BUSINESS BITS

Cash problems and solutions
HENRY C. ONG

When you are in business for yourself, you normally would get so busy with the operational aspects of your company. Very often, in fact, some entrepreneurs tend to focus too much on marketing and promotion at the expense of finance and accounting, thus often running into serious cash flow problems. To avoid such situations, you must ensure that the accounting function is not left entirely in the hands of your bookkeeper. You need to be truly in charge of it.

So what are the things in accounting that you should know? On a daily basis, you need to check the daily summary of your sales and cash receipts. The total sales for the day may be a combination of receivables, which are what your customers owe you, and of cash sales from outright transactions. You should also check if the cash on hand and the bank balance by end of the day are all properly accounted for.

You can do this by reviewing your cash position report where all the cash in and cash out transactions for the day are recorded. It is possible that some cash collections for the day may not all be deposited in the bank or kept on hand because some of the cash might have been used to pay expenses or salaries. In this case, you will need to do some adjustments to record the correct amount.

Every weekend, you need to check your accounts receivable list to see which of your customers are not paying on time. Reviewing the credit profile of your customers individually will give you a better idea for your collection strategy the following week. You can give your customers a telephone call, pay them a visit, or write them a letter—whichever you think would be most effective to get them to pay you.

On the other hand, you should also check your accounts payable for the week. Find out which payable you can pay immediately with cash discounts, and which you can afford to delay without annoying your supplier. You also have to prepare how much money you need for your payroll for the coming week, and how much money you need for such other expenses as withholding taxes and VAT payments. By budgeting all the payments, you will get a good idea of how much money you need to raise from receivable collections and cash sales.

On a monthly basis, you will need to review the work of your bookkeeper. You can check if all the journal entries made are properly classified and posted to the general ledger. For example, assume that you are renovating your store and you have made payments to your contractor. It is possible that your bookkeeper may wrongly record the transaction under salary expenses instead of correctly capitalizing the payment to the contractor under fixed assets. This could happen especially when there are no clear guidelines for the bookkeeper on what chart of accounts to use for particular transactions.

After checking the journal entries, you should expect your bookkeeper to make an income statement available to you 10 to 15 days following the close of the month. By reading the income statement, you can evaluate your business to see whether you need to adjust your pricing or reduce your overhead expenses to increase your income. You can also determine if there is reason to suspect that you have incorrect buying procedures or if there is inventory pilferage at your warehouse.

You should also expect to be furnished with a balance sheet along the income statement. From the balance sheet, you can review the financial condition of your company, particularly in terms of how much your assets such as cash, accounts receivable, inventory and fixed assets are as compared to your liabilities to suppliers and banks, if any, and your invested capital. When reviewing your balance sheet, make sure that the cash account is reconciled with the bank balance so that any timing differences between the two accounts can be properly adjusted.

You need to conduct a regular cash count to check the petty cash maintained by your cashier. The actual cash in the petty cash box plus the total amount of paid-out slips should total the budget you have set aside for the month. In practice, you may want to do surprise cash counts to see if your cashier is honestly keeping the cash in the box. For monitoring purposes, you may also want to strictly implement a fixed monthly petty cash budget.

For accounts receivables, you can ask for an ageing schedule from your bookkeeper so you can see how much of your collectible is overdue by 60 days or 90 days and beyond. From this report, you can make an assessment of how many of your customers could no longer be collected from, thus giving you an idea of how much of your receivables from them should already be written off as bad debts.

Your inventory may be your most important asset in the business especially if you are a retailer. By checking your inventory list, you will note which items are slow-moving and which have already deteriorated due to obsolescence. When doing a physical count at your warehouse, you can also use the inventory report as a basis for determining if there is any potential pilferage or error in recording.

Finally, you must not entirely rely on your bookkeeper when it comes to filing returns to the BIR. Always check that you are complying properly and legally paying the correct amounts of taxes. For example, make sure that what you deduct as withholding tax from salaries is remitted completely to the BIR. Do the same for VAT payments. Remember that you need to compute and remit your VAT payments based on the sales and expenses that you legally declare.

The best accounting policies are those developed under the watchful eye of the business owner. You don’t need to do the bookkeeping work yourself, but you must understand the basics of the accounting process and should be able to interpret financial statements. It is very important for you to regularly work with your bookkeeper in managing your finances. Remember, the more involved you are, the better your accounting will be.

(Henry Ong, CMA, RFP, is president and COO of Business Sense Inc., a financial advisory and consulting firm that helps small and medium businesses. Business Sense is affiliated with INPACT International Network of Certified Public Accountants. You may reach him at hong@businesssense.com.ph or www.businesssense.com.ph.)