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Bookkeeping and Record Keeping Basics

Adapted Irom content excerpted Irom the American Express OPEN Small Business Network
Proper bookkeeping is important to sustaining and expanding a business. Without it, you run the
risk oI hitting cash Ilow crunches, wasting money, and missing out on opportunities to expand.
When you are devising or revising your bookkeeping routine, remember that the purpose oI
bookkeeping is to help you manage your business and to enable tax agencies to evaluate your
business activity. As long as your bookkeeping achieves both oI these objectives, it can - and
should - be as simple as possible.
The general guidelines here outline what you must take care oI and provide ideas Ior how to
keep your books in an orderly manner. But beIore making any decisions regarding bookkeeping,
check with your accountant or tax preparer because bookkeeping needs vary dramatically by
Many small business owners choose to use soItware to keep track oI various aspects oI their
business, and resources are provided here to help you institute computer automation. The key to
taking Iull advantage oI bookkeeping soItware is to determine iI it saves you time and Irees you
up to concentrate on running your business. In many cases it will, but be careIul not to Iall into
the trap oI wasting time setting up computer bookkeeping that could be more eIIiciently handled
on paper. The paper bookkeeping Iorms mentioned here can be obtained Irom most stationary
Some bookkeeping Iunctions are best relegated to an accountant. While it is essential to retain a
thorough knowledge by reviewing your books Irequently, an accountant or bookkeeper can Iree
you up to concentrate on expanding your business. Even a bookkeeping task that takes only a
Iew hours a week may be better relegated to someone else iI that time can be better spent.
Click on the topics below to learn more about what basic records need to be kept by a small
O #evenues and Expenses
O Cash Expenditures
O Inventory #ecords
O Accounts #eceivable
O Accounts Payable
Revenues and Expenses

Your business will use either a #evenue and Expense Journal or a Ledger to keep track oI how
much money is going out, where it is going, and what is coming in.
A #evenue and Expense Journal is used by most small businesses and is single-entry accounting
-- recording receipts and expenditures only. Double entry accounting involves a ledger and
necessitates that each activity be recorded as a debit and a credit on your books. In the past it was
thought that all businesses needed to use the more cumbersome method oI double-entry, but the
single entry system is now used Ior many small business owners. Single-entry accounting can be
kept on paper or computer. Programs that perIorm single-entry accounting include Quicken by
Intuit and MicrosoIt Money among many others.
A ledger is used to record every transaction twice based on the idea that each transaction has two
halves that aIIect your business. For example, iI you sell an item, your books would reIlect a
decrease in inventory (a credit) and a inIlow oI payment (debit). II you use double-entry
accounting you may want to use a computer program or a bookkeeper to keep your ledger up to
date. II you allow anyone else to keep your books be sure you review them regularly. Programs
that do double-entry bookkeeping include: M.Y.O.B by Teleware, Peachtree Accounting by
Peachtree SoItware, and Quickbooks by Intuit.
Your accountant can advise you on which type oI recordkeeping you should choose. Also
consult your tax advisor about whether you should use a cash or accrual-based bookkeeping
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ash Expenditures

Cash spent in your business needs to be accounted Ior iI you want to record all business expenses
in a given year. There are at least two ways to do this: write yourselI reimbursable checks or
keep a petty cash record.
II you choose to pay yourselI back with a check, simply keep track oI all cash receipts and total
them weekly, biweekly or monthly, depending on your volume oI expenses. Keep a log oI each
category oI expense, Ior tax purposes and write yourselI a check Ior the total. Write cash
reimbursable in your check register to diIIerentiate this Irom taxable income. Alternatively, you
can keep a petty cash record by writing a check to petty cash and keeping a log oI each expense
paid out oI petty cash.
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Inventory Records

Keeping on top oI your inventory records will enable you to prevent pilIerage, keep inventory
holdings to a minimum, and track buying trends, among other things.
II you sell a large number oI small-ticket items -- Ior example, as in a stationary store -- you
might want to use a computer system to track inventory or tie your computer system into your
sales by having a POS (point oI sale) inventory system. II you sell larger ticket items you may be
able to do it yourselI on paper.
The crucial inventory inIormation you need to capture is: date purchased, stock number oI item
purchased, purchase price, date sold, and sale price.
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ccounts Receivable

II your products or services are paid Ior at time oI delivery, you will not need an accounts
receivable tracking system. However, iI you provide services or products Ior which people pay
you at a later date, your accounts receivable records keep track oI what is owed to you. You can
monitor accounts receivable by holding on to a copy oI all invoices sent out or by keeping an
accounts receivable record. Either way, the inIormation you need to capture includes: invoice
date, invoice number, invoice amount, terms, date paid, amount paid, and the name oI the entity
being billed.
Many soItware programs are available to help you generate invoices and track hours and
expenses incurred Ior each client. These programs can save hours oI time Ior a business owner
and create proIessional-looking invoices. But, according to Ed Slott, author oI "Your Tax
Questions Answered", (Plymouth Press) keeping your accounts receivable on computer is
sensible iI it enables you to collect payment more quickly or get a better handle on where your
money comes Irom. Otherwise a paper system is very eIIective. SoItware programs that will
create invoices or track hours include: QuickInvoice by Intuit soItware; Timeslips and
WinInvoice by Good SoItware; and PerForm Pro Plus Irom Delrina.
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ccounts Payable

Accounts payable are debts owed by your company Ior goods and services. Keeping track oI
what you owe and when it is due will enable you to establish good credit and hold onto your
money as long as possible.
Business owners with Iew accounts payable items use accordion Iile Iolders labeled with dates to
keep track. Other small Iirms simply pay bills twice per month and keep all bills in a "To Pay"
Iolder. Larger companies use accounts payable paper records organized by creditor. #egardless
oI the system you choose, you should retain the Iollowing inIormation about accounts payable:
invoice date, invoice number, invoice amount, terms, date paid, amount paid, balance (iI
applicable), and clients names and address.

Wbat is Casb Flow?
Cash Ilow is an expense or revenue stream that changes a cash account over a given period Ior a
business, a project, or a Iinancial product. There are two entries made Ior each category; Cash in
& cash out. Activities such as operation income, Iinancing, investing, donations & giIts bring in
cash, while investments, expenses and donations take cash out oI your cash Ilow. This can be
said Ior both businesses and personal accounts.
Wbat is Casb Flow Statement?
A 'cash Ilow statement or a 'statement oI cash Ilows represents the amount oI cash used &
generated by a company, a person or a project within a given time period.
Cash Ilow statement is calculated by adding non-cash charges such as depreciation to net income
aIter taxes. Cash Ilow is an important indicator oI Iinancial strength. Financial analysts use cash
Ilow statements to measure a company`s Iinancial strength and perIormance.
Free Casb Flow Statement Template
Here is a Iree cash Ilow statement excel template. I usually use this cash Ilow statement template
to brainstorm new project ideas. When I have a new project or a business idea, Iirst thing I do is
to look at worst case & base case scenario cash Ilow projections by entering projected numbers
in this excel sheet.
So, Ieel Iree to download the Cash Flow Statement I`ve been using and use it Ior your needs.
I have created this cash Ilow statement excel template to use as a quick and dirty cash Ilow
projection tool Ior my ideas/projects. In no means, it is supposed to replace a well thought,
quality cash Ilow statement. II you are preparing a cash Ilow statement Ior an important reason,
such as presentation to potential investors, please use a proIessional business plan soItware. I use
Palo Alto to create all oI my own and my clients` business plans.

Projecting ash Flow
Adapted Irom content excerpted Irom the American Express OPEN Small Business Network
Cash Ilow problems oIten catch small business owners by surprise. An accurate cash Ilow
projection can protect entrepreneurs against this situation. A cash Ilow projection charts the
amounts oI money your business expects to receive and pay out each month in a rolling six- or
12-month period. This Iorecast takes into account the lag time between billing your clients and
getting paid; incurring an expense and paying Ior it; and collecting taxes that aren't due to the
government until a later date. A well-prepared cash Ilow projection will allow you to plot
anticipated cash Ilow positions over time. It will help you anticipate shortIalls in time to do
something about them, protecting you Irom a cash Ilow crisis. Also, a cash Ilow projection can
help you spot sales trends, tell you iI your customers are taking too long to pay, and help you
plan Ior major asset purchases. In addition, should you decide to seek a loan, banks will ask to
see one-year cash Ilow projections by month, and three- to Iive-year projections by quarter. The
Iollowing step-by-step process will guide you through preparation oI a cash Ilow projection:
$tep 1: ash on hand

Count your cash at the beginning oI the Iirst month oI your projection. This amount is your "cash
on hand." In succeeding months, the ending cash balance Irom one month will be carried over as
the beginning cash balance oI the next month.
$tep 2: ash receipts

#ecord cash sales, credit card sales, collections Irom credit accounts, and any interest income.
The key to doing this successIully is recording receipts in the months you actually expect to get
the money, not the month a sale is made.
$tep 3: ccounts receivable

#ecord anticipated receivables in the months you expect them to be paid. II you have not kept
records that show you how long it takes individual customers to pay their bills, calculate your
"average collection period" by dividing your total sales Ior the previous year by 365. That gives
you your average daily sales volume. Then, divide the KES value oI your current accounts
receivable by the average daily sales volume. That number is the average number oI days it takes
you to collect on a bill. Using that number as a guide, record payments as they will come in over
the next year.
$tep 4: Miscellaneous cash

Account Ior anticipated miscellaneous cash inIusions, including new loans Irom banks or Iamily
members, or stock oIIerings.
$tep 5: Total cash available

For each month in your projection, add the amounts in steps one through Iour. This Iigure shows
the total cash available to you in each month.
$tep 6: ash paid out

Now it's time to calculate how much cash you anticipate spending in each month oI your rolling

First, assess operating expenses. Again, the secret is to note every expense in the month it will be
paid, not the month it is incurred. Be sure to include the Iollowing items in your list oI operating
O Gross wages, including anticipated overtime
O Monthly stipends to owners
O Payroll taxes and beneIits, including paid vacations, paid sick leave, health insurance, and
unemployment insurance
O Subcontracting and outside services, including the cost oI labor and materials
O Purchases oI materials Ior use in making your product or service, or Ior resale
O Supplies Ior use in the business
O #epairs and maintenance (be sure to include occasional large expenses Ior remodeling,
renovation, etc.)
O Packaging, shipping and delivery costs
O Travel, car, and parking costs
O Advertising and promotion, including Iliers, direct mail, print or TV ads, yellow pages
listings, web site maintenance and design
O ProIessional services such Iees paid to attorneys, bookkeepers, accountants, consultants,
O #ent
O Telecommunications such as phone, Iax, Internet Service Provider
O Utilities such as water, heat, electricity, gas
O Insurance including Iire, liability, workers' compensation, etc.
O Taxes
O Interest due on loans
O Other expenses Iocusing on costs speciIic to your business
O Miscellaneous (include a small cushion Ior miscellaneous expenditures)
When you're Iinished recording these, subtotal your operating expenses.
$tep 7: Other costs

Calculate the other ongoing costs oI doing business. Be sure to include the Iollowing items:
O Loan principal payments - vehicles, equipment purchases, etc.
O Capital expenditures - depreciable expenditures such as equipment, vehicles, construction
oI new or improvements to existing buildings, and improvements to leased Iacilities and
O Start-up costs - expenses incurred prior to the Iirst month oI operation and paid Ior over
the course oI the Iollowing year(s)
O #eserve or escrow - money set aside monthly Ior taxes paid at the end oI the year, plus
any money escrowed to help make payments on large insurance or machinery bills, Ior
O Owner's withdrawal - payment oI owner's income tax, health and executive liIe
insurance, etc.
$tep 8: Total cash paid out

Once you have listed all other costs oI doing business, add them to your subtotal Ior operating
expenses. This Iigure is your "total cash paid out," and reIlects your estimates Ior the total cash
you will have to spend each month.
$tep 9: Determine your monthly cash flow

Subtract your total cash paid out (Step 8) Irom your total cash available (Step 5). The diIIerence
is your monthly cash position or cash Ilow. As you plot your projected cash Ilow, check to be
sure your cash position at the end oI each month is positive. II it is not, take steps early to cover
these anticipated shortIalls.
Update your cash Ilow projection monthly, making adjustments whenever you encounter an
unexpected expense or income. As actual sales and disbursements are made, list the actual
amounts next to the estimates on your cash Ilow projection. Check Ior accuracy in your Iorecast,
and make adjustments to Iuture months as needed. As one month ends, add another month to the
end oI your rolling projection.

ash Flow Triage
Adapted Irom content excerpted Irom the American Express OPEN Small Business Network
It's Monday morning and you don't have enough cash on hand to make Friday's payroll. What
options do you have? Cash Ilow crunches aIIect every company. Ideally, you can weather these
crises by accessing a line oI credit or revolving loan you've already set up with your bank, or
tapping into cash reserves you've put aside Ior such an occasion. But what can you do iI you've
Iailed to plan ahead? Here are some triage techniques to help get you through such an
O Factors
O Target unpaid receivables
O Ask a supplier Ior a loan
O Lease-back your assets
O Credit cards
O Juggle bills
Factors will quickly buy your receivables Ior cash -- oIten within 24 hours. You pay a high price,
oIten as much as 15 percent oI the value oI the receivables, but you can get cash literally
overnight. And once Iactors purchase receivables, they generally take over all the paperwork and
accounting aspects oI managing them. Since sales to Iactors are usually conIidential, you can
keep your cash Ilow woes quiet. To Iind a Iactor, look in the yellow pages under "commercial
Iinance companies."
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Target unpaid receivables
Turn Iirst to reliable, long-term customers who have historically paid on time. Ask a couple oI
your best customers iI they'd be willing to pay their bills, or a portion oI them, early. Be upbeat
and honest -- tell them that you're tight on cash and would appreciate it iI they could pay you
now. Consider oIIering the customer an incentive Ior early payment -- perhaps 1 or 2 percent oII
the total bill.
For clients with very old debts, oIIer to Iorgive 15 or even 25 oI their outstanding balance iI they
pay within the week. This is not a cheap solution, but no more expensive than some debt options.
And it may net you money you'd never see otherwise.
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sk a supplier for a loan
Is your business a major account Ior any oI its suppliers? II so, consider asking the supplier Ior a
loan. Go to regular, longtime suppliers (who aren't also competitors) Iirst, and emphasize that
this is a blip. Because you are a steady customer Ior their goods and services, suppliers have a
built-in incentive to help you stay in business. Show your appreciation by paying them promptly
once the crisis has passed.
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Lease-back your assets
While your oIIice Iurniture, computers, phone system or other equipment has cash value, you
can't just sell it oII and still operate your business. What you can do, however, is Iind a leasing
company that is willing to buy it and lease it back to you. The money you get will be based on
the value oI your assets, and you can expect the leasing company to charge you a high premium.
Use this option careIully. Since the leasing company -- not your business -- will own the
equipment, it probably won't hesitate to take it back should you miss payments.
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redit cards
SkillIully managed, credit cards can eke you through a cash Ilow crisis. But be careIul:
entrepreneurs who have successIully bootstrapped their companies on credit card debt are more
the exception than the rule. Credit card debt carries much steeper interest rates than bank loans or
lines oI credit. And unless you repay the money quickly, heIty monthly payments will put Iuture
cash Ilow in jeopardy. II you have no other choice, treat credit card debt as a short-term loan and
repay it within a Iew weeks.
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uggle bills
II you Iail to pay your employees, chances are they'll quickly start to look Ior work elsewhere.
Suppliers, on the other hand, may be quick to Iorgive a late payment or two. Call your creditors
and ask Ior a grace period, or arrange to pay only a part oI the outstanding balance this month.
Closely examine your bills to determine which ones you must pay and which ones can wait. Pay
those creditors who are most crucial to the continuation oI your business Iirst, and others later.
Don't, however, simply skip a payment; be sure to explain your predicament to the creditor Iirst.
10 Ways to Help Increase Your ash Flow
Adapted Irom content excerpted Irom the American Express OPEN Small Business Network
As any small business owner knows, maintaining smooth cash Ilow requires juggling nearly
every Iacet oI a business, Irom staying on top oI accounts receivable, to extending lines oI credit,
to managing inventory. The essence oI successIul cash Ilow management is regulating the money
Ilowing in and out oI your business. Increasing your cash Ilow reduces the amount oI Iixed
capital that you need to support the given level oI your business. An increased, consistent cash
Ilow also creates a predictable business pattern, making it easier to plan and budget Ior Iuture
growth. Here are 10 things you can do to increase your cash Ilow:
O Organize your billing schedule
O Stretch out your payables
O Take advantage oI early payment incentives
O Balance your client base
O Check your pricing
O Don't buy all in one place
O Form a buying cooperative
O #enegotiate your insurance and supplier policies
O Tighten your inventory
O Consider leasing instead oI buying
Organize your billing schedule

The Iaster your receivables turn over, the more capital you'll be able to spend on growing your
business. To help you bill early and oIten, put yourselI on a billing schedule with an accounting
soItware program like Intuit's Quickbooks Pro or Peachtree SoItware's Peachtree Complete Plus
Time & Billing. These two programs can automatically classiIy the age oI accounts receivable --
Iewer than 30 days old, between 30 and 59 days, between 60 and 90 days, etc. This kind oI
automated Ilagging system allows you to act immediately on overdue accounts.
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$tretch out your payables

Take the maximum amount oI time allotted (oIten 60 or 90 days) to pay your suppliers. Think oI
these terms as an interest-Iree line oI credit Irom your supplier. It gives you suIIicient time to
collect receivables without spending money on short term credit lines
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Take advantage of early payment incentives

II your suppliers oIIer you a discount Ior paying early (usually within two weeks oI receiving the
bill), take them up on it. Think oI it this way: a 2 on a 30-day invoice is equal to a 24 annual
return iI the money was invested. II your suppliers don't oIIer this kind oI incentive, ask Ior it;
they may be willing to oIIer the discount in return Ior speeding up their receivables.
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Balance your client base

Many service and proIessional companies -- such as advertising or P# agencies, accountants,
attorneys, real estate management Iirms, etc. -- work with certain clients on a project-by-project
basis. Look Ior ways to convert some oI these clients to a retainer relationship, where they pay
you a set amount oI money per month Ior a certain number oI services. You might want to oIIer
them some kind oI incentive -- value-added services, a discount -- to encourage them to shiIt to a
retainer. This might reduce your proIit margin, but it will help make your cash Ilow more
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heck your pricing

Have your prices kept pace with your rising costs? When was the last time you raised your
prices? Many small businesses hesitate to increase their rates because they're aIraid they'll lose
customers. However, customers actually expect their suppliers to institute small, regular price
hikes. Also, be sure to check out your competition on a consistent basis. II they're charging
higher prices, you should too.
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Don't buy all in one place

You can save money by splitting your business between suppliers. Closely examine where you
need to pay Ior added service, and where you can save money by paying commodity prices. For
example, you might want to buy your computer hardware Irom a value-added reseller who can
help you choose the right system to meet your business needs, while you can purchase other
items -- such as printer cartridges, cables, or oII-the-shelI soItware -- Irom a mail order catalog
or other price merchant. To make certain you're paying competitive rates, you can compare
prices oI typical oIIice equipment (such as computers, printer supplies, or postage meters) at
Beacon #esearch Group's BuyerZone.
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Form a buying cooperative

Save money on supplies by rounding up a Iew colleagues and buying supplies like Iloppy disks
and printer paper in bulk, then divvying them up amongst yourselves.
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Renegotiate your insurance and supplier policies

Are you getting the best possible deal on insurance, phone service, and other regular business
expenses? #eview each oI your insurance policies annually and get three quotes Ior each to
ensure you're getting the most Ior your money. Keep a close eye on price sensitive services such
as your long distance phone service or your Internet access service. #egularly examine these
bills and call around to make sure you're getting the lowest available rate.
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Tighten your inventory

Overstocking inventory can tie up signiIicant amounts oI cash. #egularly gauge your inventory
turns to make sure they are within industry norms. You can do this by calculating your inventory
turnover ratio (cost oI goods sold divided by the average value oI your inventory). Avoid buying
more than you know you need when suppliers lure you with big discounts; this can tie up cash.
Periodically check your inventory Ior old or outdated stock, and either deIer upcoming orders to
use that stock or sell it at cost to improve your liquidity.
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onsider leasing instead of buying

Leasing generally costs more than buying, but these costs oIten can be justiIied by the cash Ilow
beneIits. By leasing computer equipment, cars, or other tools you need to expand your business,
you will avoid tying up cash or lines oI credit that might better be used Ior running your business
day-to-day. Lease payments are also considered a business expense, so the tax beneIits are
maintained even though the items are not purchased.