Service Fees or Fees for Services are a relatively easy type of business to account for. Generally there is little inventory to account for and any inventory required is generally very easy to manage as it would be very specific to a job performed. For a Pool Service Company that provides general service and upkeep there may be a limited number of parts needed in addition to specific parts that are required for specific pool failure problems. With each service call a specific type of part may be required or no parts at all. Billing for service time, outlining the job duties for the call, and adding any parts to an invoice are relatively straightforward.
Consultants charge fees for services whether it’s an hourly, monthly, or a charge per service fee. Service companies are like consultants as they are providing a service. If your company provides services only without the sale of goods you likely don’t require a financial software package to do your annual accounting. Your expenses would be limited unless you were a large service company with employees. A one or two person service company or consulting company would require very little in the way of accounting.
As a service or consulting company you still need to get an invoice to your client. If your client comes to your office and pays before leaving a receipt for payment may be all that is require. If you are a landscaping company that works for homeowners you may only need a hand written invoice. If you are a business to business service company or consultant you will likely require a more formal type of invoice.
A financial accounting software package would likely be too much for a service or consulting business. A smaller system without all the other components required in a financial software package is all that is required. Focusing on just the specific software you need to do your invoicing will help to keep things simple. If you require software for payroll or a manufacturing process a different type of software would be needed. Consultants and service companies are not just one person operations but for those that are a simple online invoicing solution may be your best approach when it comes to invoicing your clients.
Inventory is all the raw materials, work in process, and finished products that are considered a part of a company’s assets that will be ready for sale. Depending on the type of business you have there are different ways of accounting for your inventory. Setting up an inventory system will depend on how you plan to account for your inventory. If you have many raw materials you may have a system where all materials enter an accounting system at the time of purchase or you may assign all materials purchased to a general ledger account and manually account for your inventory through a general ledger as opposed to an inventory system.
Inventory can be a labor intensive part of a business and setting up a system will be determined by how well you want to manage your inventory. There is a cost to manage your inventory but there is also a cost to not managing your inventory. When you don’t manage your inventory you are vulnerable to theft, breakage, non receipt of merchandise, incorrect quantities of merchandise received, cost variances on materials, incorrect products received, billed for products never shipped, etc.
Managing inventory also helps in managing your revenues. When inventory has been sent out but no sale invoice has been entered it is at this point you will realize your client was not billed. Mistakes happen in all areas of business and sales invoicing is no exception. By managing your inventory you are also managing your sales revenue.
Inventory counting is done at least once a year to adjust or match the inventory listed on your financial statements. Some companies spot check their inventory by counting different segments of their inventory monthly or quarterly. Identifying problem areas sooner than later will help to ensure your costs are not unpredictable at year end. Theft of inventory by customers, employees, delivery personal, vendors, etc comes off your bottom line ….out of your profit. You don’t want to spend $5 to account for $1 so you have to understand your inventory process.
Your inventory process starts the day you purchase inventory. The purchase invoice must be paid and accounted for. Once the inventory is delivered it must be accounted for and stored. If it goes from box to showroom to sale to customer you have a very short inventory process. If you are purchasing raw materials they must be stored, processed into an inventory item for resale and stored again. Raw materials may be accounted for as a raw material, a work in process/unfinished inventory item, or a finished inventory item each with their own assigned cost. Understanding your inventory flow will help you to set up a system that helps you reduce you inventory costs without incurring unreasonable inventory management costs.
Fixed Costs are defined as expenses that do not change in relation to the activity of the business. So no matter how many sales you make your costs will remain the same for a given period of time. A good example of a fixed cost is monthly rent or monthly salary. Knowing your fixed costs will help you in creating a budget and will alert you as to how much cash you will need each month to cover your fixed costs.
Traceable Fixed Costs are costs that can be traced back to a segment. Depending on how in depth you like to manage your costs you may separate the traceable fixed costs from the common fixed costs. A Common Fixed Cost could be rent if the rent encompassed all segments of the business, if the rent were to disappear with a segment of the business, the rent would then be traceable to that particular segment. For a business that manufactures 3 types of tables and each type of table has their own manufacturing plant the rent for each plant could be traced back to its own segment.
Common Fixed Costs are costs that cannot be traced back to a particular segment and these costs support the operations of the business. For one receptionist to support the 3 table manufacturing plants her salary could not be traced back to any one individual plant and if one plant were to disappear the receptionist would still be required and would continue to be a fixed cost. It is not always easy to determine whether a cost is traceable or not and the best method to use to determine a traceable cost is to remove a segment, if the cost disappears with the segment then the cost is traceable.
Fixed Costs per unit will change with the amount of activity. A fixed cost such as rent could be assigned to each item of inventory produced. For a fixed monthly rent cost of $2,000 and an activity level of 1,000 units produced in a month the fixed cost per unit is $2. If the activity level increased to 2,000 units per month the new fixed cost per unit would be $1. Each item of inventory would have a fixed cost of $1 assigned to it when determining the cost to produce one item.
The Balance Sheet is a statement of financial position – a financial statement that summarizes a company’s Assets, Liabilities, Intangibles, and Owner’s Equity. Assets are broken down into Current, Fixed, and Other categories. Liabilities are broken down into Current and Long-Term liabilities. Equity is broken into Shareholder, Retained Earnings, and Income for this year.
Current Assets are items that can be exchanged for cash in the current year, things like your bank account, accounts receivable – your client invoices, inventory, and any other items you have that can easily be converted into cash.
Fixed Assets have a commercial value but will not be converted to cash or consumed in the business. These are items like furniture & equipment, vehicles, land, and leasehold improvements.
Other Assets are assets that may not be converted to cash in the coming year like prepaid expenses.
Current Liabilities are items that are due and payable in the coming year. Accounts Payable, payroll liabilities, taxes, leases, current portions of loans are items that will be taken care of in the coming year.
Long-Term Liabilities are liabilities not payable in the coming year. Things like future taxes, the balance of a loan that is not due in the coming year but will be repaid in future years.
Intangibles are items like goodwill, trademarks, patents, etc – intangibles are a significant factor in the value of your business.
Equity is the value of all assets less the liabilities. When you start your business and you have no earnings the equity part of the balance sheet is the difference between your assets and liabilities. As you grow you will realize a profit or loss and this will affect your equity position. The profit/loss will roll into your retained earnings which is part of your equity section.
Your total assets less your total liabilities will equal your total equity. The Balance Sheet states your Assets, Liabilities, and Equity which is a good indicator of your financial position at a given point in time. The Balance Sheet is one financial statement that lenders rely on because it gives a good financial picture at a given point in time as to how well your company is performing.
What kind of filing system do you have? Even a filing system that has not been determined and set up is still a filing system. Whether you have a paper filing system or computerized filing system or both organization and procedure is key to a successful filing system. A filing system will help you stay organized and efficient ensuring you get paid, that you pay your obligations as required and for managing your year-end process.
Deciding on how to file your client invoices will be determined on how often you need to refer to them. If you simply send the invoice out and never have to look at it again your invoicing software will likely be the only filing system you need for your outgoing invoices. The invoice software will file your client invoices by client and by invoice number. Your invoicing software may even file your client invoices by date.
If you have a more complex financial environment you may need to set up paper client files that include copies of client invoices. If you refer to the client file often sometimes it is easier to manage the client file by having the paperwork directly in front of you. Your filing system would then include your paper filing system for your clients. Would you have a centralized filing system for all client files or a decentralized filing system where client invoicing would be held separate from an account manager’s file?
For Accounts Payable invoices for purchases made a paper system is quite often kept. These paper files are held for backup to items entered into a financial software package and for backup should the tax department want to verify your expenses. Because the invoices did not originate from your system a file must be kept to verify their existence. Invoices could be scanned and filed electronically but a secure backup system would be needed in the event a computer should ever crash and information was lost for good.
Keeping an organized filing system will help save time as questions do arise as to an invoice to be paid by you or an invoice in question by your client. Having that information at your fingertips helps save time and is one way to create efficiency in your business.
Accounts Payable is the amount owed by a business to its suppliers for goods and services purchased and are reported on the balance sheet as a liability. Procedures are required to process invoicing for payment to ensure invoices are not double entered or double paid and they are coded to the correct expense account. Regardless of the size of business an orderly process ensures fewer issues.
An accounts payable process could be as simple as paying an invoice upon receipt and filing the invoice in a file folder for annual tax accounting. Some businesses have entire departments to deal with their accounts payable. Generally you don’t enter a vendor invoice into an accounting system unless someone with authority in the company has approved the invoice.
For companies that receive goods a packing slip comes with the items, the items are verified, signed off on, and the packing slip goes to the accounts payable department to be matched to the incoming vendor invoice. The AP person then attaches the packing slip to the invoice and enters the vendor invoice into the accounting system. When an invoice has be paid at the time of purchase the invoice is given to the Accounts Payable person to be entered into the accounting system.
Procedures for Payments for accounts payable invoices is required to help the AP department pay your vendors in a timely fashion. As calls come into the AP department from suppliers looking for payment your department needs to be clear as to how your company pays their bills. Some companies pay at the end of the month, some pay on demand, some pay weekly, how you pay will be determined by many factors like – cash flow, work environment, efficiency, and vendor terms.
Payment terms that you have set up with your suppliers will have a big impact on your payment schedule. If you do not pay within the terms you agreed to you may not be extended credit by your suppliers. Cash Flow will determine what monies you have available to pay your bills. Setting your vendor terms to match your cash flow will help you to succeed in paying your bills on time. If you receive monies from your clients at the end of each month it would be smart to set up vendor payments sometime after these cash payments have been received.
Work flow and time commitments will also impact your payment schedule. If you have the cash flow to pay but don’t have the time due to conflicting work demands you need to set up a more efficient time to process payments. Setting up procedures for Accounts Payable will keep you organized, efficient, and in good standing with your suppliers.
Credit Card transactions will affect your cash flow. How you use your credit card will determine how you cash outflows will be affected. Your cash outflow on your Cash Flow Report should be the amount you pay on your credit card each month. How much you pay on your credit card could be determined by many factors.
Some start-up businesses rely heavily on their credit cards to operate their business. When cash is tight and there are more cash outflows than inflows credit cards can be one form of financing to keep your business operating. When using credit cards as a financing tool not all expenses will be entered into your Cash Flow Report only the actual cash outlays. Future cash outflows can be projected to pay down the credit card debt.
When carrying a balance on your credit cards you will have monthly interest that will also affect your financial situation. Interest expense will affect your financial statement however it won’t affect your cash flow unless it is being paid as interest is just one more expense to account for.
You may be incurring many expenses but have very little outflow of cash when relying on credit cards. In the future you will have higher cash outflows in relation to expenses when paying down your credit cards. Regardless of how many expenses you have used your credit card for only the actual payment to your credit card will affect your current Cash Flow Report.
Accounts Receivable – the money owed to a business by its clients. It’s the collection of all your outstanding invoices that have yet to be paid by your clients. Some companies don’t have accounts receivable because their clients pay for their goods and services as soon as the sale is completed. Their cash inflows are immediate. Accounts Receivable needs to have policies and procedures to guide it. Sending out an invoice does not guarantee payment!
Accounts Receivable reporting generally falls into the categories of Current – Over 30 days – Over 60 Days – Over 90 days – over 120 Days. Ideally you don’t want anything in any category except the current category. Communicating with your clients can help you collect your funds sooner and with less risk of going unpaid. Having processes in place to ensure your client invoice goes to the proper department to be authorized and paid will help you stay current. If you are unsure where to send the invoice contact your client they are happy to get your invoice authorized and paid unless they have an issue with the product or service you supplied. If your client has an issue find out sooner rather than later the longer you leave it the more time and effort it will cost you to follow up and get paid.
If you are having problems getting payment find out why. If there’s an issue with what you supplied your client they will tell you. If the invoice wasn’t received they will tell you. Get a commitment for a payment date and if your client has no issue and they have the invoice but can’t commit to a payment date your client is likely having cash flow issues. If there is cash flow problems try to get another form of payment or a partial payment. Work with your client so you can get paid. Ask you client when you can call back to find out about getting paid, work with your client and keep your relationship on friendly grounds. If it seems unlikely you will ever get paid perhaps your client has something of value they can trade to pay off their debt.
Cash Flow Management will help you identify the outstanding accounts receivable and it will alert you to monies not yet collected. Don’t wait until it’s too late stay on top of your receivables and know when to expect a cash inflow. You’ve made the sale now make sure you get paid!
When you start a company one of the things you will have to decide is what your Invoicing Policies will be. Confused? Yes you need policies for your invoicing. You must decide what your policy will be in the timeliness of you invoice – when will you invoice, immediately, weekly, monthly, etc. What will your terms be, payment due upon receipt of invoice, net 10 days – payment due within ten days of invoice date, net 30 days – payment due within 30 days of invoice date.
If your client is not given an invoice at the time of sale how will you get an invoice to your client? Will you email or snail mail your invoice, or will you do both. How will you determine who to contact to email an invoice to – will you send the invoice to the authorized person that made the purchase or to the accounting department of a company. What process will you have in place to ensure the invoice gets into the right hands? Getting the invoice authorized and to the department issuing the payment is paramount for you to get paid.
What will your policy be for late payment of an invoice? Will you charge a late payment fee or interest on outstanding balances? If a client is continually late on paying invoices will you secure a down payment before providing more products or services or will you give your clients a discount incentive to get them to pay sooner? How will you handle invoices that go unpaid for an extensive period of time?
When it comes to payment what types of payment options will you provide? Will you offer payment plans, credit card payments, cash only, will you accept cheques or electronic fund transfers. Will you offer credits or refunds on goods that your client wants to return or has issues with?
Creating policies before you Start Invoicing will give you a clear direction before a problem arises. Policies will be changed and adjusted as your business encounters new situations but having policies in place will help eliminate confusion and provide you with a starting point to guide you through the process of invoicing and receiving payments from you customers without undue delay.
An Asset is defined as any item that has an economic value owned by a person or by a corporation that can be converted to cash. Some examples of assets are: cash – your bank account, accounts receivable – monies owed to you by clients, inventory, furniture and equipment, vehicles, property, and prepaid items. There are other assets like goodwill, payroll advances, leasehold improvements, it really depends on the type of business you have as to the type of assets you may or may not have. Not all businesses will have the same assets but there is a structured approach to recording assets and the types of asset accounts.
Understanding what an asset is and how to account for it will make it easier for you to record an item and make it easier for the person responsible for filing your taxes. At what point does a cash outflow for an item become an expense and not an asset. Understanding the accounting rules with guidance from an accounting specialist will help you record an item properly when purchased. Creating procedures to account for assets versus expenses will help you and your staff approach these items with ease.
As an example: the purchase of an office printer. Is it an expense or an asset? It could be either. There is a dollar amount associated with the determination of expense or asset. If the printer was a used item and purchased for $20 you would likely not classify it as an asset but as an expense. Most asset categories have a dollar limit associated with it that separates what is worth the effort of calculating annual depreciation and these amounts are government approved amounts. Your accounting specialist can determine for you what dollar amount among other things determines asset or expense.
Regardless of whether an item purchased is an asset or expense the cash outflow must still be reflected on your Cash Flow Report if paid by cash.