Are You Too Financially Cautious?

Is it possible to be too financially cautious?  Cautious does not mean that you are just conservative or frugal with your money, but that you are too afraid to spend your money wisely. You may not even be aware that you are too cautious and here are some examples:

Hesitate to make the right investments: Aside from traditional investments, you may be too cautious to invest in your own education and knowledge, spend the money for new equipment and technology, marketing, or spending money on employees.

Too cautious about wasting money: If you are so concerned that you will waste your resources then you will end up spending too much time trying to save a nickel, but it ends up costing you a dollar. For example, you don’t want to spend the money to keep track of your finances in QuickBooks or even Quicken for personal use, but yet you incur hundreds of dollars of insufficient funds charges each month. I have seen clients spend approximately $10,000 for insufficient funds fees.

Not taking a loan when you should: I am not an advocate of borrowing money excessively or foolishly, nor do I think that borrowing should be avoided at all times, which some pundits advocate each position strongly for. However, sometimes you need to have a line of credit to smooth out some bumps or to take advantage of low-risk opportunities that arise. Alternatively, if you pay off all of your debts too quickly then you may not have any cash available.

Time versus money: Using your time productively strongly dictates your financial success. However, if you spend your time on $10 per hour activities that drive you crazy instead of paying someone to perform them, while you can be making $200 per hour, then that is a poor use of your time and financial resources.

Money before relationships: If you are too financially cautious then you will probably never want to get married, and if you do, then you will worry about not having enough money for your children and will probably not have any.

Another way of saying financially cautious is to be penny wise and pound foolish. Don’t try to save your pennies, but make dollars!

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Try to Move the Needle Just a Little Bit

Do you want to make big massive changes? From growing your sales, increasing profits, working less hours to even losing weight, it seems daunting, but here’s how to get started:

Habits: When you want to change something drastically, it all starts with your habits. Incorporate new habits into your routine, and replace the old habits with these new habits. Doesn’t this sound so easy?!

Keep track: Keep track of your results to be able to measure your progress. For example, let’s say that you want to increase your sales by 20% compare to last year. First, monitor your results using financial software, such as QuickBooks, or even in Excel. If you do not measure your results, then you will not be able to determine if your actions are working.

Give it time: When making changes, you have to give it time to see those changes happen. It can be weeks, months, or sometimes years. As long as you are seeing the needle move in the right direction, then you know that it is working, no matter how small the positive results are.

Sustainability: If you make a monumental change then it may not be sustainable over the long haul. For example, if you decide to work less and cut your hours all at once, then you will quickly become overwhelmed and will go back to your old schedule. Look at the longer-term goal and then work backwards to figure out the proper actions and timeframes. For example, if you are currently working 50 hours per week and want to cut back to 40 hours, then give yourself a timeframe of one year. Next, shoot to reduce your workweek by approximately 1 hour per week for the first month, then 1 hour the next month and so on, until you have achieved a shorter work week. Then, figure out which actions you need to take to reduce your hours.

Change can be dramatic even if the results seem small in the beginning. Have the endurance, discipline, and willpower to continue your actions to achieve your long-term goals.

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Getting More from QuickBooks

The most popular small business accounting software by far is QuickBooks. It can be easy to use, is very affordable, and can help you to run your business better. Unfortunately, QuickBooks is quite often not used to its potential. Here are some things you should be doing with QuickBooks:

Running Financial Reports: To know how your business is performing you can do so by running a profit and loss report to view income and expenses. You can easily compare results from year to year, month to month, or any time frame you wish. The same applies to running a balance sheet, which shows you amounts such as customer receivables, loan balances, cash balances, and equity balances.

Reconciling Your Accounts: QuickBooks makes it easy to reconcile your bank, credit card, and other accounts to your monthly statements. This way you know that your balances are correct and can quickly fix any discrepancies.

Customer & Sales Metrics: It is important to know who your largest customers are and you can figure this out by running a report called “sales by customer.” You can also run reports to see sales by product, service, or item. Additionally, by running accounts receivable reports you will know your customer balances.

Keeping Track of Vendors: While it’s important to know who owes you money, you also want to know who you need to pay and when. Bills can be entered with due dates and amounts so you can better plan your cash flow.

Budgeting: Instead of using Excel to create a budget and manually update it, you can create a budget within QuickBooks. Then you can plan for the future better and compare the budget vs. your actual results.

An alternative to QuickBooks is to go back to using ledger paper, which is shown in the photo above, but let’s not go back in time!

It is important to utilize QuickBooks as much as possible as a tool to help your business prosper.

My Customer/Tenant Didn’t Pay Me. Can I Deduct This on My Tax Return?

I get asked this question a lot, mostly from business owners. The answer to this question is that it depends. First a quick accounting lesson of cash vs. accrual. I promise not to keep it too technical!

If you are a cash basis taxpayer, then you record income or sales once you get paid, either by cash, check, or credit card. You also record expenses when you pay them, even if with a credit card.

For an accrual basis taxpayer, you record income when it is earned. For example, if you are a consultant and you sent an invoice to your client in January for December’s work, then you record the income from the invoice during December. The same goes for expenses, as it generally doesn’t matter when you paid your bill, but when you incurred the expense. This means that if you ordered supplies in December, but paid for them in January, you can deduct the expense in December.

Now to answer the original question: A cash basis taxpayer cannot deduct as an expense an outstanding invoice that was not paid by their customer, or tenant, if they are a landlord. Remember, the invoice was not included as income. On the other hand, an accrual basis taxpayer can deduct an expense for non-payment from a customer or tenant, as long as it is deemed uncollectible.

Most small business clients and landlords are on the cash basis method of accounting. It is much easier for record keeping purposes, and especially for income tax purposes.

Do You Use QuickBooks? You Should Be Doing This!

QuickBooks is a very popular accounting software program for small businesses, and I use it personally for my practice as well. But, if you are using QuickBooks, there is one key step you should be taking – reconcile your bank and credit card accounts!

Why? When you reconcile your accounts, it helps to make sure that the data you entered is accurate. Everyone makes mistakes when they enter data, even when they upload data (uploaded data has a tendency to duplicate transactions when you have transactions between multiple accounts). This is okay, as long as you catch your mistakes by reconciling to your bank and credit card statements.

Reconciling your accounts will not only help you to make sure bank accounts are accurate, but it will also help you to make sure that your receivables from customers and payables to vendors are more accurate as well.

Fortunately, this is not a difficult task to do. If you have never reconciled before, it may take some work to get the first month’s reconciliation taken care of, but after that, the task become easier.

We offer ongoing QuickBooks support to assist clients with their books to insure they are getting the most from QuickBooks. Do you need help?

A Primer on QuickBooks

What exactly is QuickBooks? QuickBooks is an accounting program that is used primarily by small businesses. It is very user-friendly, which makes it ideal if you are not an accountant.

QuickBooks will enable you to take control of your business finances to help you to make better decisions. Business owners can keep track of receivables from customers and clients, bills that are due, and account balances such as checking accounts, inventory, and credit cards. You can even reconcile your accounts to your statements to make sure your records are accurate. Can you imagine not knowing how much your customers owe you?

Ideally, you will want to be able to generate financial reports such as profit and loss statements, as well as balance sheets. A profit and loss statement will tell you how much your sales, expenses, and profits were, while a balance sheet reflects assets (such as checking accounts), liabilities (such as loans), and equity (the difference between assets and liabilities, which is your ownership stake).

Successful small business owners know how their business is performing on an ongoing basis. This is where QuickBooks can help. Your decisions should be made based upon the financial results of your business.

Just remember not to do it alone. While QuickBooks is very user-friendly, many people do need assistance from an expert. It can be extremely advantageous to consult with us on an on-going basis. We can advise you on how to best set up QuickBooks, how to use it effectively, and how to interpret your business results to help you to save money, taxes, and increase profits.