Proper cash management is critical for small business owners especially for start-ups with limited funding. Mismanagement of cash and finances can result to many problems like running out of cash for common payables like taxes, salaries, rent etc. which might lead to early retirement of the business. Before you start your business or if you are running a start-up, here are 5 common mistakes that business owners make regarding financial and cash management.
No separation of business and personal finances
This is more common to sole proprietors especially those who do not have a DTI or separate trade name to use in order to open a separate bank account for their business. Not separating business finances from personal together with no proper accounting can usually leads to problems. It will be hard to make any financial related decisions about the business. It is also a common source of temptation for business owners to over spend on personal things.
If you are running a business, it is advisable that your company have a separate bank account and you only take a salary from it which you will use for personal expenses.
Treating VAT as part of sales
For VAT registered businesses that are selling products or services that are not exempted to VAT, a 12% VAT is usually added in the price of the product. The 12% VAT added in sales less the 12% used in the company’s expenses should be paid to the BIR every 20th of the month (for monthly reporting). Since the 12% additional in sales/collection of the business is usually deposited in the business bank account together with the total amount of sales, it is common for business owners to measure their sales including the 12% and mistakenly use it to fund their operation. This usually leads to a problem especially to under-funded start-ups during the 20th of the month where there is no fund left to pay the VAT to the BIR.
Not filing any form or tax return in the first few months of operation
There are business owners who start their operation without learning or having someone who are knowledgeable about the basic compliances, forms to be filed and other things to be paid. Neglecting these even in the first few months of operation can be costly later on due the penalties imposed by the government for not filing or not filing properly. In BIR alone, for the basic monthly and quarterly forms, the minimum penalty for not filing is 200php per form for sole proprietors and 1,000php per form for partnership and corporation. By average, MSMEs are required to file 2-3 forms per month.
To illustrate this, let’s have a basic computation for sole proprietors, partnership and corporation neglected or maybe let’s just say forgotten J to file their monthly/quarterly returns.
|Formation||Number of Months||Number of Forms per month||Minimum per Form||Minimum Penalty|
If you registered as corporation and you failed to file for 1 year, you are now required to pay 36,000 and that is only the minimum amount, the actual amount to be paid based on your operations is still not included plus its penalties. And remember that is for BIR alone.
The first month that you are registered to the BIR should be the first month that you started filing or paying even if there is no actual operation.
No proper bookkeeping
I’ve met business owners where their only basis of profit is when their bank account is growing, no bookkeeping at all. There are also business owners who only make the basic “Listahan” of sales and expenses. Both methods might work for businesses with very small transactions like 50 or less transactions a month or if the business’s cash flow stays positive starting the first month of operation. However, these methods can be troublesome during tax filing, making analysis for improvements, budgeting and worst government audit. There is no alternative for proper bookkeeping.
Not reading financial statements
Do not hire an accountant or buy an accounting software just for the sake of compliance or “para may mafile lang” (just for the sake of filing reports). Having financial statements have more benefit than that, it will help you in many ways regarding the decisions that you are going to make in order to move your company forward. Schedule a regular review of your financial statement together with your accountant, if you cannot do it monthly, at least do it quarterly. Money is the life blood of your business and as a business owner; it is your responsibility to check if it is on the right track or running well according to your plans.
There are many types of reports and it can be time consuming to learn them all but at least learn how to read the basics like Balance Sheet and Income Statement. It is also useful to have your accountant prepare a monthly or quarterly comparative version of these report for easier viewing.
We have a company that provide accounting services that is packaged with online accounting software where business owners can view their reports anytime. We designed our own reports/formats in order for business owners to easily understand their finances. If you have your own accountant, you can coordinate with them to design a report that you think will be more useful to you.