Accounting for small businesses

The difficulty of successfully running a business is borne out by statistics showing that half of all start-up businesses will fold within five years.

Notably, the number of black-owned companies, which increased by 37.3% throughout the '80s, grew more rapidly than the U.S. population as a whole. And sales and receipts from black-owned firms grew even faster, more than doubling during that time. Unfortunately. black-owned firms fail at a higher rate {57,7%) than companies owned by any other ethnic group, Majority-owned businesses fail at a rate of 49.7%.

The reasons for business failure are myriad: poor marketing, undercapitalization and the lack of managerial skills-- namely the inability to keep accurate and current financial records.

Too often, careful accounting is the last thing small business owners think about, when in fact it should be the first. Yes, the small business owner is plagued with a host of worries--making payroll, acquiring products and selling goods. But business owners put themselves at a competitive disadvantage when they are not accounting-oriented from the very begining.

Many small companies fail to hire an accountant right away, says Wayne O. Leevy, managing partner in the Philadelphia office of Mitchell/Titus & Co. "You don't want to be in a situation where even the business structure (S Corporation, partnership or proprietorship) is not beneficial to the owners."

Leevy believes every business should start out with three basic advisers: banker, accountant and insurance agent. Before one even starts a business, a visit to an accountant is advised. This way, if nothing else, the business person understands the financial reporting responsibilities. An accountant will be helpful in formulating the business plan.

There is some fear of accountants, mostly in terms of cost. But getting it right the first time costs less than making up for mistakes the second time around. Besides, there are accounting firms that specialize in small businesses at reasonable prices--less than $100 a visit.

After about a year in business, Miami-based Apricot Office Supplies and Stationery Inc. found Watson & Co., an accounting firm that also was just starting out. This situation was ideal "because the accountants on staff were formerly CPAs at many of the major accounting firms," says Apricot's CEO Basil Bernard. "Since we were one of their first customers, we got top-class advice and recordkeeping at lower rates."

As a business owner who is just starting out, you need to review all the books yourself, says Bernard. "Keeping track of when the bills come in and when they get paid is part common sense. But after a while, you have to concentrate on just running the business." Getting Your Act Together

Accounting is fairly consistent across all business types. Every company needs to maintain a basic recording system, including a bank account that is used for all money transactions.

There are five things every business owner should do when dealing with a bank account, says Robyn T. Elliott, a Culver City, Calif., CPA who teaches a free course entitled "Recordkeeping for Small Business Owners" at the Entrepreneurial Institute in Los Angeles. They are:

* Maintain separate business and personal checking accounts.

* Don't have an automatic teller machine (ATM) card on the business account.

* Write checks instead of paying for items with cash. They serve as an accurate form of recordkeeping.

* Reconcile bank accounts monthly and make sure that all errors are corrected.

* Record all money that is dispersed.

"Many small businesspeople have a problem just understanding what they need to use the bank account for," says Ralph J. Grant, a partner in Oakland, Calif.-based Grant & Smith. Grant adds that businesspeople tend to spend cash. Or they do not deposit all money received. They also tend to write checks for expenditures. "It is the basics that people don't get."

One mistake that a lot of small businesses make is to include their sales tax as part of their bank accounts, notes Bernard. "At the end of the month, they're in dire straits to pay the IRS because they thought they had $1,000 in the account when they actually have $900."

Elliott adds a caveat. If a business owner writes 15 to 20 checks a month, he or she can probably maintain the company's recordkeeping on ledger books bought from the local office supply store. But if the business is writing 30 checks a month, "the volume is getting more complicated, and the small business person is going to need to see an accountant more than once a year," says Elliott.

Outside of balancing a bank account, another basic necessity is to keep files of all important documents. These would include invoices, receipts and contracts. "The filing system can be a problem," says Grant, especially when documents are not filed systematically or timely. "Putting a rubber band around a bunch of receipts and putting them in a box is not an ideal file."

Computerization is making it easier for small businesses to keep track of financial records and to stay current on accounts. Apricot keeps track of some 17,000 products-- from copiers to pencils-via a computer network and inventory software.

Using accounting software is just one step. "A software package is helpful, but it's not sufficient enough in and of itself to avoid using an accountant," says Joseph Mancuso, president of the Center for Entrepreneurial Management in New York.

Good software doesn't solve problems, warns Mancuso. Using a computer to keep accurate records may save time and money, by making it easier on a consultant, who won't have to rummage through poorly kept records.

"We're meticulous with our recordkeeping," says Apricot's Bernard, whose wife, Marlene, is the operations manager and handles the 6'year.old company's books. Last year, the company did a little over $2 million in sales.

CPA Elliott says small businesses should have checklists. Every week, a business should review accounts receivables and take action on slow payers; review accounts payable; keep current on taxes and reports to state and federal government; and stay up to date on payroll.

On a monthly basis, a business should scrutinize daily and weekly journals, post numbers to a general ledger; create a profit-and-loss statement; reconcile bank accounts; balance petty cash accounts; date accounts receivables to see what payments are late; and perform inventory control to reduce stock that moves slowly and increase items that move quickly.

While all of this looks daunting, it really isn't. Aside from that, "accountants aren't miracle workers," says Bernard. "If you give them garbage, you'll get garbage back."