How to Prepare for Minimum Wage Increases

Los Angeles just increased their minimum wage on July 1, and we’re set for more increases over the next 4 years. Businesses that haven’t planned – or won’t plan for increases in the future – will be the ones whose operations are most disrupted by the increases. There’s no reason for your business to be one of them. You can take steps today to plan for your increased payroll.

You’ve Got This

Maintaining your cool is going to be the basis for all the other actions you take. There’s no reason to panic and get into the “this is never going to work” mindset. It’s going to affect your cash flows, but there are ways to plan for it so that you won’t even notice the increase. However, to do that, you need to stay calm and go over your financials with the belief that there is a way to increase wages without too much pain. It’s also useful to remember that everyone is affected by the minimum wage increase. That means your competitors are in the same position, and the best way to set yourself apart from them is to be prepared.

Review Your Finances

If you’re worried about minimum wage increases, the first activity on your list should be reviewing your finances. Look for anywhere you can cut costs and discuss them with your bookkeeper. Many times, businesses have ways of increasing cash flows that are hiding in the financial statements. Your firm may have an excessive amount of receivables that could be collected, or there could be unnecessary expenses that you can trim to meet your increased payroll obligations.

Bookkeepers will often know if a business can handle wage increases just from their familiarity with your financial statements. It’s possible that your bookkeeper will tell you that you can absorb the minimum wage increases without any action on your part.     

Cloud-Based Technology

As a cloud bookkeeper, I have a special place in my heart for cloud-based technology.

On the financial side, talk to your bookkeeper or accountant about QBO and Xero and what apps integrate with them. Float is a wonderful app that creates cash flow forecasts by pulling information directly from your books. You can identify any cash crunches resulting from wage increases and take action ahead of time.

Expensify is another useful program. It generates expense reports that you can review to see how you can cut down on expenses. If you’re worried that there may be some area where you’re spending too much, Expensify will allow you to see it.

Refinance & Renegotiate

If you have any business loans, review them to see if it’s possible to get a lower interest rate. If your financial statements were prepared incorrectly when you submitted the paperwork for the loan, it’s also possible that you could have been charged a higher rate than you should have. In the process of reviewing your financials, you should be to determine if your position has improved since the loan was approved.

Also, if you are dealing with vendors, you can pull reports from your accounting software to see how much you’re spending. If you’re spending a significant amount with one vendor, it’s possible to get a discount based on the volume of your transactions. Many vendors will offer discounts of 1-3% for high-volume customers.

Minimum wage increases are scary for some businesses, but they shouldn’t be. Every problem has a solution, and if you’re stressing about this one, you can find a way to meet payroll if you’re willing to work at it. Put in the time and effort to address the issue, work closely with your bookkeeper to find a solution, take the necessary actions, and you’ll be able to rest easy.

Sign up for my email list, or email me at ben@bookkeeping4engineers.com to schedule a free 30 minute consultation. You'll receive a free copy of my eBook How to Beat the Competition and Grow Your Business: A Guide for Architects, Engineers, and Designers as a "thank you" when you confirm your subscription to my email list.

Ben Warga

8 Easy Tips to Prevent Business Fraud

By Ben Warga

Business fraud is regularly in the news. Unfortunately, the source of the fraud is most often an employee of the company. While I believe trust in employees is an integral feature of a healthy business, I also believe that strong internal controls for fraud prevention are necessary in every firm. With that in mind, I’ve created this list of 8 simple internal controls that require little effort to implement or enforce.

1. Division of responsibilities

Division of responsibilities is one of the easiest ways to prevent fraud. If the person making deposits and recording deposits is the same individual, that person could pull a check out of the deposit and also ensure that the same check is not recorded in the books. With no record of that check, it’s as if it never existed, making it much more difficult to track.

The person processing payroll and the person recording payroll should be two different individuals. This way, one person is always checking the other’s work to keep an eye out for any funny business. I don’t process payroll to ensure that this kind of separation is maintained. Many business owners want to grow and hire their own accounting department, and implementing this practice with my clients ensures that it is a core feature of their business operations for years to come, even after I’m long out of the picture.

2. Check signing is the sole responsibility of the owner(s)

No one should be able to sign checks except for the owner(s). Once a business starts delegating check signing authority to employees, it opens itself up for fraud. You may have hired the most honest employees who would never dream of stealing, but it’s better to be safe than sorry.

3. Use cloud accounting software and check it regularly

Cloud accounting software allows you to check your accounts from anywhere with an internet connection, and to see which checks have been entered and for what purpose. You should also be checking your bank account regularly, but the accounting software will tell you how a check is actually coded (office supplies, rent, insurance, etc.) so you’ll know if there are any odd entries. For instance, why is there a $500 check for insurance in May when the policy payment is due in August?

4. Report all checks to your bookkeeper

This is especially important if you don’t have a bookkeeper in the office. You should email or call at the end of every day when you write checks to inform your bookkeeper of the check number, payee, amount, and purpose. This serves two purposes. First, it may take a few days for that check to clear the bank, and this practice keeps your books in good order and prevents you from overdrawing your checking account. Second, if a check shows up in the feed (assuming you’re using cloud accounting) that hasn’t been reported, it should immediately send up a red flag with your bookkeeper, who can then contact you to see if it was written and not reported, or if this is a fraudulent check.

5. Keep blank checks in a locked file drawer, cabinet, or safe

If someone breaks into your office, or if a client with sticky fingers wanders in, or if the cleaning crew hires someone who isn’t on the up-and-up, or even if your company hires a less than honest person, this practice prevents those individuals from having access to not only blank checks, but also your routing and account numbers.

6. Run background checks on all employees with access to checks

If you have an employee who has access to checks, it’s a good idea to pay for a background check to be safe. Most of the time, it will come up clean, but if it doesn’t, you’ll be glad you paid a little extra for that knowledge.

7. Ensure that the check register is properly maintained

The easiest way to catch fraud before it does significant damage is to keep an eye on your check register. If duplicate check numbers pop up, or if a check that hasn’t been written yet is cashed, you know you’re the victim of fraud.

8. Write supplier checks to a company, never to an individual (even if the individual is an owner)

If anyone from a supplier tells you it’s OK to write a check to them, thank them kindly, and then write a check directly to the supplier. It might be common practice for their company to accept checks that are written to individuals, but it’s not a proper business practice. The employee could either underpay their employer and leave you on the hook for the remainder, or if it’s the owner, it may be a sign that the owner is not reporting business income.

The above recommendations are just a few of the internal controls that help prevent fraud. There are other, more complicated processes that can be adopted, but these are best left to be researched and crafted by the individual business owner. If you find that your business is lacking internal controls, don’t wait to bring them into play. Starting today could save your business a significant amount of money and trouble down the road. 

Sign up for my email list, or email me at ben@bookkeeping4engineers.com to schedule a free 30 minute consultation. You'll receive a free copy of my eBook How to Beat the Competition and Grow Your Business: A Guide for Architects, Engineers, and Designers as a "thank you" when you confirm your subscription to my email list.

The Keys to Cracking Accounts Receivable

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One of the big problems I consistently hear about from architecture, engineering, and design firms is that customers promise to pay, and the firm never sees a dime.

I intend to show that it is possible to reduce the length of the payment cycle by adopting effective receivables practices. In this article, I am going to first provide some suggestions for getting your receivables under control and then detail the keys to prevent them from getting out of hand in the future.

Note that all of the suggestions in this article assume you haven't retained your rights to payment through a lien. If you have done so, you don't need this article. Instead, contact your attorney immediately.

COLLECTING THOSE OLD RECEIVABLES

Factoring

If you have a decent amount of receivables under 90 days, you can sell it to a factoring company for a percentage of the total price. Many factoring companies offer 90% of the total; they typically pay 75% up-front and an additional 15% when the money is collected. If you’re going to use factoring, check to make sure you’re using a reliable company that pays what it promises. You might find a company that seems to be reputable, only to find out later that their checks keep getting “lost” in the mail.

Collections

Anything past 90 days you’ll most likely have to send to collections. At best, you can expect to get 50% of the amount they collect. The general rule with collections companies is that the less money they offer you on what they collect, the more reputable they are. A company that offers 50% might just send you a check one day without any explanation as to what was collected, and you’ll have to take their word for it. A company that offers 25% might send you a report along with the check: “We collected $xxx.xx of the total $xxxx.xx on such-and-such a day through a payment plan. Enclosed is a check for 25% of $xxx.xx, which comes to $xxx.xx. Additional checks will be issued for each payment we receive.”

****IMPORTANT NOTE**** In most states, the business that hires the collections company is liable for the actions of the collections agent. Some collections organizations operate in multiple jurisdictions and do not follow all the laws in every jurisdiction. When you send something to collections, you need to ensure it’s with a company that observes the laws of the area in which you are located. If not, you could find your business being served with civil and/or criminal suits.

Payment Plans and Discounts

If you’re OK with putting in a little more time and effort, the combination of a discount and a payment plan often works wonders for finally getting those old receivables off your books.

Most businesses charge penalties for late payments. Offering to drop those penalties and break the invoice up into monthly installments is often a very effective method.

Writing Down Bad Debt

Finally, if there’s no way for you to get payment on that overdue bill, it’s time to write it off. Bad debt is tax-deductible, but you only have a small window of time to take advantage of this (generally a year from the invoice date, but consult with your accountant.)

****ANOTHER IMPORTANT NOTE**** Don’t write old invoices off just because you don’t feel like collecting them. Writing off even 0.5% (1/2 of 1%) of your total billed amount for the period in question shows that your business has a problem with collections. If it is 1% or higher, it demonstrates a serious cash flow deficiency. The average business operates at a 5% profit, which means that writing off 1% is equivalent to giving away 20% of your profits!

Sign up for my email list, or email me at ben@bookkeeping4engineers.com to schedule a free 30 minute consultation.

Receivables Controls

Now that we’ve discussed a few ways to collect past-due receivables, I’m going to lay out some steps your firm can take to ensure that you’re getting paid sooner for what you’re billing.

Create a Policy in Writing

This is the first step. Decide what your policy is going to be for all your invoices (will it be COD, will it be due in 30 days, will there be a discount if it’s paid within 10 days, are there penalties, what types of payment are accepted, etc.) and put it down in writing. You should review and update the policy every 2 years, but the basic framework will likely remain in place for the life of your business.

Once it’s set down in writing, post it in a highly visible area that clients often see. Then, give copies to anyone who meets with clients. Make sure that everyone in the office is clear on the procedures. On a separate sheet, lay out disciplinary actions for employees who don’t follow the new rules.

Have a Plan for Collecting

After creating an invoicing policy, the next step your business needs to take is creating a policy for collecting the money you’ve billed. Will you mail an invoice when the job is completed? After? When will your company follow up on unpaid invoices? What actions will it take on unpaid invoices? These are the questions that need to be considered when you come up with your plan for collecting. It’s also helpful to put this in writing and to set up a scheduler that sends out reminders to follow up on invoices.

Email Invoices with Links for Online Payment

This is a surprisingly effective practice for receiving timely payment. I recently read an article on a study in South Africa that said adding a link for online payment reduced collections times by 6-10 days for nearly every business that was studied. In a similar article, 95% of Australian business owners who used A/R management apps that send invoices which include links to pay online said that the processes “are ‘very’ or ‘somewhat’ effective in reducing late payments.”

“He’s Not a Client. He’s a Risk.”

An old boss of mine told me this about a client who had a notorious habit of not paying, or of renegotiating invoices after he signed a contract. One of the keys to receivables management is knowing your clients. There are some that you know will always pay who occasionally need a little extra time. There are others who will never pay without a fight, even if they have the money and they’re given all the time in the world. Increasingly, small businesses are using credit checks on new clients to determine what terms will be offered. This may be a process your business needs to implement if it continually finds itself coming up short in regards to client payments.

I’ve laid out some steps to effective receivables management that I hope will be helpful for the reader. Remember that the first step is to have a receivables process in writing that is used and known to all employees. Once you have these processes in place, it should become less of a hassle to collect past-due receivables.

Sign up for my email list, or email me at ben@bookkeeping4engineers.com to schedule a free 30 minute consultation. You'll receive a free copy of my eBook How to Beat the Competition and Grow Your Business: A Guide for Architects, Engineers, and Designers as a "thank you" when you confirm your subscription to my email list.

Ben Warga

Why Your Business Should Be Accounting in the Cloud

By Ben Warga

Both accounting professionals and their clients are quickly realizing the advantages of stepping away from their desktops and into the cloud. With services such as Xero and QBO (QuickbooksOnline) accounting for an ever-growing market share, cloud accounting will soon come to dominate the industry. In the coming years, desktop accounting software will be viewed as outdated as printing presses and the mimeograph.

Let’s discuss a few of the reasons for this shift.

Time Savings

There are many ways in which cloud accounting saves time for the small business owner in very direct, obvious ways.

First, with cloud accounting, no software updates are ever needed. Because the software exists on servers outside of the business owner’s place of business, it is updated automatically without the owner or accounting team ever needing to do anything. This means that there is no downtime spent downloading updates, installing them, correcting problems with software updates, etc.

Second, most desktop accounting program providers cease supporting software after it reaches 2-3 years. This means that every couple of years, the business owner is forced to devote time to finding new software, purchasing it, and installing it, while also converting old files over to the new version. With cloud accounting, all these tasks are performed automatically, usually without the business owner ever realizing they have been done (unless there is a major graphics overhaul, which rarely happens.)

Some business owners might pay their bookkeeper to take care of updating their desktop accounting program, in which case the use of cloud accounting translates into a dollar savings rather than a time savings. The owner is not paying their bookkeeper for time spent on the low value task of software installation. Instead, the bookkeeper can focus on high value tasks like reporting and analysis.

App Integration

Is there some additional task you want your bookkeeping software to perform that it doesn’t? There’s probably an app for that, and most apps do not integrate with desktop programs.

For instance, are you looking for better expense accounting? Apps like Expensify track transactions, creating expense reports automatically and emailing them to owners for approval.

Hubdoc (a personal favorite of mine) eliminates the time you spend categorizing and filing receipts. Instead, users scan receipts into a central “hub” which creates its own folders and subfolders for vendors, clients, and bank statements. When you want to find an old invoice or bill, you simply find the vendor’s folder and look through it for the date. Hubdoc also scans your Xero or QBO account for transactions which match receipts and attaches the receipt to that transaction. There’s even an app for your phone so you can take a photo of a receipt as soon as you make a purchase. You’ll never need to wonder “What type of expense is this?” again because your bookkeeper will be able to view the receipt, compare it to the transaction, and assign it to the correct category.

Tsheets is an app that integrates with cloud accounting for time tracking. Employees can log in from anywhere and their hours are recorded. Tsheets also breaks down employee time by task, showing employers how much time is spent on individual projects, which provides more accurate job costing for the employer. When you know how much time each employee has spent on a project, you can get a better idea of how the budget for the job compares to performance.

Another interesting app is Expensify. This integrates with cloud programs and tracks travel and expenses. Users are able to manage transactions, create receipts, upload receipts for purchases, and generate expense reports. Through Expensify, business owners can approve transactions and view reports. Much like Tsheets, Expensify creates increased knowledge of the costs associated with each job.

Access to Information Anytime, Anywhere

With desktop accounting software, you’re forced to access your accounting program either at the office or remotely, and remote access relies on a host of factors. Cloud accounting can be accessed from anywhere in the world as long as you have an internet connection. This means you can create invoices on the fly when you’re in the field, check up on reports when you’re at a conference, or access financial statements on vacation (although I sincerely hope you’re not checking financial statements on vacation.) Bookkeeping in the cloud provides business owners with the tools to know how their business is performing financially anytime, anywhere.

These are only a few of the many reasons cloud accounting is the wave of the future. If your bookkeeper or accountant is still tied to their old desktop accounting program, I suggest you tell them to jump on the bandwagon today. You’ll be glad you did.

4 Ways Your Business Can Benefit from Hiring a Bookkeeper

“Why do I need a bookkeeper?”

If my life was a song, this would be the chorus. I hear so many variations of it:

“I have a CPA, why do I need a bookkeeper?”

“My office manager/partner/husband (or wife) does the books, why do I need a bookkeeper?”

“I don’t do the books now, so why do I need a bookkeeper?”

My desire in writing this post is to relate a few of the many benefits of hiring an independent bookkeeper to handle your company’s finances. Without further ado, let’s move on to the first reason.

Opportunity Cost

Opportunity cost, simply put, is the cost of choosing one option at the expense of other options. In economic theory, it’s generally assumed to be the best option that’s chosen, but that is not always the case in real life.

Most business owners aren’t bookkeepers by profession – spending time keeping the books does not generate revenue for them. This means that when a business owner chooses to do the books, he or she is prioritizing the books over income.

Having a dedicated bookkeeper means maintaining the books is no longer a losing proposition for the business owner. If you’re an engineer who wants to spend time doing load calculations instead of frantically googling to find the difference between a meal 50 and a meal 100 in the tax code, it makes sense to hire someone to handle the accounts. Having a bookkeeper allows you to focus on the revenue-generating activities that you do best.

Specialized knowledge

There is a certain amount of knowledge that is required to be a first-rate bookkeeper, and almost every person who was not specifically trained as a full-charge bookkeeper does not have that knowledge. I know people often think that bookkeeping is just reconciling accounts, but it is much more than that. Financial reporting is one of the key activities of a bookkeeper, and so often it is overlooked or brushed to the side.

Everyone knows the adage “Knowledge is power.” Reports like the balance sheet, profit and loss statement, and statement of cash flows compile information from the accounts to provide an owner with knowledge of the performance of the business. With advances in automation, these reports have become much easier to create, but they are often very confusing for people who don’t read them regularly. With a specialized bookkeeper, you can tell how your business has performed, is performing, and likely will perform in the future based on the reports he or she generates; having a secretary or assistant reconcile the accounts doesn’t provide you with this same kind of knowledge.

Outsourcing

This argument is often seen by business owners as the best reason for hiring an outside bookkeeper. With an independent bookkeeper who works remotely, you never need to worry about vacation time, sick pay, health insurance, 401K, etc. By outsourcing your bookkeeping, not only do you free up time that can be spent on revenue-generating tasks, you also reduce your labor costs (you’re not paying that extra tax bill for an employee either.)

Cheaper than a CPA

“What’s the difference between a bookkeeper and an accountant?” is neck-and-neck with “Why do I need a bookkeeper?” as the question I’m most commonly asked.

The roles of bookkeepers and CPAs overlap. CPAs can do everything we can do, plus they have specialized tax knowledge that bookkeepers don’t have. Bookkeepers, however, are often much more intimately acquainted with the ins-and-outs of each business they handle; a CPA usually has a large client list with general knowledge of each client, while the bookkeepers who work underneath him or her have specific knowledge about the accounts they handle. It is similar to the situation between doctors and nurses: a nurse might not have the level of knowledge a doctor has, but information the nurse has collected and provided to the doctor can help in diagnosing a disease and creating an effective treatment for the patient.

While CPA is the highest certification anyone can attain in accounting, it also takes many years and a lot of formal education. As a result, this knowledge comes with a high price tag, which means that CPAs command a much greater hourly rate than bookkeepers. I charge a flat fee for my services, but if I break it down by the hour, an accountant charges (on average) about twice as much for bookkeeping services as I do.

I have no problem admitting that there are times when a business owner needs a CPA. There are certain areas I cannot legally touch as a bookkeeper. For instance, if I give tax advice, it voids my errors and omissions insurance. The obvious solution for the business owner is to use an independent bookkeeper to handle the books, while retaining a CPA for taxes and audits, saving money in the process while ensuring that the business is fully compliant with the IRS. 

Time to hire a bookkeeper?

There are more reasons why retaining an independent bookkeeper is important – better information for tax preparation, financial statements that are prepared in the way lenders request, the piece of mind that comes with knowing the books will always be done, etc. – but there isn’t any need to make this article any longer than it needs to be. All you need to know is that the benefits of having a bookkeeper far outweigh the costs. If you’re wondering how to strengthen your businesses position, and the above reasons resonate with you, it may be time to hire an outside bookkeeper for your business.

The Two Accounting Methods

The Two Accounting Methods

There are two methods which are commonly used for accounting: cash basis and accrual. Both systems have their strengths and weaknesses, but most accounting professionals prefer the accrual method. The main difference between the two lies in how sales and purchases are recorded. What follows is a brief overview of each method and an explanation as to why the accrual method is preferred.

(Note that there is a third hybrid method that is used for small businesses with large inventories, but this method is rarely utilized.)

The Cash Basis

This is the simpler method of the two. In cash basis accounting, transactions are only recorded when money changes hands. If a service is performed on one day, but the client does not pay until two weeks later, the transaction is recorded on the day it is paid. Accounts receivable and accounts payable do not exist in this method.

The cash basis can temporarily reduce tax obligations. If a service is performed in December but is not paid for until January, the income from that service will be on next year’s tax bill and not the current year. A business using this method will not be taxed for income until it has been realized. 

Cash basis allows a business owner to see how much cash is on hand, but does not provide an accurate picture of debts and obligations. Because of this, it works well for short-term operations, but is a poor basis for long-term planning.

Summary of Cash Basis Accounting:

  1. Simple
  2. Can defer some taxes because it recognizes revenue when it occurs
  3. Beneficial if company is strapped for cash (better short-term projections)
  4. Shows how much money is currently in business accounts
  5. Poor system for long-term projections due to lack of receivables and payables tracking
  6. Obscures actual financial standing of business

The Accrual Method

The more complicated system is accrual accounting. This is the more widely used method, although some small business owners prefer the cash basis due to its simplicity. The accrual method recognizes income and expenses when they are incurred, not when cash changes hands. Income and expenses are tracked through accounts receivable and accounts payable.

The advantage to this method is that it gives an accurate picture of how the business is performing -- with knowledge of outstanding invoices and obligations, the owner has a clear idea of the company’s position. In addition, the increased accuracy that comes with the accrual method allows more definite planning for the future direction of the business. Businesses using the cash method may appear healthy because their financial statements show a positive cash flow, but a mountain of unrecorded debt could be sinking the business.

The accrual method also helps in margin and ratio analysis because the numbers present a more complete overview.

Summary of Accrual Method Accounting:

  1. More complicated than cash basis accounting
  2. Uses accounts payable and receivable to record unpaid debts and unrealized revenue
  3. Provides a better picture of the status of the company by showing sales performance, which can then be used for future projections
  4. Analysis of operating margin and profit margin is easier and more reliable
  5. Meets GAAP (Generally Accepted Accounting Principles) standards

Conclusion

Although some small business owners prefer the cash method, the accrual method is the preferred system for a company that is looking for stability. The accrual method gives management a better idea of how the company is performing and allows improved planning for the long-term success of the business. Additionally, it is the method that investors and financiers expect to see when examining a company’s finances.

Using cash basis, a company in severe financial distress can appear to be healthy and generating substantial cash flows. This is a “trick” of the cash basis method because liabilities are not recorded until they are paid. With good reason, lenders and investors are usually very suspicious of cash basis accounting because it does not accurately reflect a company’s liabilities.

You may be asking yourself “But how can I be sure of my current cash flows when I’m using the accrual method?” The deficiencies in accrual accounting can be easily overcome by using a financial statement that is often overlooked: the statement of cash flows… but that’s a subject for another blog post!

How Can a Budget Help Your Business?

 

To budget, or not to budget, that is the question:

Whether 'tis Nobler in the mind to suffer

The Slings and Arrows of outrageous Fortune,

Or to take Arms against a Sea of troubles…

 

I like using quotes, and this one seemed perfect for a little editing to introduce this piece.

Many people stress the importance of budgeting to small businesses, but rarely does anyone take the time to explain why it’s important. There have been countless videos and tutorials created to show people how to make a budget, but rarely do they examine what makes a budget vital to operations. If you take only one thing away from this blog post, it should be this:

A budget provides direction.

Well-prepared budgets provide this direction through a careful consideration of cash income and use. This oversight allows decisions to be made based on an honest assessment of a businesses’ financial situation, and not the scattershot approach of guesswork and gut feeling. Actual monitoring of the budget also allows a business owner to determine where he or she is on the path to a series of static goals, and to adjust business operations accordingly.

There are numerous benefits to the direction that comes from budgeting, more than could be summed up in a blog post of reasonable length, but I only intend to discuss four of the most important.

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1.     Long-term goals

A budget converts the concept of “growth” (or “stability”) into a figure, usually as a year-end goal. With this number in mind, the focus of the business becomes reaching that goal, moving business operations out of the day-to-day and placing them within a longer timeframe. The firm uses the budget to conduct itself in a forward-looking manner, keeping income goals, savings, and progress at the forefront of all decisions. When a business owner begins to think of operations with a longer view than simply having money for payroll at the end of the week, it becomes possible to discuss building a structure that will last 5, 10, 15 – even 50 or more years into the future. This makes budgeting particularly useful for business owners with children who would like to see their sons or daughters inherit the practice in the future.

2.     Money Controls

The money controls inherent in budgets clamp down on impulse buys, eliminating unnecessary purchases.  

When prepared correctly, a budget shows the business owner what money is available, and what is already committed. Knowledge of where your business is in relation to its goals allows you to more effectively address and plan for purchases. It seems boring to budget when XYZ Engineering across town just bought a dozen of the most current AutoZZZ subscriptions that have that cool new 3D modeler, but when your firm updates in 6 months, you won’t need to worry about a cloud of debt hanging over your head. And if XYZ Engineering put that purchase on a credit card, they also have to worry about interest payments that you don’t.

3.     Examination of Expenses

Nobody is perfect. We all have expenses for services we don’t use that often. I had a gym membership for years that I only used maybe once every two months. After creating a budget, some clients find that they have duplicate subscriptions for services that they didn’t even know about.

When you budget for a business, it allows you to see where you can cut expenses. You may find that you’d forgotten your phone system is designed with 50 employees in mind, but all you have are 20. Are you going to grow fast enough that you’ll need those 30 extra lines immediately, or could you downsize and add lines as they become necessary? A budget gives you the information you need to make these decisions.

4.     Anticipation

This is another key benefit of budgeting. When a business owner knows how much money is coming in and how much is going out, he or she can be ready for just about anything. Knowledge of cash flows allows a firm to set aside money in the good times and monitor the outflow of savings in the bad times to ensure that a business weathers the storm. Being prepared for a recession helps to soften or eliminate the pains that go along with it.

In addition, being prepared means looking ahead to anticipate future expenses, which goes hand-in-hand with money controls. How long will that old printer last? When can the office afford to upgrade all its computers? Do we have the money to hire another draftsman to increase output? A company with a well-prepared budget won’t need to use any guesswork or “sign-and-pray” checking because a budget plans for the future and gives business owners the flexibility to pay for both expected and unexpected expenses.

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Budgeting can be intimidating at first. It requires a significant investment of time and energy to obtain the necessary information, analyze it, organize it, and then use that information to create a plan for financial success. It also necessitates a set of up-to-date books that are fully reconciled to create an accurate picture of where the company is in relation to where it needs to go. I can create a budget for any business that produces results. If you have a bookkeeper on staff, or someone you use already for your bookkeeping needs, ask them today about budgeting and where they can take your business. You’ll be glad you did.