Very often, small-business owners (primarily sole proprietors or sole owners of corporations) confuse the term “data entry” with “bookkeeping” and even “accounting.” Another pair of often-confusing terms is “bookkeeping” and “full charge bookkeeping.” The distinctions are important and the proper execution of all of them is vital to the fiscal health of businesses of any size.

Data entry is easy enough that anyone can perform data entry duties, but not everyone can do bookkeeping. Bookkeeping requires specific accounting knowledge and training to do it properly. Let’s take a look at how these terms differ (from simplest to most complex) and how they affect your record-keeping.

Data Entry
This refers to the simple entry in the company’s ledger of bills, payments, invoices, and receipts after conducting the related transactions. The data entry clerk may also record other items such as third-party payroll expenses (the costs associated with using an outside provider to handle your payroll). The actual preparation of sales or payroll tax returns and payments are not part of a data entry clerk’s job description; this person may, however, record them after the fact.

Bookkeeping
Bookkeeping encompasses all the data entry as noted above as well as preparing reports, returns, and payments for sales and payroll taxes. Bookkeeping is generally divided into accounts receivable (what customers are paying into the business) and accounts payable (what the business is paying out to its suppliers and vendors). Depending on the size of the company, these areas may be divided among different clerks or one bookkeeper may perform all the related tasks.

A bookkeeper will record any customer payments that come in and prepare reports for the owner and/or managers to collect on accounts receivable; on the flip side, a bookkeeper will also prepare manual checks to pay vendors. If your company does its bill paying via online banking and you prefer to handle your accounts payable that way, make sure you have internal policies and safeguards set up around this practice since these checks are not signed. (For instance, non-profit organizations often have the board treasurer approve all bills for payment and then will check the expense sheet against those approved bills.) The bookkeeper will record all bank deposits plus perform bank statement reconciliations and record company credit card activities.

Important note: make sure that your data entry clerk, accounts receivables clerk and accounts payable clerk all understand how to use your accounting program (as well as fully understand how to execute their individual responsibilities) to avoid costly mistakes down the line when your accountant gets the information.

Full charge bookkeeping
This is a more complex level of bookkeeping that requires more skill and training and the business owner will pay more for a true full charge bookkeeper. The investment is well worth it, since good bookkeeping makes the job of the corporate accountant that much easier; and having well-kept, accurate records informs key business decisions and long-term financial health of a business.

A full charge bookkeeper does it all–the data entry, the bookkeeping responsibilities listed above, plus:
· Prepares customer invoices
· Receives the payments and prepares the bank deposits
· Records vendor bills, prepares vendor payments
· Prepares payroll (using bookkeeping software)
· Prepares government returns and payments
· Records purchase and sale of assets, depreciation/amortization of assets
· Records deferred income, accruals, and month-end adjustments to prepaid expenses
· Prepares internal financial statements

We’ve written before about the importance of having and understanding financial statements, and how to use them as road maps that guide your company’s fiscal management and health. As you can see from the explanation above, bookkeeping is not an easy task that anyone can do.
Therefore, a trained, knowledgeable, trustworthy, reliable bookkeeper is one of the best additions to any small business operation.

It’s been said that humans only utilize about 10 per cent of our brain’s capacity; I’ll argue that it’s the same for businesses utilizing their accounting software. Business owners typically only see or use 10 per cent of what’s available to them because they might not have the time or expertise to drill down and uncover the other 90 per cent. However, by outsourcing their company’s bookkeeping to a professional, they could tap into their financial information much more efficiently, and base their key business decisions on a much broader—and deeper—base of fiscal intelligence.

Outsourcing a company’s bookkeeping to a professional service can help a business:

1.    Obtain timely Cash Flow reporting. In doing so, business owners and managers can make sure they have enough cash to meet their current obligations—accounts payable, payroll, critical inventory purchases, etc. Cash flow reports provide a critical overview of the expenses that are planned vs. the income you expect to take in. If a cash crunch is on the horizon (which you would see from this report), the business owner knows it and has the opportunity to approach creditors to ask for an extension, or contact late-paying accounts to see if collection is imminent. Speaking of which …

2.    Obtain Aged Receivable reports. By seeing exactly how long those receivables have been in the payment pipeline, the business owner or credit manager can act on a timely basis to work out the terms necessary to collect receivables faster. Your customers might be having a cash flow problem themselves—not surprising given the slow economic recovery our country is experiencing—but with the right information and the right attitude, you should be able to work out a mutually acceptable payment arrangement.

3.    Obtain Aged Payable reports. By staying on top of what you owe to your suppliers and vendors, you will manage your terms with them much better—financially and personally. It’s so important to maintain good relationships with suppliers, contractors and others who rely on your company for prompt payment. An organized report of payables, complete with dates that invoices were received and when they are due, will help the business owner manage the company’s overall cash flow situation, as well as uncover cost centers that might actually be costing the company more than the return on that investment, such as inventory that is not turning over quickly enough.

Your bookkeeping professional can set up reports for different cost center categories and help you monitor income and expense related to those costs to identify areas where your business might become more profitable after making some changes. You won’t know any of this until you have the information in hand.

4.    Keep an eye on profits on a monthly and quarterly basis. A company’s profitability cannot be understood until there is adequate information about cash flow, accounts receivable and accounts payable. This information, combined with analysis of the company’s revenue streams, will identify a business’ profitability drains and gains on a timely basis and allow crucial course corrections before it’s too late.

5.    Track expenses more closely and reduce unnecessary expenses. This ties in directly with keeping an eye on profits and monitoring accounts payable. By examining a full set of reports it is possible to identify potential cost-cutting measures, such as switching the telecom provider for a better plan with more features (and less money), bidding out your janitorial supplies, or purchasing smaller amounts of non-essential office supplies on an as-needed basis. You won’t know any of that until you are able to review expense reports.

6.    Track liabilities and assets. Assets, liabilities and owners’ equity are the three components that make up a company’s balance sheet. The balance sheet, which shows a business’s financial condition at any point, is based on this equation: Assets = Liabilities + Owners’ Equity. This equation is what a business should be using to keep track of money as it flows in and out of the company. Of course, as discussed here, it’s hard to know what that balance sheet will show without all the information a bookkeeping professional can provide.

I can’t stress enough the importance of having all the right financial information at your company’s proverbial fingertips. Please don’t hesitate to call with any questions or concerns you have about your firm’s financial reporting; I’m here to help.

By Louis G. Pacelli, MBA

* Business profile. This document describes your business, including annual sales, number of employees, length of time in business, and ownership.
* Business plan. A business plan is particularly important for new businesses, as they lack a track record for lenders to go by. Your plan should convey all important facts about your business in a concise manner. Your business plan may range anywhere from 5 to 20 pages, plus financial projections. Learn to Write a Winning Business Plan.
* Loan request. This should detail the amount of money requested, how the loan funds will be used, the type of loan, and the amount of working capital you have on hand.
* Collateral. Describe what will be used to secure the loan, including equity in the business, borrowed funds, and available cash. Review the information in Should You Personally Guarantee a Loan to Your Small Business?
* Personal and business financial statements. You will likely need to provide financial information for anyone who owns 20 percent or more of the business, including owners, partners, officers, and stockholders. Lenders will want to see a complete schedule of current debts with balances, payment schedules, maturity, and collateral used to secure other loans.

You may also be asked to provide:

* Balance sheets from the last three years.
* Profit and loss statements from the last three years.
* Cash flow projections indicating how much cash you expect to generate
* Accounts receivable and payables aging, breaking your receivables and payables in to 30-, 60-, 90- and past 90-day-old categories.
* Personal financial statements listing all personal assets, liabilities, and monthly payments, as well as your personal tax returns for the past three years.

Lenders may also require additional documents during the loan process, such as:
Articles of incorporation
Proof of taxpayer ID number
Legal descriptions of real property
Leases
Equipment inventories with serial numbers
Proof of insurance for collateralized items

There are other documents that may improve your chances of getting approved. Some of those are:

* Letters of intent from commercial accounts stating their intent to do business with you
* Market data showing demand for your type of business
* Research on competitors, including information on their customer base and price points

Collecting this additional information is a good idea, but don’t submit it with your application unless your loan officer requests it. Too much information can be overwhelming and actually hurt your chances of getting a loan.

There is hope, however, for companies in this predicament. It comes in the form of a creative financing alternative known as asset-based lending. ABL is ideal for companies that can’t qualify for traditional business loans due to fast growth or other extenuating (and often temporary) circumstances. Startup firms and those with heavy seasonal inventory needs are good examples, but any company with a solid foundation and a history of success that’s facing temporary financial challenges could benefit from ABL.

ABL generally comes in the form of (1) factoring services or (2) accounts receivable financing.

In a factoring service, companies sell their outstanding receivables to a commercial finance company — sometimes referred to as a “factor” — at a discount that’s typically between 2 percent and 5 percent. The amount of the discount depends on variables such as the credit risk of the debtor, any risk associated with the industry, the number of days the funds are in use and how much of the receivable is advanced up-front (80 percent is common).

There are two key benefits of factoring:

1. Improved cash flow: Instead of waiting 30, 60, or even 90 days to receive payment, a business gets most of its accounts receivable at the time the invoice is generated. Getting receivables sooner can mean the difference between success and failure for companies operating on long cash-flow cycles.
2. No more credit analysis, risk, or collections: The finance company performs credit checks on customers and analyzes credit reports to uncover bad risks and set appropriate credit limits, essentially becoming a business’s full-time credit manager. It also performs all the services of a full-fledged accounts receivable department, including folding, stuffing, mailing, and documenting invoices and payments in a ledgering system.

With accounts receivable financing, companies borrow against the value of their accounts receivable instead of selling them to a finance company outright. Their receivables, in effect, become collateral for the business loan, with the finance company advancing funds based on a calculation of the outstanding receivables. The best candidates for accounts receivable financing are companies that can demonstrate a history of strong financial planning, have solid financial reporting capabilities, and don’t have high customer concentrations (no more than 60 percent of sales to one customer, for example).

When searching for an ABL lender, talk to your bank first. However, since ABL is a specialized type of lending, many banks don’t do it in-house. Instead they refer their customers to commercial finance companies.

Be sure to check out any potential commercial finance company carefully. Find out how long they’ve been in business and how well capitalized they are. How many local businesses have used (or are using) them? Does the commercial finance company itself qualify for commercial banking services? With the credit crunch, some finance companies are now highly leveraged and may be in poor financial condition themselves, so do your homework. Professional experience and adequate capitalization are crucial.

A commercial finance company will become an integral part of your business team. Therefore, do your due diligence and think carefully about the relationship you’re entering into.

Bookkeeping starts at the first occurrence of a transaction. It involves the recording of every single transaction that takes place in a business from purchases to payments made, sales and payments received, in an accurate, orderly and sequential manner. This could be done manually in a tabular book, in an Excel worksheet or in a bookkeeping system such as QuickBooksA good, effective bookkeeping system gives you control over the key financial aspects of your company and helps you track the progress of the business and prepare and monitor the tax returns.

Business owners often tend to lay their hands on certain invoices, bank statements and other documents but not everything that flows through the system. Therefore, having all this information in an organized manner and and place (physical or virtual) gives you less worry and is of great value to the business. Whether you do your bookkeeping yourself or outsource the services elsewhere, there are a few things that business owners can do to make the process easier, more accurate and profitable.

1. Choose a good accounting system. Choose either cash-based or accrual-based accounting. If you use the cash method, you count income when you receive it and expenses when you pay them. Under the accrual method, you count income and expenses when they happen, not when you actually receive or pay them.
2. Keep daily records. This is one of the most basic rules. If you don’t keep accurate daily records, you don’t have an accurate way to track the financial condition of your business. Once you have a good system set up, accurate record keeping will take just a few minutes a day.
3. Monitor your checks carefully. Be cautious when you’re writing checks and don’t just toss canceled ones into a filing cabinet without reviewing them. Remember, those checks are as good as cash and should be treated as such.
4. Always reconcile your bank statements. This is another basic tip that can reap big rewards. Matching your bank statement with other monthly records makes it much easier to reconcile your statements and track expenses.
5. Do an audit. Keeping your invoices and checks in numeric order, and keeping separate bank accounts for your business and personal funds, helps you maintain a good audit trail. Your record keeping will be much more effective if you have a system that allows you to quickly and easily retrace your company’s financial activities.
6. Manage your computer. Web-based bookkeeping software is absolutely essential for all businesses. The applications make it easy to track income and expenses, prepare tax documents, summarize your company’s financial activities, and back up critical records for safekeeping.

If you are unfamiliar with accounting or bookkeeping, it might be a good idea to hire a bookkeeping service to handle your transaction records. Outsourcing your payroll can save you time and money, not to mention a headache or two. If you need any assistance with getting your records in order then it will serve your business well to contract the bookkeeping services of a firm of that can put a system in place for you, and maintain it if necessary, so that you can focus on your core business.

In any case, good bookkeeping is imperative to your business. Rather than look upon a good bookkeeper or accountant as an expense to your company, think of them as the focal point on how to make you money.

With the global financial crisis still fresh in everyone’s mind it is time to consider if you have the best information at hand to make informed business decisions. When the crisis hit a lot of small businesses suffered and were forced into bankruptcy.

What does all this mean for your business? A large number of businesses fail for two reasons first they don’t collect their debts when due and second there is poor cash flow usually a result of not collecting their debt timely.

Cash is a vital resource in any business and without a good cash flow plan the business will struggle to meet its obligations resulting in possible bankruptcy. Monitoring your cash flow on a weekly basis will highlight areas of concern before they arise.

A healthy cash flow can be achieved through the use of a number of tools.

1. Providing regular cash flow reports.
2. Reviewing the Aged Accounts Receivable report (Debtors, people who owe you money).
3. Reviewing the Aged Accounts Payable report (Creditors, people who you owe money).

The cash flow report should also take into consideration other cash expenditure for example Payroll, leases, bank loans and all other liabilities of the business. Timing of the inflows and outflows of cash is also an important part of the cash flow plan to ensure that you do not have all your liabilities arising at once.

Your bookkeeper should also follow up with your customers by making  telephone calls and sending letters to help collect invoices due and ensure that your invoices and statements are sent out on a regular basis. It is outside the scope of a bookkeeper to provide legal advice but there should be a collection strategy in place to deal with older receivables.

It is not a good practice for the business owner to chase their own debts as it creates a difficult situation between the owner and the clients. The role of the business owner is to build and maintain a good working relationship with their client.

The Aged Receivable and Aged Payable should be reviewed on a weekly basis along with the cash flow report and the bank reconciliations to ensure the business owner has sufficient information to make decisions on future growth, current and future obligations and to correct any issues that may arise that will have a negative impact on your business.

Utilizing a bookkeeper to process and prepare your financial information on a regular basis saves the business considerable time ensuring decisions are based on current data in accordance with all relevant changes to legislation.

Before you decided to hire an external bookkeeper make certain they have the required qualifications and experience to undertake this role. For more information visit the American Institute of Professional Bookkeepers website.

Imagine a world with no computers. We might be there again someday soon, but not in the 1850s pastoral sense of “no computers.” Instead, more along the line that we won’t need boxes near or around our desks to perform all of the tasks that we currently rely on such boxes to do.

With the recent explosion of Software-as-a-Service and the Web 2.0 phenomenon, we are well on our way to making such a scenario a reality. SaaS and hosted programs have been offered for around a decade, but only in the past few years have they really matured into the fully-featured solutions that people can rely on for their computing needs, that small business owners can rely on to run their businesses, and that professionals can rely on to provide accurate and dependable client service.

SaaS
In brief, SaaS programs solely exist in a web-based format. They allow users to essentially rent the application for a monthly or annual charge. So, for instance, instead of purchasing an accounting system, installing it on their servers, maintaining and updating it, a business can instead use the program over their high speed data connection. The programs run either through a secure web browser or custom interface, providing the user with anywhere/anytime access to a full strength program. For most such programs, the fact that the program is hosted makes little actual difference to the user in terms of interface and operations, although there are certainly benefits inherent in the SaaS model to both the user and the technology vendor.

Web 2.0
And SaaS is just a part of the larger picture of Web 2.0 and Cloud Computing, which are the continuing evolution of how we use the internet and computer programs in general. Web 2.0 is primarily associated with websites and web tools that promote interactive collaboration, such as Wikipedia, Google Apps, YouTube and social networking sites. According to Tim O’Reilly, the original coiner of the phrase Web 2.0, one of the apparent indicators of the success of such a site is that “the more people that use it, the better it becomes.”

The Cloud
The concept of Cloud Computing is, appropriately enough, at a higher level, reflecting many more things that we do (or can do) involving remotely available information, programs and computing infrastructure. In their February 2009 whitepaper “Above the Clouds,” academics at the University of California Berkely defined Cloud Computing as “both the applications delivered as services over the internet (SaaS), and the hardware and systems software in the datacenters that provide those services. A major component of Cloud Computing is often referred to as utility computing. Instead of users simply having subscription-based access to programs (SaaS), organizations, corporations and other entities can also buy access to virtual machines, storage space and even datacenters, allowing them to rapidly expand their own IT capabilities in very little time, but without the infrastructure and maintenance investment.

Growth in SaaS and Web 2.0
I noted a few years ago that hosted model of computing made sense for developers and for users, but at that time, users were still a little reluctant to place the same level of faith in a remote hosted program than they did in a locally installed one. My primary points then were that the hosted model was more cost-efficient for software companies and more preventive of piracy, while for users there were the very tangible benefits of being able to access the system and data from any location, as well as relief from the burdens of installing, updating and maintaining these programs.

My how things have changed. Current economic conditions have caused most traditional technology providers to experience static or even slightly declining growth, while the SaaS market has experienced double digit growth and is predicted by research firms Gartner and IDC to expand by 20%-30% in 2009.

While I would like to take some credit for this growth since I’ve frequently expounded on the benefits of SaaS, the growth has been across the board, a reflection of widespread adoption across all professions and industries. The evolution to the hosted model has taken a big step, moving beyond the early adopters, and into the realm of the mainstream. And this provides additional benefits to users, as the more mature offerings on the market will be joined by more and more competitors.

What Web 2.0 and SaaS Mean for You & Your Clients
For tax and accounting professionals, the promise held by hosted programs and collaborative Web 2.0 websites means, once again, less time keeping up with program updates and instant access to programs and data from anywhere. The primary reason more of these professionals haven’t moved to such programs en masse is because there were seemingly only a few options, leaving devotees of particular programs to remain with their standard applications. And while some of these programs now offer remote access add-on functions which allow for some added benefits, they are not hosted applications.

There are, however, several fully-hosted applications out there for both client service functions and internal management, from professional tax compliance systems like GoSystem from Thomson Reuters, and OrangeDoor Pro, to professional accounting/write-up systems such as Accounting Relief AC from AccountantsWorld. Professional firms can also achieve greater productivity through web-based applications for workflow processes from SurePrep and Copanion. Web 2.0’s offerings include the TaxAlmanac.org wiki, where professionals across the country collaborate to build an extensive tax knowledge encyclopedia.

The ASP model also fits into the SaaS model in a fashion, allowing firms to use programs online on a subscription basis, even though the programs aren’t offered in that way from the technology vendor. One such example is Insynq, which can host and manage a variety of professional accounting programs.

Web 2.0 and SaaS are also proving beneficial to small businesses and their relationship with their accountant. The giant in the room is still QuickBooks with its online version, but it has been joined by other capable online small business management systems from NetBooks, Clarity Accounting and ClearBooks. The Accounting Relief AC system noted previously for use by accountants also offers a small business portal into the system, allowing these users to have access to only their data, but letting the accountant retain full control over their books and have real-time access to the data at all times. And NetSuite and Intacct have been offering client-side SaaS accounting systems for more than 10 years, with more extensive ERP, CRM and financial management features for mid-sized and growing companies.

Also noteworthy are tools that either add-on to an existing program, providing web-based features that enhance usability, as well as web-based utilities that focus on specific areas. The SmartVault system is an excellent example of the first, allowing users to easily scan and attach invoices and other documents to their QuickBooks transactions, with the documents stored online and accessible remotely by their accountant. Likewise, Bill.com exemplifies the second, taking many of the headaches out of managing payables by providing a system through which small businesses scan bills, which are then fully managed and paid by Bill.com.

It’s So Easy, You’re Already Doing It
While you may not think about the terminology or technology behind the programs that you and your clients use every day, you are almost certainly already using many hosted applications and Web 2.0 websites. Whether that means you’re using any of the technologies I’ve noted in this article, or other advanced collaborative tools like Microsoft’s Groove and GoogleDocs. Or perhaps web-based research, backup utilities and social networking websites. Even portals, which when used in conjunction with a firm’s website, extend the benefits of Web 2.0 to the site, allowing clients and firm staff to share documents and work more collaboratively.

Outsourcing the PC
The promise of all of these trends, Web 2.0, SaaS and Cloud Computing, is that more and more of the things we currently rely on our own computers to do, will be done elsewhere. In short, the PC is gradually being outsourced, or at least most of its functions are. For most professional uses, the end result could very well be systems that require only a monitor and interface devices (keyboard, mouse- if they don’t all go to touchscreens). Users will be able to log into anything from anywhere, whether personal files, work programs, client data or collaborative processes. Hard drives won’t be necessary since everything will be stored in a secure datacenter, which means backups will be automatic, and data will be much safer than if it were stored on a computer in a professional’s office and is vulnerable to many security threats.

The PC won’t die exactly, it will just evolve into something entirely different and eventually not even be referred to as such, since it will no longer be “computing,” but instead will be the user’s interface to much greater and more powerful processing capabilities at the other end. All of this is coming as a result of Web 2.0, SaaS and Cloud Computing, to all professions and industries. It won’t be an immediate transformation, but it is already happening. And you’re already seeing some of the benefits in your practice today.

Ever hear a story about a business owner who enjoys accounting and bookkeeping? I think it is an urban legend. Small business owners tend to dislike crunching numbers because it takes too much time, can be too confusing or it involves expensive, hard-to-use software.

The result: 64 percent of businesses manage their money half-heartedly out of shoeboxes and spreadsheets, or generally lack a solid accounting system, according to SimCorp USA Inc. and the Financial Executives Consulting Group.

You can take control. Here are five ways that online technologies will save you accounting time.

Head to the cloud, eliminate software

For a small business, turning to the cloud can provide a plethora of accounting and money-tracking applications that have very clear advantages. Such advantages enable users to work from anywhere, on any computer that has a browser.

All of these solutions work on a Mac or PC — there are no limitations.

Working with accounting solutions in the cloud also allows you to grant access to collaborators such as business partners and accountants who can help with the work that needs to be done. Though some applications charge a monthly fee that could exceed the cost of desktop software, there are many inexpensive options, and some that are completely free.

You will also find that cloud-based applications automatically back up data, eliminating the risk of lost work.

For some people, working in the cloud raises anxiety levels brought on by potential security threats. Therefore, you should make sure the service you choose has privacy and security measures that are certified by a third party. VeriSign and TrustE are among the best known.

Manual entry is dead – stop using it

Many individuals spend countless hours on their accounting processes manually entering purchases, receipts and payments.

When you make a purchase, it automatically becomes visible on your credit or debit card statement. And when you deposit a payment, it is posted to your bank statement.
The information already lives in digital form, so there should be no need to manually enter it into a spreadsheet. Choose an accounting application that allows you to import data directly from your bank and credit card accounts.

Automate to stop human error or duplication of work

Running a small business means there is an unlimited amount of data that needs to be tracked, so using an automated system will dramatically save you time.
When the numbers come in directly from the bank, there is no chance you will accidentally transpose two digits and then spend hours trying to locate your error. The chance of bookkeeping errors that lead to lost income or tax penalties is greatly diminished.

A good accounting application will also be efficient.

Do you type invoices manually and then record the information into a spreadsheet? You are duplicating your workload. A good online solution will allow you to create invoices and automatically register the income, taxes and other details into the right places.

Simplify tax time

What does tax time cost you, emotionally and financially, every year?

Let me paint an alternate scenario: You choose an automated, cloud-based accounting tool that gathers your transactions year-round. You then either put in time to manage your books, balance sheets and income statements — far less than if you were doing things manually — or you invite a collaborator such as an accountant to do that for you.

Come tax time, there’s no backlog. There’s no panic. What a relief.

Keep track of the details

Though we hate to admit it, we business owners cannot track everything ourselves.

There are many responsibilities to running your own company, and while you focus on the juggling act, small but important tasks can be missed.

A smart, intuitive accounting tool helps you pay attention to what matters most. Look for solutions that alert you when bills are due, when customer invoices are overdue, or send you real-time overviews that you can understand at a glance.

Accounting is too important to ignore, and does not have to take a lot of time.

With the new breed of online financial tools available, you will find they are easy to use and will simplify your life. And they are often inexpensive or free.
Begin the New Year on the right note. Make it your resolution to reduce the time you spend on accounting, so you can focus on your business.

Kirk Simpson, CEO of Wave Accounting.

In today’s challenging economic environment, it’s more important than ever for entrepreneurs and small business owners to have a firm grasp on financial management.

When all is said and done, there are a handful of questions that every owner should always know the answers to after the business financials have been put in the drawer for the month. Here is my list of the five most important small business financial management questions. Notice that I ask the questions but I don’t provide the answers, because none of these are “one answer fits all” questions.

1. How much profit do you really make on each of your 10 largest customers? Why is this question so important? Because the profit you make on those big customers determines in large measure the profitability of your overall business.

Consider how often they buy, how large their orders are and how quickly they pay. Those are the obvious things, but also consider the special price concessions you might give them in appreciation for their business. Do you extend special services to them in delivery, warranty support or other customer service? Do you extend payment terms or wait longer before you call their Accounts Payable department? Do you process special turnaround orders or accept smaller orders than you really want to? Are you giving these concessions because you’re building a relationship that you hope will pay off later? If so, ask these customers if they will be willing to pay you more money tomorrow for something they’re paying less money for today. Want to guess their answer to this question?

Each of these extras cost your company money or time—two real costs of servicing that account. This is not to say you shouldn’t do it, but you should know how profitable that account is in order to make the best decisions for your company. My point: Your largest customer isn’t always your most profitable customer.

2. How much does each product you sell really cost you? I am amazed at how many companies figure their all-important Gross Profit on a product by deducting only the direct costs of manufacture or purchase from the selling price. Often this simplistic calculation is applied to an entire department, or the entire operation, rather than for the individual product itself—which can lose money. That’s because this is rarely the true cost of a product you sell. Consider the costs to receive, package, warehouse and deliver the product. How about servicing the warranty on its performance, or the development cost if it’s your proprietary product?

Then there’s the overhead cost of running your plant or warehouse. The costs related to having the facility ready and manned for operations range from the lights and extra insurance to the stock pickers’ wages, the janitorial service, and maintenance contracts on your equipment. If one of your products requires a disproportionate amount of overhead costs, an average overhead calculation for your company as a whole will never give you the right answer. Your most popular item could be a loss leader without your even knowing it. If you apply this issue to every item you sell, where you are actually losing money because presumed gross profit is not calculated correctly it’s really hard to make up the deficit on volume.

3. How quickly does your inventory revolve, or turnover, during a year? Funny things happen to inventory that doesn’t move out of your warehouse quickly enough. It disappears, breaks or becomes old, obsolete or generally unusable. Or it just gets misplaced or lost, to be found soon after you’ve bought more. Or the market price comes down and you have to mark it down to sell it. All of these problems take money out of your pocket without returning any benefit.

The first step in preventing inventory losses and damage to your bottom line is to know how quickly your inventory normally turns and to note any changes in that rate. Step number two is to refine the overall turnover rate to an item-specific turnover rate, at least for high-cost items. Why the detail? Because expensive items that don’t move and cost more to carry may be hidden by fast-moving commodity items on your floor that have much lower margins.

4. How quickly do your receivables get collected? This sounds like a no-brainer to most business owners, but ask yourself this: What is the average number of days your credit sales are outstanding (also called the Days Sales Outstanding or DSO)? Too often we believe in the concept of prompt collection but don’t follow the practice. Collections get out of hand without our realizing it, because we’re busy selling more and “managing the growth.”

Think of it this way: Decide how much interest-free money you are willing to lend to your customers as a percentage of sales, and stick to it. Follow the trend of your DSO and take action when it starts moving in the wrong direction. If strong margin gains are available in return for extending terms, that’s OK—but do this deliberately, not accidentally. As a follow-up, watch your accounts receivable aging trends as well, because old balances look the same as new balances in a DSO calculation—and it’s statistically proven that the older those balances are, the less likely they will be collected.

5. If your business does what you expect it to, when will your cash reach its highest and lowest points of the year, and roughly how much cash will that be? Everyone seems to agree they’d like to know these answers in order to better plan for short-term borrowing needs or explore investment opportunities in advance. It’s much easier to plan ahead when you can anticipate the fluctuations in your company’s cash flow. And yet few owners of small businesses believe they can get the answer in any way that’s reasonably reliable or cost-effective.

Many CEOs track cash flow by following net income and the bank balance, neither of which is going to be very useful in predicting future cash needs for most businesses. Capital asset purchases; growth in inventory, receivables and payables; debt service; capacity expansion—these can all have a profound influence on future cash balances. The good news is that all can be reasonably predictable with a little work.

by Louis Pacelli, President of LGP Business Services

PARAMUS, N.J., September 3 2010 – Lou Pacelli, president and founder of LGP Business Services LLC (LGPFS) in Paramus, N.J., announced that Edward J. Pavel, Jr. of Totowa, N.J. has joined the firm as managing partner. Pavel will be responsible for developing new business for the company’s business accounting division LGP Business Services, LLC (LGPBS), and will oversee the implementation of online solutions to serve its client needs more efficiently.

LGP Business Services provides small and medium-size businesses with critical support services including comprehensive operations and financial review; debt restructuring and lender negotiations; interim management services; and turnaround services for troubled companies. LGPBS also serves lending institutions with field examinations and asset verification of customers. Pacelli launched LGP Business Services in early 2009.

“Ed brings a unique skill set and depth of experience in all facets of financial services, with particular strength in strategy development,” said Pacelli. “Our clients will benefit from this as well as his proven abilities in designing and implementing technology-based solutions for large financial institutions.”

Decades of Wall Street Experience
With a career spanning nearly 30 years, Pavel has held senior management positions at Thomson McKinnon Securities, Shearson Lehman and Bear Stearns. He developed hedging strategies in the mortgage, interest rate, foreign exchange and energy markets; handled institutional sales in financial futures and foreign exchange; and designed and implemented trade strategies and methods for identifying arbitrage opportunities between currency spreads and short-term interest rates.

In recent years Pavel founded a commodity investment firm and developed proprietary trading algorithms for debt, foreign exchange and equity markets. In 2007 he opened a private financial consultancy specializing in e-commerce and small businesses. His practice comprised business plan development; comprehensive operations and processes evaluations; financial modeling; and creation of inventory management systems, productivity metrics, and efficiency strategies.

“As managing partner at LGP Business Services I will set goals for strategic growth and profitability-for the firm as well as our clients-and develop the methods and systems to achieve those goals,” noted Pavel. “It’s a great opportunity for me to mesh my experience in management and revenue growth with my interest in technology.”

For more information about LGP Business Services, LLC and its financial services for businesses and banks, or comprehensive accounting solutions from LGP Business Services, LLC, contact President Lou Pacelli at (201) 345-3227 or info@lgpbs.com.