How You Use ROI Every Day
For those who don't know, ROI stands for "return on investment". Colloquially, you might think of it as "bang for your buck". Though it's frequently used to describe investment decisions, ROI is something you use in your daily life. You go to the gym because the payoff of improved health has greater value than the time you put into it. You're getting a good return on that time invested.
You might even use ROI to compare two options. Let's say your goal is to lose fat, and there are two classes open when you go to the gym. You could go to an hour-long spin class, or an hour-long yoga class. Doing your research, you find that spin class burns 50% more calories, so you choose to go to that one, as it offers a better ROI.
Looking at it from a financial perspective, there's a very simple formula to calculate ROI.
Return on Investment = (Gain from Investment - Cost of Investment) / Cost of Investment
Now, when it comes to ROI in small business, people tend to think of it primarily in terms of sales and marketing. Before you run an ad or hire a marketing firm, you should be looking at whether the income you're likely to gain outweighs the amount you're about to spend. (For a more in-depth look at mistakes owners make in their marketing budget, see our prior article, Living a Lie: The mistakes that make entrepreneurs go broke.) If you are paying a marketing firm $10,000 a year and your sales only increase by $3,000, you're not making a good return on your investment. Likewise, if you hire a salesperson at base $45K + commission, and he only makes $15,000 in sales, he's probably not in the right position at your company. These are the sorts of obvious examples people think of when it comes to ROI in their business.
However, any business decision really comes down to a matter of ROI, and that is true for hiring an accountant, as well. We're constantly fighting the stereotype of accounting as a necessary evil, and one way to do that is to look at all the benefits that come with good bookkeeping and CFO.
First, of course, are the tax savings. Accurate books not only help you avoid an audit and costly penalties, but also aid you in tracking and recording every deduction for which you're eligible.
Second is saving on expenses. A good CFO service should be locating areas of overspending and helping you restructure to lower or even eliminate certain costs. (Actually, we tend to recommend you eliminate those expenses which don't produce a good ROI. See? It really does all come back to that.)
Third, we like investigate means of increasing revenue. This could be by introducing a new product or service line, acquiring another business, re-examining current pricing strategies, or even by locating and collecting on aged receivables.
To look at how The Bookkeeper does this from an ROI perspective, we save or earn our average client enough in our first year with them to pay our fees for 23 months. That's an almost 100% return on investment.
Finally, there are the benefits which are harder to quantify, primarily opportunity costs. What do you save in energy and stress by hiring someone to take over certain tasks for you?
This week, I challenge you to take a close look at your business, find what's paying off, find what's not, and do something about it.
Expanding our horizons with Xero
Though we are very proud to call ourselves Diamond-level QuickBooks ProAdvisors, one of our best business traits is adaptability. We try to stay on the forefront of a changing global market and, when we read that Xero is the fastest-growing international accounting software (by number of users), we knew that we had to add it to our repertoire.
We are proud to announce that we are now Xero certified partners. This means that we have completed an extensive training course, and passed a rigorous certification exam to demonstrate our proficiency with the software. So if your business uses Xero, we are ready and able to seamlessly transition to managing your books.
You might be wondering how Xero compares to QuickBooks. Both have their benefits and drawbacks. The Xero dashboard might be a bit less user-friendly for a non-accountant, whereas QuickBooks is very easy-to-read. Many users also just prefer the familiarity and solid reputation of QuickBooks, which is perfectly understandable. However, Xero does have some useful built-in tools, particularly an included budgeting application, payroll included on larger packages, and currency conversion on the premium package. Depending on the package chosen, the pricing is similar between the two systems. (Xero starts at $9 per month, with premium plans going up to $70/month.) Obviously, both are online-compatible for cloud computing.
As previously mentioned, we are still incredibly happy to be partnered with QuickBooks, and will continue to offer our support and services for QuickBooks clients. However, there is no harm in diversifying our skill set. Based on our market research, Xero is worth investing our time into. If you too would like to learn more about the benefits of using Xero, you can read about their features here, or contact us. We would love to answer questions you might have about this or any other accounting software.
Year in Review: Our clients' big wins in 2015
People tend to think of bookkeeping as a necessary evil. Your business has to have it, so just find someone who will do a decent job and whom you don't have to pay too much.
We beg to disagree.
We like to use our service to do more than just keep our clients' books clean. We like to go beyond balancing books to growing businesses. In that regard, 2015 was a very good year for us.
Today we want to showcase three clients who had big "wins" in the last 12 months.
C
lient #1: A Money-Saving Solution
One of our client's businesses was facing some difficulties staying profitable. Looking at the books, we found some areas where expenses were duplicated and some cases of fairly extreme overspending. We met with the owner and devised a plan to cut expenses. Once the plan went into effect, we were able to increase the bottom line by over $30,000 a month.
Of course...big deal, right? Everyone knows accountants are penny-pinching killjoys. Let's look at our second story, and see how we can help a client without forcing them to spend less.
Client #2: A Long-Denied Loan
A different client desperately desired a consolidation loan. He had gone to three different lenders, and been denied each time. He was getting nowhere in a hurry.
So, we took over.
First, we received authority to act on his behalf. Then we got to work, combing through his financials and organizing the data for presentation. Finally, we were able to present the information to the bank in the way we knew they wanted it. This time it was approved, and we were able to get our client a consolidation loan at one of the same institutions who had previously rejected him.
Thanks to those efforts, our client was able to consolidate his debt under one payment, and greatly improve his cash flow.
Still, that story isn't as great as...
Client #3: 
Money from Thin Air
Sometimes, something as simple as developing better procedures can make all the difference to a business. This was the case with a client who didn't have a good system in place for managing A/R.
Specifically, there was over $102,000 in receivables of which the owner was not even aware. (Some of the unpaid invoices were over two years old.)
When we discovered this large balance of aged receivables, we immediately began developing collections procedures, including a series of formalized letters to the debtors. Using the practices we put into place, over $30,000 has been collected within the last four months, with payments continuing to roll in.
To re-cap, that's money that the client did not even know existed.
These are just a few of our highlights from 2015. We can't wait to see what we do in 2016.
Ledger Nightmares: Entries only an accountant should make
One of my favorite holiday traditions is watching "The Nightmare Before Christmas". For those of you unfamiliar with the movie, here is the basic plot synopsis: The leader of Halloween Town takes an accidental visit to the land of Christmas and is so enchanted by all of it that he decides to give Santa the "year off" and take over in his place. The residents of Halloween Town are, needless to say, ill-suited for this task, and the results are hilarious and horrifying.
The problem is, they see just enough of Christmas to think they know how to emulate it, but they misunderstand the core concepts.
This is a frequent issue when non-accountants take on bookkeeping duties. Recording sales and expenses is one thing, but there are certain entries which really should be left to the professionals.
This week we're looking at the most frequently-confused accounting principles and discussing why it is better to not attempt these yourself.
Setting Up Chart of Accounts & Opening Balances
Though you would think bookkeeping would be simple with a clean slate, getting your company started can be one of the most complicated times, accounting-wise. (Okay, everything about starting a company is complicated.) There are legal and professional expenses, you must determine book value of any assets which you already have, and entering equity amounts can be difficult. (In particular, how you record money the owner contribues, whether as paid-in capital or a loan from the owner, can affect tax liability.)
When these issues are compounded by extra demands on the owner's time and focus (not to mention the learning curve associated with self-training on accounting software), you have a recipe for inaccuracies.
While you are setting up your business, get someone with experience to jump-start the accounting side of it.
Capital Expenditures
Expanding your business is an exciting time, particularly when you're investing in new locations. Whenever you are spending funds or assuming liability to obtain a physical asset which will be used for productive purposes for at least one year, that is a capital expenditure. Capital expenditures can be land, buildings, machinery, or even software upgrades (generally provided they meet a certain cost threshold).
For an amateur bookkeeper, capital expenditures might appear deceptively easy. Buying some land for a new plant site? Debit Land, credit Notes Payable, and expense whatever incidentals come up along the way, right?
Of course not! If it was that easy, everyone would do their own books.
If you record a capital expenditure like that, your book value will be off and when you calculate depreciation it will be inaccurate. (We'll get to depreciation and other contra-accounts later.)
Rather, when capital expenditures are recorded, you are also to include in the book value the net cost of getting the property ready for use. If the ground needed to be levelled, that cost would be included. Likewise, if there were salvageable materials present which were then sold, that gain would be used to reduce the book value. Certain legal and professional fees surrounding the sale may be included as well. It's all very interesting (but also very complicated for a layperson).
Referring to our example, what about that Note Payable? Assuming it's accruing interest, at year-end you'll need to make...
Adjusting Entries
Month-end and year-end adjusting entries are both necessary and a pain in the neck. There are several types of adjusting entries, such as adjustments for goods or services clients prepaid you for (Unearned Revenue), expensing those things for which you prepaid, recording accrued interest, etc.
One of the biggest dangers at year-end is recording adjustments to inventory. Even with consistent inventory tracking throughout the year, there are generally still adjustments to be made at year-end. Mistakes in inventory recording can result in over or understated COGS (Cost of Goods Sold) and inaccurate tax liability calculations. For reasons such as this, it's usually a good idea to have an accountant look at your year-end statements before preparing taxes. (Remember that many CPAs will simply prepare your taxes based on the statements you give them. For that reason, be sure you are hiring someone who will actually look for issues in the accounts themselves.)
Even if it's not a special occassion, such as making a major purchase or at year-end, there are still transactions that require bookkeeping assistance. Notably, any of those involving...
Contra Accounts
A contra account is one which is intended to have an opposite normal balance for that account classification. For instance, a sales discount is a contra revenue account, so it has a normal debit balance (whereas most revenue accounts have a normal credit balance).
Contra account entries have the potential to be very tricky, and the greatest offender for this is depreciation. Recording depreciation is essential for accurately estimating the current value of assets, but calculating it is a complicated process. First, life expectancy of the asset and salvage value must be computed. After that, straight-line depreciation is the simplest, but nowhere near as accurate as usage-based or the double-declining balance method. Finally, when the asset is finally sold or scrapped, the gain or loss must be calculated and recorded based on the present value. Of course, any errors can then negatively affect tax liability.
Long story short, any time you feel like you're getting in over your head, ask a professional. Trying to D-I-Y complicated accounting entries can turn your General Ledger into a horror story.
Stop Eating Frogs
Mark Twain famously said, “Eat a live frog first thing in the morning and nothing worse will happen to you the rest of the day.” In recent years this has become a particularly popular sentiment amongst entrepreneurs, used as a reminder to not procrastinate in completing disliked chores. Small business owners typically have to manage so many different aspects of their company, it's inevitable that there will be some tasks they dread.
For many, their "frog" is accounting.
But, here's the secret...for some people, frog is a delicacy.
We may be in the minority, but, at The Bookkeeper, accounting and finance aren't just something that pays the bills. We actually find a lot of it fun.
Here are a few of our services which, though business owners typically find distasteful, we really enjoy.
Developing Business ProceduresYou know the only thing more fun than reading a collections procedure manual? Writing a collections procedure manual. It combines several of the things we love, like research, technical writing, and custom-tailoring business practices to an individual company. What's not to love?
Of course, we've heard some people refer to research as "boring" or technical writing as "tedious". But we feel the same way about SEO optimization and, apparently, some people enjoy that.
Budgeting
Budgeting seems to have a negative connotation for a lot of people. A budget is seen as something constraining. But we think budgeting is awesome. You get to look at all your revenues and expenses, and figure out where you can save or earn more money. Who doesn't like having more money? A budget lets you make plans and take steps to achieve your goals. Not knowing your budget is like driving blindfolded. Maybe exciting for some, but too risky for us.
Debt Repayment Plans
A lot of people who are in a great deal of debt don't like to think about how much debt they're in. Of course, ignoring a problem doesn't make it go away.
For business owners overwhelmed by debt, figuring out a way to repay it all is too big a frog to eat. Much easier to just make the minimum payments and try not to think too hard about those rising balances. Fortunately, we love writing debt repayment plans.
Like so many problem, debt seems a lot bigger when you're in the middle of it. That's why we enjoy taking an objective, mathematical look at the problem, and coming up with a tangible, step-by-step solution to eliminating it. And it is so exciting to show someone how they can, often without even spending additional money, be debt-free and have savings built up in, frequently, as little as five years.
Profitability Analysis & Pricing Strategies
Some people may be put off from some aspects of accounting because of the math involved, particularly when it comes to things like calculating gross profit margins. We at The Bookkeeper are huge fans of math, perhaps because of its consistency and objectivity or, perhaps, as the great philosopher Cady Heron stated, "Because it's the same in every country." (Yes, both Mark Twain and "Mean Girls" quotes in one article. Small business accounting can be very culturally relevant.)
Math is especially useful when it comes to looking at which products or services provide higher revenues or greater returns, and where prices can be raised to improve profitability. Using a little bit of math and research to make more money, without having to sell more or perform more work? That's fun.
These are just a few of the services we provide for our clients, not just because our clients find them difficult or loathe doing them, but because we actually do find them interesting. Where the client sees a live frog, we see a perfectly seared filet mignon.
If there's some chore in your business which you simply despise completing on a daily basis, whether it's finance-related or something else, consider whether it's worth it to you to pay someone else to eat that frog.
You're in business for yourself, so why do something you hate?
Success Stories: The client who got a financial makeover
A good deal of the time, business owners don't recognize potential issues within their company until they become real problems. By the time those issues are discovered, drastic actions are required to remedy them.
That was the case when Craig was approached by a friend who, bluntly and truthfully told him, "I have no idea how my business is doing."
A surface look at his financials didn't present a clear answer. He was billing plenty, but there just wasn't much money left in the account at the end of each month. He couldn't see where the money was going.
So, Craig dug deeper.
He went through all of their financials for the past two years and found a few areas of concern. The biggest problems were:
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All personal expenses were being run through the company.
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Net wages were being recorded as gross salary (causing a greater tax expense).
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The company was significantly overstaffed.
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There were no legal documents.
Complicating the issue was that the client actually had an in-house accountant, and The Bookkeeper was only working on this issue in a consulting role.
A change was clearly necessary but, like many changes, that didn't mean it would be easy.
At the next meeting, Craig brought all of these issues to the client's attention. From there, they devised a multi-step plan to get the company in shape.
First, they took all personal expenses out of the company, so they could get a more accurate picture of its financial status.
Second, Craig went back and corrected the two years' worth of payroll entries in the in-house accountant had entered incorrectly.
Third, the client reduced surplus staff (including the accountant).
In the end, the client ended up hiring us for his bookkeeping and CFO work (for a fraction of what the in-house accountant was being paid). There was a great deal of work up-front in cleaning up his financials, but ever since the "makeover", records have been kept accurate and up-to-date, with no issues or surprises.
Here have been the effects of this change:
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All payroll expenses are now accurate.
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The company is staffed at an appropriate level.
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Monthly expenses have been reduced by $4,000.
Most importantly, the client has peace of mind that he knows exactly how well his business is doing, and no new problems are sneaking up on him.
5 Signs You're Ready to Hire an Accountant
Of course, assuming all goes well, most businesses reach a place where they do need to hire an accountant. The trick lies in knowing when you have gotten to that point.
We have identified five simple signs that your business is at that point. If you see yourself anywhere in the following list, it might be time for you to start searching for an accountant.
1. When you're presenting your business. This is an easy one. Everybody knows that you need pristine books whenever you're opening your business to inspection. Whether you are applying for a loan, interviewing a potential partner, or looking to sell, you want to showcase your business in the best possible light. Preparing your financial statements for close investigation entails a lot more than running a few reports. If accounting is not your area of expertise, this is really a time when you want to "leave it to the professionals".
2. Before you're in over your head. Like most other varieties of disaster, bookkeeping disasters are much easier to prevent than they are to fix.* If you're falling behind on your reconciliations, or guessing at balancing entries, you're probably already in worse shape than you realize. Don't kid yourself that you're going to figure it out as you go along, or do some extra studying in your spare time. You're a business owner - "spare time" is a myth. (You do still require sleep and social interaction, after all.)
*This is not to say we aren't willing to work with you to fix disasters after they happen; we just greatly prefer identifying problems before they become disasters.
3. When something seems..."off". There's an old joke (you may have heard it) that, "The definition of an accountant is, 'Someone who solves problems you didn't know you had in ways you don't understand.'" This somewhat feeds into entry #2 in that, by the time a bookkeeping layperson realizes something is wrong, it's probably very wrong.
If your cash flows don't seem to be accurately reflecting your revenue, or if your expenses are running unexpectedly high, it's good to get a second set of (highly-trained) eyes on your books, to identifying current and potential problems. In addition to the fact that identifying and correcting problems is core to an accountant's job description, it's also good to have an outsider who can take an objective look at your financials and identify issues you may have overlooked.
4. When it's taking time away from other things. Maybe you just need to hire a bookkeeper because your business is doing so well that your attention is required elsewhere. If accounting is not your forte, and doing it yourself is sucking time and energy away from areas of your business which better suit your skillset, outsource it. There is no logic in toiling away at something you dread when you could focus on growing your business. When your business needs you marketing, or training employees, or meeting with clients, and you can't because you're mucking through bookkeeping, hire an accountant.
5. When you're sick of it. Chances are, you didn't start your own business to work hard doing something you hate. If you loathe doing your bookkeeping, you are going to have a very hard time doing a good job at it. Distaste for a task compels the doer to procrastinate, or rush through it. In accounting, this can very quickly lead to huge errors (particularly if it's already not a subject of familiarity for you). If keeping your own books is making you miserable, then delegate it. After all, you're the boss for a reason.
The Financial Reasons Small Businesses Fail
Almost every entrepreneur has heard the statistic: 80% of small businesses fail. There are many reasons this happens, and can include everything from market slumps to lazy owners. To enumerate every way a business can go under would be an endless, impossible task.
However, there are a few financial characteristics frequently found in struggling businesses. Here are the most common financial reasons small businesses fail.
There's no plan. It's not uncommon to meet new small business owners who have a brilliant product idea, a well-developed marketing plan, a slick website, and not one thought given to their budget. We've already written on the tough financial questions to answer before starting your own business, but the importance of a solid financial bedrock cannot be overemphasized. A well-researched budget and fixed goals is the key to surviving that crucial first year in which most businesses go under. Great customer service and spot-on marketing are not enough to balance out shaky financials.
Speaking of customer service...
Poor credit management and pricing strategies are bad for everyone. No one craves popularity like an entrepreneur and, when your business's success is entwined with how well-liked you are, the urge to avoid offending anyone becomes even stronger. In the early days of a business, when there are only a few customers, there is a common impulse to let clients slide on late payments, or to offer frequent "friends and family" discounts. It's easy to justify this with the logic with the idea that you need to establish customer loyalty, and you can tighten the reins a bit when you have a solid customer base. There are a few reasons this doesn't work:
- Clients who don't pay on time aren't going to appreciate the slack you've given them in the past; they are going to resent the restrictions you enforce in the future.
- Likewise, your patrons who are just coming to you for the lowest price will quickly go elsewhere when your rates rise.
Lenient accounts receivable and cheap pricing might gain you a quick boost in early sales, but they are not a sustainable model. Delivering a product you can be proud of, at a price that is worth your hard work and can keep your business afloat (and actually requiring customers pay you that fair price) ensures that your customers the pleasure of patronizing your business for years to come. Because you have to remember...
Cash is king. Yes, it's a cliche, but that doesn't make it any less true. A great business model matters little if you run out of money before you can implement it. Managing cash flow is key to not just the health but the continued existence of your business. Here are a few of the most common cash pitfalls small businesses face:
1.) Insufficient capital. In all likelihood, your business will not be immediately profitable. So not only do you need enough cash to get your business started, but you need enough to allow yourself to operate at a loss for a while.
2.) Not having a large enough cash cushion. Think "Princess & the Pea" levels of padding. Regardless of how well you plan, the economy is unpredictable. Look to history for examples. No one expected the Boston Molasses flood which, in addition to the damage caused and lives lost, resulted in a nearly $11M settlement (in today's money) for the responsible company.
3.) Over-investing in fixed assets. It's great to plan for the long-term but, if you don't plan for the short-term as well, your business will not get a long-term. Sacrificing too much of your cash for something like manufacturing equipment (even if you're getting a great deal) can hurt you, as that is not a liquid asset and will be of no help to you in the event of an emergency (i.e. your factory flooding a major metropolis with 2.3M gallons of molasses). Think of it like a game of Monopoly; if you start building hotels too soon and suddenly need cash, you're stuck selling all your buildings back to the bank for half-price, and you know bankruptcy is right around the corner. Only, in real business, instead of losing yet another game to your annoying brother-in-law, you've lost your entire livelihood.
Expanding your business is the ultimate goal, but maintaining cash flow gives you the solid foundation you need to build upon.
80% of new businesses fail, but that means 20% succeed. To be that 1 out of 5, have a plan, know your value, and remain patient. Better to start small and grow something big than to start too big and dwindle away.
Resolutions for Your Books
The clock has struck midnight, and rung in a new year. And you only have 105 days to get in shape.
Your books, that is. April 15th is coming up fast, and you want your books to be looking goodwhen the big day rolls around. Fortunately, there are many ways in which getting your books healthy is a lot like getting yourself healthy. So, to help you keep a resolution for good accounting in the new year, we'll be comparing it to the most consistently popular New Year's resolution.
How to Clean Up Your Books in the New Year
1. Make a plan. A common first step to those seeking to lose weight is to get a gym membership. Likewise, those who are serious about cleaning up their books should invest in some good accounting software. It is also imperative that, if you haven't yet, you set up a chart of accounts and have separate bank accounts and credit cards for your personal and business finances.
2.
Smaller, frequent efforts are more beneficial than larger, infrequent efforts. Going to the gym once a week for four hours isn't going to help you as much as going three times a week for one hour. In fact, you're expending more energy for less results. Bank reconciliations are similar. Doing your reconciliations on a monthly basis is a huge, exhausting chore. Doing reconciliations weekly or even daily is an easy, manageable routine which keeps your books in better shape.
3. Follow your document "diet". Yes, we'll go ahead and admit this point is a bit of a stretch. (Extended metaphors are hard, guys.) Would it help to say that receipts are the organic granola of accounting? Anyway, just like a lot of people track their calories while attempting to lose or maintain weight, you should be tracking your purchases as well. When tax-time arrives, those documents are a great asset for itemizing deductions.
4. If it's too much to do alone, get help. Personal trainers make their living showing people how to work out, but they still can't do the exercise for them. That's just one (of many) ways in which accountants are cooler than personal trainers. A good accountant can do project work and help you get your books in order. However, many business owners prefer to avoid the work entirely, entrusting an expert with keeping their books long-term.
Imagine how easy it would be to get in shape if you could just pay a trainer to go work out for you. Just shows how much easier it is to take care of your financials.
Success Stories: The Client Who Wanted to Quit
We were once approached by someone with a small project. He was just interested in us "prettying up" his financials in preparation of selling his company. He was concerned that his business was not paying him the money he wanted to make, and had just received a new job offer for $60,000.
When pressed about it, he admitted that he wasn't terribly thrilled about this new job opportunity, but felt that he had to take it as, in his perspective, his only income from his current business was a $45,000 draw.
But when The Bookkeeper looked at his financials, we saw:
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Family's health insurance - $9,600
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Automotive payment - $9,120
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Auto, gas, insurance & repairs - $8,450
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Meals - $10,200
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Vacations - $7,700
When added to his draw, this amounted to a total monetary benefit $90,070.
This equates to $116,500 in total equivalent taxable income, instead of the $45,000 the client perceived.
When we met back with the client and illustrated to him how much he was actually making, he turned down the job offer, kept his business, and remained his own boss.