This month’s blog will discuss cash management of small businesses. Small business owners must manage their cash flow on a daily basis, which is only reasonable given that this is one of the many core elements of a business. It is very common for small business owners to fall into a black hole of ineffective and poor cash management. So, let’s take a look at why cash management is critical for these small owner managed businesses.
Tax
You must be able to account for your sales taxes, as well as differentiate between your personal and business-related withdrawals. Failure to organize and adequately account for these expenditures may result in inaccurate records for, if and when, they are called upon by the CRA, particularly during an audit.
Profitability
Mixing personal and business-related withdrawals can result in miscalculations of the true costs incurred by your business. This is highly critical as to avoid hampering any efforts of making sound analytical decisions. Poor cash management can also decrease profitability as theft or errors may go unnoticed as a result of improper reconciliations and untimely tracking of cash.
There are many simple – yet effective – ways to implement cash management procedures so as to avert the shortfalls noted above. One process that owners can implement is to develop a budget at the outset of the month that highlights expected revenues, expenses and personal disbursements. It is noteworthy to highlight that the degree of complexity in a budget for a small owner managed business is much lower than that of a medium to large sized business. Owners should develop a budget that is tailored specifically to their business and cash needs. Once a budget is developed, it is necessary that you keep track of actual progress against your expectations on a frequent basis. Not doing so may result in significant variances (over and under budget) that would render your cash management ineffective.
In addition to generating a budget and comparing actual results to it on a regular basis, other processes can be put in place to further enhance the management of your cash:
First, reconciling receipts to actual cash on hand on a daily basis. This helps ensure that you have gotten paid and actually have all the money that you are entitled to.
Second, deposit all cash in a bank account. This prevents the habit of keeping money on hand as it may result in you “dipping” your fingers into the “cookie jar” for personal use.
Third, maintain records of your transactions and have them filed. This helps you reconcile any discrepancies you may find as well, and help with bookkeeping and filing taxes. If your business expands greatly so that handling the accounting and bookkeeping becomes difficult, it is recommended that you outsource such services to professionals in order to make sure that your time and effort is directed to the essential development and growth of your business!
Conclusion
In summary, cash management is critical for owner managed small businesses for several reasons. Most importantly, to remain compliant in their tax obligations while enhancing the profitability and growth of the business. While several processes can be in place to help owners manage their cash, the one process that does not seem to have been given much attention by owners is budgeting and tracking against it in a systematic and frequent basis.
Remember, if you need recommendations or guidance on your cash management, your Ottawa Accounting Firm is just a phone call or email away. Contact us as your trusted accounting firm Ottawa for a no-obligation discussion as to how we can help your business.
