Bookkeeping Check-up Recommended
The continued pandemic has had a dramatic impact on the economy, and small businesses have particularly taken a hard hit. In a recent survey of over 1500 small businesses conducted by Babson College and David Binder Research, only 16% of Payroll Protection Program (PPP) loan recipients are very confident that they will be able to maintain payroll without further relief. 96% of those surveyed believe that COVID-19 will change the way they operate in the long-term.
While the CDC is recommending that employers conduct daily health checks, and everyone is taking their temperature, we suggest that you take the temperature of your business as well. A bookkeeping check-up is recommended. Your financials may require attention.
Half of the year has passed. (I know. I can’t believe it either!) As we move further into Q3, it’s important to conduct a mid-year review so you can track your progress, identify deficiencies, and adjust spending as required. Take a close look at your financials and give your books a comprehensive bookkeeping check-up.
Here are a few key items to examine under the microscope during your bookkeeping check-up.
The National Law Review wrote that “Under the CARES Act, a net operating loss (“NOL”) arising in taxable years beginning after December 31, 2017, and before January 1, 2021 (i.e., 2018, 2019, 2020 calendar years) may now be carried back to each of the five taxable years preceding the taxable year in which the NOL arose.” David Rae, a Certified Financial Planner™, writing for Forbes tells us that, “If you are a small business owner or self-employed and work from home, you will likely be able to take advantage of the home office deduction in 2020.” And while many expenses are tax-deductible (which means you could get money back from the government), this often only happens when you have the proper documentation. Take a close look at how your expenses are coded and make sure you have any relevant receipts attached to the transactions in your bookkeeping software.
Now is the perfect time to get into the habit of monthly reconciliations, and not simply reconciling your bank statements against the feeds in QuickBooks. You’ll want to reconcile your bank and credit card accounts, as well as any additional asset, liability, and equity accounts. It’s important to compare your internal records against your monthly statements from external sources. Even the best banks make mistakes, and computers are only as good as the people that enter the information. Monthly reconciliation will help you catch any accounting errors before they become a big problem, keeps your payables and receivables from surprising you, and even help you identify potential cash savings.
How much money do you have on hand? Having a positive cash flow is a great indicator of your business’s financial health. Your cash flow statement, a financial statement that summarizes information about the cash inflows (receipts) and cash outflows (payments) for any specific period of time, also helps monitor how your business moves money around. It tracks operating, investing, and financing activities to show where you are bringing in cash, and where you’re spending it. This valuable insight can help you better manage your finances and make sound business decisions. It is also one of the key indicators of how well you are doing against your yearly budget. With a proper cash flow forecast, you can compare business expenses and income for specific periods and estimate the effects of future business changes. You can basically predict cash shortages – and better yet – cash surpluses.
Year over Year (YoY) Reports
One of the best reports you can run at the end of any quarter is a year-over-year (YOY) comparison. If you haven’t done this before, now is an excellent time to start. Given the findings of the small business survey mentioned earlier, you may see some significant discrepancies that stick out. And you have half a year left to pivot and recoup. If Q2 2019 is on par with Q2 2020, great! However, if you notice a drop in figures from this year compared to last that are not COVID-19 related, then now is the time to analyze and identify the underlying issue to get your business back on track. Even if you see some impressive growth YoY, defining the cause for your spike in numbers now may help you improve even more during the next two quarters of the year.
Profit and Loss
If your revenues are greater than your expenses, your P&L statement will show a net profit. Otherwise, a net loss is shown. If it looks like your expenses will exceed your income this year, you can likely use that net loss for tax purposes. If your profits look like they will be higher, you might consider a major purchase that can be depreciated to offset the win on your taxes. Once you run a quality P&L (also called an income statement), we suggest talking with your CPA to find a strategy that will work best for your business.
If this bookkeeping check-up, reporting and analysis seem daunting, and you don’t want to do all this for yourself, we understand. An annual physical always makes me a bit apprehensive, too. HireEffect™ has your back! Give us a call or drop us an email before Q3 is over, and we’ll help you sort it all out.