Wise Accounts Blog

Renting business premises is an expense you could do without. What are the pitfalls to avoid?

If you are turning your abode into a place of business there are 3 stake holders to consider: your spouse, your children, your neighbours.

Being married and raising children together is enough of a challenge. Why would you add to that being partners in an enterprise also? Some marriages have exploded in your face over that issue but in some cultural backgrounds it is taken for granted as part of the territory. For instance a French baker works all night to have the famous baguettes and croissants ready at dawn for the town to consume. His wife is expected to run the shop in the morning and sell the day's supply.

The dynamics of a relationship can be skewed if your spouse becomes your employee. Intelligent people can work around that issue but consider how you would feel if you are in a job where work and home activities are not clearly defined. Further working from home gives you an insight as to how your partner/spouse spends his/her time. What hourly rate should you pay? Would you require timesheets? Is it volunteer work? Do you get a kiss for that?

Children come crashing home mid-afternoon after school and will be noisy and boisterous. Do you want that sound effect in the background when you are conducting an important phone call with a prospective client? Do you have a home office set aside where you can conduct business meetings? Is there parking available for visitors?

Neighbours can be wonderful folks to challenge you at honing your best people skills. They can also be nosey, jealous or downright obnoxious to make their presence felt. If your part of town is zoned as residential they can blow the whistle on you if you use trade tools or if they suspect you run a mortician business in your garage.

What about the internet connection? How far away is the telephone exchange? How early is your mail being delivered? Should you have a post office box? If you sell stuff on Ebay would you have time to fulfil customer orders the same day?

We have become so intransigent and set in our ways where everything is measured, timed and documented. Our ancestors didn't have any other choice. In the village each house was a business with the work done downstairs and the living quarters upstairs. You knew all your customers by name and they brought you the town news as well as their patronage. Maybe there will be a resurgence of the cottage industry if more banks go belly up.

For an online cash flow forecast and bookkeeping service check out http://wiseaccounts.biz

For a time billing and invoicing online system check out http://logbook.biz

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A budget sounds very professional to some while others dismiss it as a crystal ball exercise. Is it yesterday's method still taught at school and totally irrelevant in today's world?

A budget is better than no budget at all - but don't be fooled, it will invite challenge from all angles.

The assumption is that you can plan the next twelve months ahead with a statement of expected income and expenses and stick to it no matter what. The old rule was to glance at last year's profit and loss statement and bump everything by 10% if you were conservative or by 20% if you were part of the upcoming new wave of management. Of course if last year's was a loss you would be fired if planning to increase that loss next year also...

Budgeting completely lack any value in charting ahead your future cash flow. It simply assumes things will merrily roll on as usual.

A slight improvement would be to compare last year's performance with the year before that. Coming up with some sensible explanation of what happened would help identify the areas of strength and the areas of risk.

Unfortunately what happened 12 and 24 months ago is too far behind in some industries to be any gauge of what to expect in the future.

There are two things you can do to remedy this situation: 1- change your timeframe, 2- use a dynamic approach.

If you use a monthly trial balance you will see that both income streams and expenses are not well behaved monthly averages but come in bumps and flats. If you can pick a trend developing then incorporate that into your budget.

Instead of comparing 12 months at a time, what about making a budget for the next 6 or 3 months only? Chances are it will be more realistic and you can save your credibility by offering a revision at the end of that timeframe. Then the latter part of the year will take care of itself when we get there.

The dynamic approach requires some spreadsheet work. You need to work out a calendar and tally all weekly, monthly and quarterly expenses and receipts and log them into the future. For each date in the future you can calculate what the cash flow will be like. Will you need some bridging loan or will you have extra cash to set aside for a rainy day?

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Some people think that accounting is best left alone to accountants. I disagree. Your financial position says a lot about where you are heading. It works the same for an individual or a corporation. In fact astute, financially minded people consider their estate like a business.

The subtle equilibrium in your finances between what you owe and what you own may not be changing day after day in a striking fashion. Looking at it in the right timeframe though will expose some trends you need to be aware of.

In money matters, ignorance is no excuse. These things have a way to spring back on you at the worst possible time.

Financial matters have the knack of creeping up on you in discreet ways. If you fail to pick up the trend early enough it can be quite overwhelming to correct the situation.

You think you are cruising nicely on your way to financial independence when unknown to you something behind the scene is eating away at your savings. There are scores of deceitful hidden costs lurking behind various transactions which over time will rob you of your hard earned cash. Other times you are the culprit by indulging in items you could do without for the sake of convenience and impatience.

The only way you will be able to find out early enough is by keeping your personal accounts up to date. Don't wait for the end of the financial year to realise if you made a profit or a loss this year - you need to know that today!

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Accounting is a drudgery, a dirty word for some - yet others have chosen to make it their profession. Beyond the pain of regular data entry, the benefits of having an accurate dashboard of where your finances are heading is well worth the effort.

Knowing where the money comes from and where it is being siphoned out is in itself useful. But the prize lies in the fact that you can now see things not only in proportion to each other but also how they have evolved over recent times.

In business you have to wear several hats to survive. You have to be the visionary to be able to see beyond your marketing horizon. You have to be the engineer to come up with a better gizmo your firm is renowned for. Finally you have to be the accountant so that you don't run out of gas (money) half way through your corporate journey.

This also applies to personal finances because you should treat your estate like a business. Sound accounting information will help you handle the thousand decisions that confront you regarding the use of money, the lifeblood of business.

Should you buy an asset outright or lease it? Don't take your accountant word for it. That's the wrong person to ask especially if getting a commission from the leasing company... (same goes with superannuation and investment funds...) Bear in mind that there are leasing companies out there whose goal in life is to return a profit for their investors. If that profit comes from you then it better bring an outstanding benefit. Otherwise be your own leasing company or buy something second hand at an auction. That's not the talk you will hear often from an accountant. That's why you can't play dumb when your money is at stake.

Another concept to grasp is depreciation, a fictitious expense to represent the decrease in value of the stuff you own due to wear, tear and obsolescence. Check out how much you could get on Ebay for the gear you bought 3 years ago. That will be a reality check. Again an accountant with their arcane art will fog you with mumbo jumbo rather than give useful information.

Now for the good part - do a cash flow forecast. Put into a calendar (spreadsheet) all your expenses at their proper due dates in the future and similarly enter all your expected earnings. See what the running total looks like. Plot it as a graph. Will you need bridging finance to see yourself through a dark patch?

For an online cash flow forecast and bookkeeping service check out http://wiseaccounts.biz

For a time billing and invoicing online system check out http://logbook.biz

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Counting your dough is not a pastime for Uncle Scrooge - it is a necessity for all of us in a world where money, not love is the prevailing currency.

Accounting for what goes in and out of your purse has reached new levels of sophistication in this computer age and some have fallen behind for not keeping up the pace.

The profit and loss statement is one of several documents together with the balance sheet which describe your financial position.

We have to start first with the concept of an account. In accounting it is simply a fictitious bucket or container where money is identified. Yes you can think of your bank account - the amount held in custody for you by a financial institution. You could also have the petty cash account, the "under the mattress" account and the toll coins accounts for the change you keep in your car.

The art of accounting is to track the movement of money from one account to another. You go to an ATM machine and withdraw $100. Your bank account decreases by $100, while your petty cash account (your wallet) increases by $100. That is called a transaction and you log it into a bookkeeping program with today's date. What you do with these fresh one hundred dollars will lead to more transactions. You may spend $30 on petrol, $20 on food, and $50 on paying your phone bill. So now we have a travel account, a groceries account and a telephone account.

Accounts are listed in groups such as income, expenses, assets, liabilities and equity. Assets are things you own like your clothes, appliances, house, car and things that can readily convert to cash like bank accounts or investments. Liabilities are things that you owe like credit cards, mortgage and car loans. Equity is your net worth when everything is said and done.

Now are you ready for the punch line? The profit and loss statement is simply a listing for the current financial year of all your income accounts (your wages, the rent you collect from your tenants, the copyrights paid to you for the songs you wrote 10 years ago, etc...), followed by a listing of all your expenses (petrol, food, water and electricity bills, etc...). Finally the difference between the totals of those two groups is - wait for it - your profit or loss for that period!

But why stop there? The next thing after the profit and loss is the balance sheet. Again quite simply we group all your assets (the things you own) and all your liabilities (the things you owe) and the difference is your equity or net worth.

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