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Are you maintaining accurate records?

maintaining accurate records

Have you ever sat down at your desk and seen papers everywhere, little to zero organization, and not been able to tell where your company stood financially right away? It is easy for financial leaders, executives, and other business leaders to get in this messy state. Sure, you may have once had accurate records and known exactly where you were. But maintaining accurate records consistently is a critical piece to positioning your company for sale, getting ready for growth, acquiring capital, etc.

Are you in the process of selling your company? The first thing to do is to identify “destroyers” that can impact your company’s value. Click here to download your free “Top 10 Destroyers of Value“.

First, what is accurate or accuracy? Oxford Dictionaries defines accuracy as “the quality or state of being correct or precise.” If your company’s records are not consistently correct and precise, you may encounter some undesired results.

Are you maintaining accurate records?

A simple way to answer this question is to look at your records. Can you easily pull client reports, tax filings for the past couple of years, or receipts from a specific vendor?  Are you able to find information quickly? How well are you able to manage your business with your current records?

Why Maintain Records

Maintaining accurate records is not just for external entities like the IRS, banks, venture capitalists, etc.; but it is also essential for major management decisions, customer support, and financial growth. It allows every party related to your business to see clearly where the company stands. Banks, attorneys, decision makers, etc. all need to understand how your company is positioned. “These records will help you analyze your business’s profitability, stay out of trouble with tax authorities, maintain positive relationships with clients and vendors, protect your business from lawsuits and win lawsuits if you are harmed” (Investopedia).

maintaining accurate records

No one likes to drive blind, so why would you have disorganized, inaccurate records that blind you from seeing the whole picture when making decisions?

How to Maintain Records

There are several ways to maintain accurate records. These include identifying revenue streams, keeping track of invoices and receipts, preparing financial statements, tracking deductible expenses and preparing tax returns. Although these are not all the important records you should maintain, they are a good starting point.

Identify Revenue Streams

This might seem like the most obvious thing to do. But oftentimes we arrive at a new client to find they are mixing business and nonbusiness receipts as well as taxable/nontaxable sources of income. Separate for-profit and non-profit clients from each other. If you service multiple industries, it might be useful to separate your revenue streams by industry.

You don’t want to avoid looking at your business’s revenue. Where did that revenue come from? Is there an industry or type of business that is more profitable than others? Maintaining accurate records isn’t just for those outside the business, but it also will allow you to understand your entire company’s performance.

If you’re selling your company, buyers want to see each revenue stream clearly. By not having accurate records, you may be looking at destroyers of value. To improve the value of your company, identify and find solutions to those “destroyers” of value. Click here to download your free “Top 10 Destroyers of Value“.

Prepare Financial Statements

To prepare precise financial statements, it is critical that you maintain accurate records. Your income statement and balance sheet act as a window into how your business is performing. If the data isn’t 100% accurate, then any decisions made based on that data will not be the best decisions possible. This is because the information isn’t reliable. This can cause a disaster!

Keep Track of Invoices & Receipts

Because of the importance of tracking profitability, you as the financial leader should have a process to track your income and expenses. As a major tool in managing cash, regularly produce reports of the amount and composition of accounts receivables and accounts payable, what has been collected and paid. Not only will this create a system to time payments and encourage your team to collect, but your bank or creditor will be able to rely on your system. This is essential knowledge for the banks to know if you are in a financial crunch.

Prepare Tax Returns

Taxes are a necessary part of operating a business. When you produce tax returns, precise records are required. You need to report income, expenses, and debt on this document. Thankfully, this is not a major burden on your time as you should already have these three categories accurately measured and tracked as you need them to effectively measure the success of your business.

Track Deductible Expenses

Unless you track your deductible expenses throughout the year, you will most likely forget them when you prepare your tax returns. Be sure to create a file for all deductible expenses.

Tips in Maintaining Accurate Records

There are a couple tips and tricks to maintaining accurate records. Some of these include separating personal and business finances, having client files, storing contracts, and maintaining accounting/tax records.

Separate Personal & Business Finances

One of the top rules in operating your own company is to separate personal and business financials. When companies do not separate business and personal finances, records are muddled and there is no clear method to see what is personal and what is business. By doing this, you may run into tax issues, relationship issues, and inaccurate records.

Have Client Files

Separate each client into their own individual file. This will allow you to easily see when they started doing business with you, what work you’ve done with them, and how your relationship is progressing. In addition, you will be able to save time by picking up just one file for the client. And you will have everything you need to know about them in that folder. Need to have invoices, etc. in another folder? Make copies and put everything related to that specific client in their folder.

Store Contracts

When you get served with a lawsuit, it can be shocking. But the best way to combat the stress is to know exactly where to find everything you need to battle your accuser. Store and make copies of all contracts in one place. Then categorize the contacts by clients, employees, vendors, suppliers, etc.. Organize the contracts in a way that makes sense for your business.

Maintain Accounting & Tax Records

The worst offence in maintaining accurate records is not staying on top of your accounting and tax records. Instead of doing the past three months of accounting in a week, create a system to update, maintain, and produce reports regularly. Submit these report for your financial and executive team to view on a schedule.

One of the main “destroyers of value” is not consistently having accurate records. If you are looking to sell your company or just want to improve its value, download your free guide to avoiding things that take value away from you.

maintaining accurate records

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Broken Debt Covenants?

It’s almost that time again…  quarterly debt covenant reporting.  Is your company going to have some explaining to do?  If so, you’re not alone.

Banks generally set 3-4 key covenants on their loans.  These covenants serve as “tripwires” that alert the bank to potential trouble ahead.  Most companies don’t bust all of them, but many find themselves out of compliance with at least one of them at times.  This is particularly true in a soft economy like we’re seeing in Houston these days.

The most common broken debt covenant we see in this environment is the Debt Service Coverage Ratio (DSCR).  Mathematically, DSCR equals:

DSCR=EBIT/(Interest +(Principal/1-Tax Rate))

In English, DSCR is equal to Net Operating Income divided by the cost to service the company’s debt.  It basically measures your company’s ability to make its debt payments.  You can see why this covenant is especially important to your banker

Impact of Broken Debt Covenants

What does it mean to have broken debt covenants?  Worst case, the bank can call your loan.  Generally speaking, banks don’t want to do this, especially if it’s not part of a troubling pattern for your company.  The more likely scenario is that your credit line could be frozen and your company will need to start surviving off only the cash flow generated from operations.

If you find yourself in the situation described above, don’t panic.  By making a few changes, your company can free up cash flow to get a little breathing room until things turn around.  Here are a few examples:

Ask key vendors to stretch their terms – Your vendors don’t want to own your company.  When cash is tight, most vendors will work with you if you as long as you are willing to make regular payments, even if it’s not by the due date.

Have a designated collections person – Nobody likes making collection calls, so unless collections is someone’s job, it’s no one’s job.  Having a dedicated collections person ensures that customers are paying within terms or have made arrangements to pay out past-due invoices, ensuring that your business has the cash to fund operations.

Invoice immediately – It may not seem like much, but getting your invoices out even a couple of days sooner can free up a considerable amount of cash.  Make sure you get them out right away and that they are clear and easy-to-read to avoid payment delays.

Looking for more ideas to help free up cash?  Click the link below to download our free list 25 Ways to Improve Cash Flow.

broken debt covenants

broken debt covenants

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Proforma Invoice Example

See Also:
Proforma Invoice

Proforma Invoice Example

For example, Juan distributes products to and from Mexico. Juan’s business meets all legal specifications that would allow him to import his products into the United States. His company, a fleet of 18 wheel trucks, crosses the border several times each day. In an effort to make the importing process as smooth as possible, Juan must make sure to carefully document his shipments to meet the regulations of both governments. Failure to do so could lead to a slowing or complete halt in the capturing of profit. Clearly, Juan must do anything he can to avoid this.

Juan is worried about a recent shipment. The customs agents of Mexico have informed him that his shipment may be delayed for inspection. This will cause problems in the deal that Juan has made. He must think of a solution to help speed the process. Juan needs to find a way to smooth over the red tape and allow his business operations to continue as normal.

Create a Proforma Invoice

Juan and his business advisors decide that the best course of action is to create a proforma invoice. He has his assistant write an exceptional quality proforma invoice, vs quotation made off company letterhead, for this project. This way his company will come across as the reliable and trustworthy business that it is.

When the customs agents receive this proforma invoice, they are put to ease. They still spend some time inspecting the load but release it after just a few hours, rather than holding it over for a number of days. A simple document has solved a problem that effects Juan’s entire company. Juan rests easy that night knowing he has pleased his customers.

If you want to increase the value of your organization, then click here to download the Know Your Economics Worksheet.

Proforma Invoice Example

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Proforma Invoice Example

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Proforma Invoice

See Also:
Proforma Earnings
Proforma Financial Statements
Credit Letter
Balance of Payments
Proforma Invoice Example
Product Cost

Proforma Invoice Definition

Proforma invoice, defined as an invoice which is sent to a customer before they receive product, has more than one use. For customers it serves two main purposes. First, a proforma invoice allows customers to see estimates on what their invoice will be: product cost, shipping cost, processing fees, and more. Second, the proforma invoice format is a record to be presented to customs agents when attempting to import or export items.

Proforma Invoice Meaning

A proforma invoice, commercial invoice compared, means an invoice which is made before the sale has actually taken place. When distinguishing a proforma or performa invoice an understanding of latin may be of use: pro generally means before, while per generally means after the fact. This is the main difference between a proforma vs commercial invoice.

Often times, when importing or exporting products, customs agents want to understand the deal taking place. They have many reasons for this, to have a document to later confirm the shipment or to create an expectation of what should and should not be shipped with a product. The proforma invoice, or performa invoice for that matter, gives customs agents an understanding of shipped contents, shipping time, value of the shipment, and more.

On the other hand, clients appreciate an estimate of total cost when receiving shipment. This is akin to receiving an estimate prior to work at the car shop. This document can convey a sense of professionalism to the customer.

Proforma Invoice Example

For example, Juan distributes products to and from Mexico. His company, a fleet of 18 wheel trucks, crosses the boarder several times each day. Juan must make sure to carefully document his shipments to meet the regulations of both governments.

But a recent shipment worries Juan. The customs agents of Mexico have informed him that his shipment may be delayed for inspection. This will cause problems in the deal that Juan has made. He must think of a solution to help speed the process.

Juan has his assistant write an exceptional quality proforma invoice, vs quotation made off company letterhead, for this project. This way his company will come across as the reliable and trustworthy business that it is.

They are put to ease when the customs agents receive this proforma invoice. They still spend some time inspecting the load but release it after just a few hours, rather than holding it over for a number of days. A simple document has solved a problem that effects Juan’s entire company. Juan rests easy that night knowing he has pleased his customers.

For more ways to add value to your company, download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.

Proforma Invoice

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Proforma Invoice

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Debit Memorandum (memo)

See Also:
Credit Memorandum (memo)
Account Reconciliation
Credit Sales
Chart of Accounts (COA)
Accounting Principles
Account Reconcilement Definition

Debit Memorandum (Memo) Definition

A debit memorandum or memo is a form or document, sometimes called a debit memo invoice, that informs a buyer that the seller is debiting or increasing its amount in the accounts receivable, thus increasing the amount of the buyer’s accounts payable due to extenuating circumstances.

Debit Memo Meaning

A debit memo is often issued when a seller has not billed or charged enough to the buyer, or it might come from another error or any other factor requiring an adjustment. When a seller issues a debit memo, the seller is required to give specific details why they are issuing the current memo. A debit memo pertaining to banks, called a debit memo bank statement, informs a depositor that the bank will be decreasing that particular account from something other than a debit or check payment. This is usually a bank service charge of some sort.

Debit Memo Example

Cindy works for Fluffy Stuffs Inc., a toy company specializing in the manufacture of stuffed animals. The company has recently sold a large shipment of stuffed animals to Toys N’ More. Cindy billed the company for the stuffed animals sold, but worked off of an old pricing sheet to create the invoice. This is normally not a large problem except that the market price for stuffing has increased dramatically. Therefore, Cindy has created a debit memo to inform Toys N’ More of the increase in price due to current market conditions.

debit memorandum

 

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Construction Accounting

See Also:
Progress Billing for a General Contractor
Cash Flow Statement
How to Select Your Commercial Insurance Broker
Chief Financial Officer (CFO)
Financial Ratios

Construction Accounting Definition

Construction accounting, a type of project accounting, is the method for financially tracking the progress of a construction job. This is essential for bidding, request-for-proposals, project management, invoicing, construction retention payments, and more.

The process of construction accounting management involves monitoring both costs and revenues. Costs fall into 3 main categories: Direct (Direct Labor, Direct Materials, etc.); Indirect (Indirect Labor, Indirect Materials, etc.); and selling, general, and administrative.

To account for revenue, compare the expected project value to the approximate percentage of completion of the project. Over time, you will receive cash with completion invoices. A final payment made upon satisfactory completion of the job. The construction retainer is the final payment because it retains the contractor until that the project is completed.

Construction accounting and financial management involves monitoring draw, progress billing, work-in-progress, and a slew of construction accounting methods which range from GAAP compliant to industry-specific. Generally, the industry has accepted a series of unique methods of financial reporting that are not present anywhere else. These aid in construction accounting and taxation.

Construction Retention Definition

Construction retainage is the final amount of payment kept, by the customer, to ensure satisfactory completion of a project. In both residential and commercial construction, construction retainage is also referred to retention money. Although it is extremely common to the construction world, you can use this method of quality control in other places.

In the world of construction, retention accounting occurs in a similar method as above. Projects are paid with increasing completion until finished. Then, the customer will examine the project, with the project manager, to ensure that it meets their needs. The customer makes the final payment once this is agree upon. To contractors and other workers in construction, this is when retention release has occurred.

Laws exist to protect the investment of the customer as well as the contractor. Laws vary from state to state. An attorney that is experienced with construction retention laws should deal with any discrepancies. In the event of unacceptable or negligent construction, recovery of the retainage is a possibility. Maintain every document and record for each client and each project so that in the event of a disagreement, you will have support to your case.

Construction Accounting Example

The founder of Cabinetco, a custom cabinetry builder, is Maggie. Her projects, pieces of art in their own right, have continuously pleased customers. Maggie, over time, has become well versed in the process of accounting for her projects.

Maggie begins her projects with a Request-for-proposal, or RFP. Her records of past projects allow her to closely estimate the total cost of each new project. Upon this foundation Maggie makes a bid for the estimated cost of each project. In her experience, customers are always pleased when they pay less than the estimate. Therefore, Maggie makes sure to present customers an estimated cost which will be less than her billed price. She does this with a keen eye so as to ensure consistent profitability on each project.

Maggie knows that her bid price does not drive her business: customers do. She has made great efforts to present excellent work and has created happy customers. Word-of-mouth is her most effective marketing message. This leverage allows her to negotiate the lowest retainage payment possible. Maggie knows the importance of cash flow in the survival of her business.

How To Account on Long Projects

Once Maggie has confirmed her bid with a customer she begins building. She then orders the perfect materials and has a trusted team to subcontract her building. Her role in this process is as a project manager. Her ability to control quality drives word-of-mouth recommendations to Cabinetco.

On long projects Maggie sends regular invoices. These state the percentage of completion on the project, the payment due for that level of completion, expected date to the next invoice or benchmark, and other details.

Maggie, finally, presents the project to the customer. She knows that every time she sees a happy face she is retaining customers as well as defining her brand. She then sets a date for final completion and invoices for her project retainage.

Maggie has cracked the code to success in her business. To her, it is about accountability, over-delivering, and project management.


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construction accounting

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Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

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construction accounting

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Credit Memorandum Definition

See Also:
Debit Memorandum (memo)
Credit Sales
Account Reconciliation
Chart of Accounts (COA)
Transaction Exposure
General Ledger Reconciliation and Analysis
Debt Compliance 101: Keeping Your Banker Happy

Credit Memorandum Definition

The credit memorandum definition or memo is a form or document, sometimes called a credit memo invoice, that informs a buyer that the seller will be decreasing or crediting the amount that the buyer owes in accounts payable, thus decreasing the amount of accounts receivable in the seller’s account.

Credit Memorandum Meaning

A credit memo is often issued when a seller has made some sort of mistake, or extenuating circumstances have been brought to light which require an adjustment towards a sale. Credit memos from a bank are usually in regard that a bank if reversing some sort of transaction in which the bank made a payment it should not have, or the bank may have made a collection upon a note receivable or a certificate of deposit. When the latter occurs the bank will transfer the collection of funds into the depositor’s account.

Credit Memorandum Example

For example, Cindy works for Fluffy Stuffs Inc. as a part of its sales staff. The company has recently sent an order to Toys N’ More for a price based upon last month’s prices. Cindy just received the new prices the sales staff is supposed to charge customers. These prices are much lower than the past due to a drop in the market price for stuffing. Therefore Cindy sends a credit memo form to Toys N’ More informing them that they should reduce the amount that they owe to Fluffy Stuffs. Fluffy Stuffs will also reduce its accounts receivable by the same amount.

credit memorandum definition

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