When business owners fail to separate their business money from personal money,they are likely to end up in the category of an employee and the self employed. On the other hand, when you have successfully learnt the art of separating the two, then you move to the business owner and investor category. The good thing is that everyone starts from the left side of the quadrant and eventually grows and moves to the right side of the quadrant. Here are some tips to help you move from left to right.
This is most difficult especially for founding owners of businesses. Your business should have its own identity different from your own. Start by giving your business a name and registering it either as a sole trader, limited company or partnership. Then open a different bank account under your company’s name and allow all the income produced by the business to go into that account. A good control would be to have a second trusted person to sign on the account alongside you so that it is not just you who can make withdrawals. Accountability with a trusted partner can save you from making bad business decisions.
By building an accounting system you will be able to account for all your business income and expenses accurately. It will be a good idea to give yourself a suitable salary to compensate you for your efforts in building the company. An accounting system will also help you separate your tax obligations from those of the business and your personal obligations. It is also critical to create two budgets, one for your business and one for your personal needs. Your business budget will show you how much money the business plans to make and where all the income will be spent. Your personal budget on the other hand will help you manage your lifestyle and ensure that you are not living beyond your means. Your personal budget is a good tool in determining what salary you would require from your business, while the business budget will determine whether it is able to pay it.
You must develop a plan on how you intend to grow your business. The absence of this plan will increase the risk of misappropriation especially if your business is doing very well. Savings for both the business and your personal lifestyle is a must. The business must operate a different savings account from your own savings. If yours is a start up, make sure you have put six months to a year’s worth of savings for your personal needs like rent, food and utilities bills so that you give your business sufficient time to grow. As your business grows, you can decide to reward yourself from the business with taxable benefits such as savings in a pension plan or a mortgage plan. The business can also plan to invest in assets such as a company car, computer machines that will reduce your tax obligations via allowable expenses and depreciation.
Once your business is strong enough to diversify its asset base, for example in land and building or even acquiring other companies, it is advisable that your put these assets in the name of the business and not your personal name. You must only acquire your personal assets from your personal savings. Having your assets under the business name will ensure that the income the assets generate are captured under the business and therefore allow the business to grow stronger. Investing in a good financial system in your business, will ensure effective management of these assets which means you can have a wider portfolio and more free time for yourself while the money is working for you.
The World Bank puts Kenya as a growing economy with a 5% growth rate by the end of 2012. Despite of this, businesses are still finding it difficult to save, invest and execute their organizations growth plans. A good number of factors keep affecting the ability to generate our desired profitability from the rise in energy prices, high rates of inflation, cost of borrowing, labor and office facilities would either directly or indirectly affect the cost of doing business. Since most of these factors are out of the control of the entrepreneur, it is critical that you put a close leash on your expenditure with the intention of weeding off expenses that do not directly increase your sales.
This will directly affect your traveling costs. If you have a habit of having meetings outside the office you may want to watch out for this cost. You may also want to take advantage of technology such as conference calls or skyping as an option to physical meetings. If the nature of your business is one for delivering products to the customer, it would be helpful to analyses the cost of purchasing a vehicle through hire purchase, leasing one and the cost of public transport. Select the option that is conducive to your business. When considering these options, one must be careful to include the full cost of the vehicle which includes maintenance insurance, fuel and possibly a driver.
HIGH RATES OF INFLATION
Increase in inflation will reduce your purchasing power making it difficult to purchase supplies needed to deliver your service. In addition to this, it is also important to remember that the rise in inflation will also reduce the level of disposable income for your customers hence reducing your sales volumes. You then have two options, to reduce your cost of production or differentiate your outputs to increase the value of your services. For extremely profitable ventures, it would be prudent to hold on dividend payouts and invest the surpluses in secure investments such as real estate, or fixed income securities.
COST OF BORROWING
Debt can be a good or dangerous for the business. The high cost of interest makes it expensive to acquire capital to either start a business or provide working capital. Short term borrowing tends to be more expensive and if not carefully monitored, you may end up working for the financial providers. It is critical that during a season of high interest rate to use debt to acquire assets that have a high rate of return and to structure it in a way that you are able to pass the cost of borrowing to a third party.
The recent increase in minimum wage is a good indicator that the cost of labor is on the rise. You have to make a clear distinction between a profit center labor force and a cost center. Cost center labor forces are your administration, support staff and back office operations. They do not directly contribute to producing sales. Companies should consider outsourcing such services to reduce the wage bill, which included the cost of supervision and training. One must be strategic when recruiting. Staffing must be seen in the light of either increasing revenue or saving costs. A gap analysis will help you identify the critical skill needed to generate value that will get you out of a hole or propel you to greater heights.
A good office space will give you a sense of stability and comfort for you to execute your operations. Support services such as electricity, water, office refreshments, stationary and internet come with the territory. These are all expenses that are within your control. Business centers are a good way to save on facilities cost since these services are provides in bulk.
SAVINGS AND INVESTING
You must always be moving towards reducing your business risk and the best way in doing this is growing your passive income. This is income that is generated from your investments. Over dependency on one source of income could be detrimental in the long term in an environment where costs keep escalating. Investing in real estate, a second business that compliments the existing one are some examples of investment worth perusing. Investing in assets that are tax allowable would also be of great help in your attempts at reduce your tax liability.
The cost of doing business is predominately due to factors that are somewhat out of the control of the entrepreneur. As a result this increases the risk of doing and sustaining your business. You have to sharpen your skills and efforts in reducing this business risk through carefully making value adding decision for your business.
Alvin Mwangura, PassionProfit Finance Expert & CEO ARI Capital Ltd
Proper bookkeeping is important to sustaining and expanding a business. Without it, you run the risk of hitting cash flow crunches, wasting money, and missing out on opportunities to expand. When you are devising or revising your bookkeeping routine, remember that the purpose of bookkeeping is to help you manage your business and to enable tax agencies to evaluate your business activity. As long as your bookkeeping achieves both of these objectives, it can – and should – be as simple as possible.
The general guidelines here outline what you must take care of and provide ideas for how to keep your books in an orderly manner. But before making any decisions regarding bookkeeping, check with your accountant or tax consultant because bookkeeping needs vary dramatically by business.
Many small business owners choose to use software to keep track of various aspects of their business. The key to taking full advantage of bookkeeping software is to determine if it saves you time and frees you up to concentrate on running your business. In many cases it will, but be careful not to fall into the trap of wasting time setting up complex bookkeeping systems.
Some bookkeeping functions are best relegated to an accountant. While it is essential to retain a thorough knowledge by reviewing your books frequently, an accountant or bookkeeper can free you up to concentrate on expanding your business. Even a bookkeeping task that takes only a few hours a week may be better relegated to someone else if that time can be better spent.
Revenues and Expenses
Your business will use either a Revenue or Expense Journal or a Ledger to keep track of how much money is going out, where it is going, and what is coming in.
A Revenue and Expense Journal is used by most small businesses and is single-entry accounting — recording receipts and expenditures only. Double entry accounting involves a ledger and necessitates that each activity be recorded as a debit and a credit on your books. In the past it was thought that all businesses needed to use the more cumbersome method of double-entry, but the single entry system is now used for many small business owners. Single-entry accounting can be kept on paper or computer. Programs that perform single-entry accounting include Quicken by Intuit and Microsoft Money among many others.
A ledger is used to record every transaction twice based on the idea that each transaction has two halves that affect your business. For example, if you sell an item, your books would reflect a decrease in inventory (a credit) and a inflow of payment (debit). If you use double-entry accounting you may want to use a computer program or a bookkeeper to keep your ledger up to date. If you allow anyone else to keep your books be sure you review them regularly. One program that dose double-entry bookkeeping is QuickBooks by Intuit.
Your accountant can advise you on which type of recordkeeping you should choose. Also consult your tax advisor about whether you should use a cash or accrual-based bookkeeping system.
Cash spent in your business needs to be accounted for if you want to record all business expenses in a given year. There are at least two ways to do this: write yourself reimbursable cheques or keep a petty cash record.
If you choose to pay yourself back with a cheque, simply keep track of all cash receipts and total them weekly, biweekly or monthly, depending on your volume of expenses. Keep a log of each category of expense, for tax purposes and write yourself a cheque for the total. Write cash reimbursable in your cheque register to differentiate this from taxable income. Alternatively, you can keep a petty cash record by writing a cheque to petty cash and keeping a log of each expense paid out of petty cash.
Keeping on top of your inventory records will enable you to prevent pilferage, keep inventory holdings to a minimum, and track buying trends, among other things.
If you sell a large number of small-ticket items — for example, as in a stationary store, you might want to use a computer system to track inventory or tie your computer system into your sales by having a POS (point of sale) inventory system. If you sell larger ticket items you may be able to do it yourself on paper.
The crucial inventory information you need to capture is: date purchased, stock number of item purchased, purchase price, date sold, and sale price.
If your products or services are paid for at time of delivery, you will not need an accounts receivable tracking system. However, if you provide services or products for which people pay you at a later date, your accounts receivable records keep track of what is owed to you. You can monitor accounts receivable by holding on to a copy of all invoices sent out or by keeping an accounts receivable record. Either way, the information you need to capture includes: invoice date, invoice number, invoice amount, terms, date paid, amount paid, and the name of the entity being billed.
Many software programs are available to help you generate invoices and track hours and expenses incurred for each client. These programs can save hours of time for a business owner and create professional-looking invoices.
Accounts payables are debts owed by your company for goods and services. Keeping track of what you owe and when it is due will enable you to establish good credit and hold onto your money as long as possible.
Business owners with few accounts payable items use accordion file folders labeled with dates to keep track. Other small firms simply pay bills twice per month and keep all bills in a “To Pay” folder. Larger companies use accounts payable paper records organized by creditor. Regardless of the system you choose, you should retain the following information about accounts payable: invoice date, invoice number, invoice amount, terms, date paid, amount paid, balance (if applicable), and clients names and address.
Alvin Mwangura, PassionProfit Finance Expert & CEO ARI Capital Ltd