Accounts Receivable. One of the questions I get most often from people who have messy books is what to do with open customer invoices that shouldn’t actually be there.Unfortunately, if a customer has paid an invoice but the invoice is still open, it often means revenue has been double-booked. This overstates cashflow and profitability and can result in the business owner paying higher taxes. Yikes!Make sure customer payments are correctly recorded against their invoice, and if an invoice needs to be removed or written-off, do that.A helpful report that QuickBooks provides is the Accounts Receivable Aging Summary. This will group your customer balances according to whether their invoices are current (aka, not yet due) or in different time periods of being past-due, such as 1-30 days past due, 31-60 days past due, etc.People come to me with customer invoices on their books that are years old that they want to clean up. Once a tax return has been filed for a year, it becomes much more difficult to go back and fix the books. Keep this correct on an ongoing basis so you don’t have to worry about it later.If you see customer balances falling into these late periods, you should reach out to the customer to try and collect their payments.Aside from saving yourself from a clean-up nightmare later on, doing this will improve your business intelligence because you will have a clear understanding of how much your customers or clients owe you. This is extremely important for cashflow planning.
- Bonus tip: Review vendor invoices (“Bills”) as well.Just like you reviewed customer invoices, you should review the vendor bills that are “open” in QuickBooks. A helpful report is the Accounts Payable Aging Summary which is structured just like the Accounts Receivable version.If you know a bill is paid but it is still showing as open in that report, then the payment is either not recorded in QuickBooks or has been recorded incorrectly and might be duplicating the expense amount in your financial statements.Keep your payables clean so you always know how much you owe your vendors and when those bills need to be paid.