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Archives for February 2019

Beating Up The Balance Sheet

Beating up the balance sheet is a term we use in Auditing.

How do you normally diagnose the financial health of your business?  Just run a P&L report, right?

Your cash flow is smoother than ever and your operating bank balance is steadily increasing, so you must be doing great, right?

Everything is actually so great that you decide to hire another employee or perhaps move into a larger, more expensive office space.

The next day, you log in to check your bank balance again and almost faint.  “Where did all my money go?”  Well, you probably forgot that sales tax was due on the 20th of the month, or that you have quarterly 941 deposit requirements, or that it actually takes some time for vendors to receive their checks in the mail and deposit them. This is the first lesson in why beating up the balance sheet is critically important to your business.

Alternatively, you may always find yourself scratching whatever hair is left on your head after your accountant prepares your income tax returns and determines that you owe thousands of dollars to our good buddy, Uncle Sam, despite your company never having more than $5,000 at any given time in the bank.

I’ve been through this conversation thousands of times and my answer is always the same…”Have you ever looked at your balance sheet?” – That’s another way of asking, “have you been beating up the balance sheet?”

I would argue that the balance sheet is the most important report for every company (especially accrual-based filers).  I am going to teach you everything you need to know in order to accurately identify the financial state of your business.  In order to accomplish that, we are going to be dissecting every section of the balance sheet.  We’ll be beating up the balance sheet every week, here. We are going to talk reconciliations, credit cards, paypal, cash, owner draws/distributions, equity, retained earnings, sales tax, loans, payroll taxes, and a bunch of other stuff that you probably don’t care about but need to soon (as in, like, now/immediately).

Oh, and one small disclaimer:  I am an avid and loyal Quickbooks Online and cloud accounting superuser.  I do not support any other accounting applications or desktop versions of Quickbooks.  The advice I provide in my column will serve you best in conjunction with your firm’s books on QBO.  The first step before you do anything should be to convert ASAP!

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Don’t Bank On Your Bank Accounts

Focusing on your bank balances as a guide for strong business performance can be misleading.

I want you to lose the habit of getting excited when you have relatively strong bank balances.

This convenience of liquidity can force you to make irrational and poor business decisions.  You have to ask yourself if this is truly a direct result of an increase in profit.

This is why it is so important to analyze your balance sheet regularly.

Did you recently get a loan?  Are you paying all of your expenses with a credit card or line of credit?  Are you incurring expenses with personal funds?  How much do you owe in sales tax at the end of the quarter?  What do your payroll liabilities look like?  What is the balance sitting in Accounts Payable?  Do you even pay your bills?   Did you receive deposits for jobs that you haven’t even started yet?

If you answered yes to one or more of any of these questions, then it is pertinent that you take a step back.

You really need to start focusing on the equity section of your balance sheet.  For starters, Assets = Liabilities + Equity.  Unfortunately, Assets does not equal Profit.  Your equity section will contain Net Income by default (which is your primary profit indicator) as well as other Owner/Partner Equity accounts and Retained Earnings (my favorite).   We will dig into all of these fancy accounts right here by yours truly but for now I want you to start programming yourself to shift your focus from the asset section and key in on your equity section (as it pertains to analyzing profitability) instead.  Of course, you still need to be concerned with cash flow so I am only speaking in terms of assessing the performance of your business.

As a result, you will become a smarter business owner.  You will eventually begin to understand the true key factors that drive the profitability (or loss) of your business and take action accordingly.  Doesn’t that sound much better than just getting another loan whenever you are tight on funds, just to keep the ball rolling and get your bank balance back to a decent size?  There are plenty of small businesses out there that carry an average of $5,000 in their primary operating account with extremely solid financials!

I admit though – having a large bank balance is nice!  However, last time I checked, I’m pretty sure interest payments (AKA throwing money out the window) and penalties for late filings (AKA throwing money out the window) are definitely not pleasant experiences.  Understanding the financial health of your business will help you avoid these depressing facets of owning a company.

Think Equity, not Assets!

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How To Properly Reconcile Paypal Accounts In Quickbooks Online

I have absolutely no idea how PayPal manages to sucker business owners into thinking it is beneficial to conduct business with a PayPal account. If you are using PayPal for personal transactions, it’s great!  However, when you start to incorporate Paypal into your business, it creates a severe headache for your bookkeeper. It can be a nightmare to reconcile PayPal accounts in QuickBooks Online.

Let me explain why it can be a nightmare to reconcile PayPal accounts in QuickBooks Online.

Over the past several years, technology has thoroughly enhanced the methodology of bookkeeping.  We are now equipped with bank feeds and automated rules to efficiently keep up with your financial transactions.  There are many powerful tools and applications that allow us to spend less time on manual data entry. Then we can spend more time on actually providing valuable, strategic advice. This helps you make better financial decisions.  Now you can begin to  see, essentially what separates an average,  diligent bookkeeper from a trusted advisor.

In the accounting world, PayPal acts no differently than a regular bank account.  However, it lacks the functionality that working with an actual bank provides. Moreover, PayPal impacts more than just an income/expense account and an asset (bank account).

When you pay a vendor from your PayPal account, it it creates a nightmare for us behind the scenes.

If you are like most PayPal users, you are probably carrying a $0 balance in your account.  When you pay a vendor, PayPal needs to pull the funds from somewhere a credit card or bank account (or both) serving as the funding source.  So this isn’t just a debit and a credit – it actually creates multiple transactions. Each transaction must be looked at separately when you reconcile PayPal accounts in QuickBooks Online:

  1. PayPal pulls funds from your bank or credit card account.  When you see this debit, don’t make the mistake of categorizing the expense directly from one of these funding sources.  You are simply transferring an amount from one balance sheet account to another balance sheet account.  If your bank account is the funding source, it should be booked as a transfer. The money flows from the bank account to your PayPal account (asset to asset transfer).  If your credit card is the funding source, it is a transfer from your credit card account to your PayPal account (liability to asset transfer).  If you have a personal bank or credit card account as the funding source, then you should do two things. Book an equity to asset transfer and then immediately STOP doing this!
  2. Now that you took care of the transfer, you can record the expense.  Simply debit your expense account and credit your PayPal (bank) asset account.
  3. Stop using PayPal to pay vendors.

If you are collecting a payment from a client through PayPal, it is pertinent that you follow these steps:

  1. Record the payment to “Undeposited Funds”.  This is essentially a suspense account designed for temporary use. I will discuss in more detail in a future post.
  2. Record a bank deposit to your PayPal account.  Select the payment from Step 1 (that is currently sitting in “Undeposited Funds”). Then record a negative deposit within your “Add New Deposits” section.  The expense account that you should use would be something similar to “PayPal fees” or “merchant account fees”.  Your negative deposit actually creates a positive expense.  Make sense?
  3. Stop using PayPal to collect payments from clients.

Following the above steps will make it possible to reconcile PayPal accounts in QuickBooks Online. Because PayPal is not actually a bank account, we don’t really have access to monthly bank statements. Therefore, I prefer to use the “Monthly Financial Summary” – but you have to be careful.  Unfortunately, there are other debits and credits that can generate discrepancies.  For example, there are PayPal non-posting transactions. Some examples include, Authorization holds, PayPal Cash Back Rewards, Disputes, etc. At least this report gives you an opening and closing balance, and a value to reconcile against.  Assuming you booked your expenses and payments correctly, you should tie out to the penny.

The two major keys to PayPal reconciliation success are to set up your PayPal account as a bank account. Then record your expenses, transfers and payments from clients correctly using the steps above.

As soon as you are finished reconciling your PayPal account to date, then do yourself (and your bookkeeper/accountant) a huge favor. PLEASE stop using PayPal!

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