A. The company has a single- or double-entry bookkeeping system.

Record keeping is vital to the survival and success of any business. According to analysis of the cases studied, problems with record keeping constituted the second-largest problem area. Whether the business used a single- or double-entry system did not appear to be as important as how the system was executed. Timely and accurate record keeping is essential.

1. The owner prepares the books.

The small business owner who understands bookkeeping, records the transactions and prepares the financial statements has an intimate knowledge of the business. Knowledge of these accounting and financial aspects makes the owner credible with lending institutions. It also keeps the owner out of financial trouble and helps him or her stay focused on ways to make a profit.

2. The owner pays for bookkeeping service.

The owner who does not understand the essentials of bookkeeping needs to hire a trusted professional. Even then, the owner needs to understand financial statements. Failure to understand essential financial statements is an indication that the owner has surrendered managerial responsibility. It is generally wise to have the professional bookkeeping service prepare taxes when the service is already keeping the books. The owner who does not do the record keeping is rarely in close enough touch with the records to adequately prepare tax forms. The business owner who delegates so much financial responsibility to others should think seriously about using a CPA.

B. The owner reconciles bank statements monthly.

A quick way to get into financial trouble is not to reconcile bank statements monthly. With a single-entry bookkeeping system, this is the only way to maintain accuracy. Even when a doubleentry system is used, reconciling statements monthly is the only sure way to catch mistakes. Too many small business owners put this off because of other, more pressing, concerns. This destroys the validity of their own financial statements, causing them to make important decisions based on erroneous data.

C. The owner keeps income and expense statements accurate and prepares statements monthly.

The ability to track the flow of funds into and out of the business is necessary for continued viability. Cash flow problems have closed many small businesses. The monthly preparation of accurate income and expense statements is the best single way to avert critical cash shortages.

1. The owner understands purpose of financial statements.

An owner who understands that financial statements are essential for directing and controlling a business will more likely take them seriously. Well-prepared business statements put the owner in control of the business, facilitate relationships with lending institutions and simplify tax preparation, often saving the owner tax dollars.

2. The owner compares several monthly statements for trends.

Comparing monthly and annual statements for trends provides financial data for planning purposes. Trend analysis is essential for efficient inventory control, capital budgeting, vacation scheduling, timely advertising, promotional campaigns and profit maximization.

3. The owner compares statements against industrial averages.

Knowing how a business compares financially to others helps the owner who is seeking loans or expansion opportunities. Such knowledge also provides the owner with both a psychological and planning advantage, adds to the owner's awareness of how well the industry is doing as a whole and provides an early warning system for market fluctuations and trends.

4. The owner knows current financial status of business.

Not knowing how the business is doing financially is a major reason for small business failures. Managing the business with relatively simple financial tools and staying constantly in touch with the business's financial status is critical if an adequate profit is to be made. Although good record keeping is time consuming and takes away from doing the actual work of the business, it is essential nevertheless if the business is to be a success.

D. The owner makes deposits on time to avoid penalties.

Penalties are costly and take away from profits. In several of the cases studied, late deposits had become so chronic, and the penalties so high, that the businesses were financially threatened. Chronic penalties for late deposits are a sure sign of poor business practices and can be a warning sign to lending institutions that the business is heading for financial trouble, making it highly unlikely the owner will be able to get a loan when needed.

E. The company has a credit policy.

Providing credit to customers can often increase sales volume. But if the business does not have a written credit policy or does not follow it exactly, the business may lose more money on bad debts than the additional sales brought in. Written credit policies often speed debt collections, especially when discounts can be made for early payments. Several of the cases studied showed a marked improvement in cash flow after credit policies were implemented.

1. The company ages the billing system monthly.

Monthly aging of the bills due keeps the owner in touch with who the best customers are. Last year's excellent customer can be today's problem customer.

2. The company assesses a late payment fee from customers.

Late payments can jeopardize the business-customer relationship, because the customer is not aware of how poor payment habits affect the business. Providing discounts for early payments is an effective way to encourage customers to pay on time. This will improve cash flow and even build customer loyalty.

3. The company writes off bad debts.

Not writing off bad debts gives a false sense of net worth and can threaten the financial performance of the business. This also lets the owner know which customers are poor credit risks.

4. The company has good collection policies.

Many small business owners detest debt collections. A good collection policy simplifies collections and is an effective deterrent to late payments and bad debts. Timely and effective debt collection is essential for positive cash flow and increases profits because it diminishes the need for short-term operating loans.

5. The company has a series of increasingly pointed letters to collect from late customers.

The customer who is truly a collection problem will not be influenced by discounts or good collection policies alone. These customers probably have cash flow problems or other financial problems of their own. Late notices and overdue statements with increasingly demanding language will be required. Often letters from a lawyer can be helpful. As a last resort, it may be wise to turn them over to a collection agency.

6. The company has VISA, MasterCard or other credit card systems.

Credit card systems provide timely cash turnaround and put the financing burden directly on the customer. The worry and headaches alleviated by using a credit card system more than justify the small fee credit card companies charge. Such a system also simplifies bookkeeping and billing and lowers operating costs in these areas.

7. The company emphasizes cash discounts.

Cash discounts encourage customers to pay now rather than use credit. Informing customers that paying by cash saves them money improves cash flow and decreases collection costs.

F. The owner considers tax implications.

Waiting until the last minute to consider the tax implications for the purchase of equipment and other capital outlays can be costly. Thinking ahead and discussing tax implications of various alternatives with an accountant early in the year can save in taxes. Tax considerations are essential for all businesses, but for the small business, such considerations can make the difference between a profit and a loss.

1. The owner considers buy versus lease possibilities.

Deciding whether to buy or lease equipment is an important business consideration. Leasing rather than borrowing money to buy can help cash flow, save taxes and increase total operating capital. One reason to consider leasing equipment is that it may save downtime when equipment needs repairs.

2. The owner considers possible advantages and disadvantages of incorporation.

Each kind of business structure has its own advantages. Most of the businesses in the cases studied were either sole proprietorships or corporations..

3. The owner does not pay tax penalties.