Remember when you write a payroll check, that
check is net. The employee may have earned $300 but
the check received is $200. You as the employer are in trusted with $100
of your employee's earnings. The
government has no sense of humor about not receiving this money and the
additional 7.65% amount due from
you. To let you know how displeased they are.. the penalties and interest
can amount to paying 50% interest
rate. (depends upon how late you pay the taxes) Mistakes in the area of
payroll can cause numerous headaches. If you should enter this quagmire, do not
ignore the friendly IRS or State mailings.
If you should receive a notice, Good records and prompt compliance are crucial.
Just because there is money in the checkbook,
does not mean you are experiencing a positive cash flow. Your balance may
be flush with sales and collected sales tax or shy of payroll taxes that
resulted in the net payroll check. If you are a seasonal business and flush with seasonal income, that cash needs to stretch through the slow
months or for equipment replacement or labor cost to pay for a job just finished
and income not yet received.
As the business owner you should have two benchmarks in your head...how much
cash do I need to cover rent, electricity, etc. (overhead) and how much more
cash is needed to produce X amount of revenue.
On your desk each morning should be a daily cash sheet that is compared with a
12 month cash projection you created...Remember the failure to properly plan
cash flow is one of the leading causes for small business failure.
But should you get in a cash crunch....
Review the reports generated by your good record
keeping methods for:
- Unbilled activity
- Uncollected receivables
- Is too much money sitting in inventory?
- Am I pricing my product or services correctly?
- Look for expenses that can be temporarily
reduced...no matter how small...did your mother ever say to you 'pennies make
nickels, nickels make dimes'
- Call uncollected receivables
- Talk with your vendors in an up beat manner
about a payment plan
- Take your good records to your friendly banker
for a line of credit.
Proper record keeping of the inflows and outflows
of your business is not just for the IRS and your banker...proper record keeping
provides you with the tools needed to make informed business decisions.
Every time a service truck is sent or an item is
sold, a pre-numbered piece of paper captures that activity.
Every time a purchase is made, an invoice or receipt should be retained.
Every time a tax form is mailed, a copy is retained in a tax file.
Every time pocket cash is used, a receipt for that purchase should be kept and filed.. even a 33c stamp...remember pennies make nickels.
Write down your business miles driven daily.
At some point all these records come together and provide a score of how the
business did that month.
Ideally a good record system would track revenue and expense by customer or
product. Or in the case of trucks, revenue and expense by truck..
The ultimate goal is Separation of Duties...the
person that does the billing does not apply payments, the person applying
payments does not make the bank deposits, the person writing the checks does not
reconcile the bank statement.
But most of us have small offices and separation of duties is not feasible.
At the very least, the owner should receive and open all mail, especially the
bank statement. Be sure to look through the bank statement activity.
If possible the owner should make the daily cash deposit....
A professional team is important for
the success of a business. Each member brings a different piece of the
puzzle. As a business person...we should cultivate their individual
expertise...because at some point in our business growth an accountant, lawyer,
banker or insurance agent is going to be the most important person you need to
know at that point in time.
Now that good record keeping is in place, the
following information is available.
Revenue per unit
Less cost of that unit
Less overhead cost per unit
Less desired profit per unit
Less income tax per unit
The result should be zero or positive. If
the result is less than zero, then the price is too low, cost are too high, or
the desired profit margin is unrealistic. As the business owner you should
review your records for areas that will confirm or disprove your suspension.