Susan Reid is an accounting professional with over 25 years working with small- to medium-sized Canadian private and publically traded companies. She currently serves as the controller at Lendified Inc.. We recently checked in with Susan to get her advice on how small businesses can better manage their finances and how they can better prepare for a loan application. Here's what she had to say:
When and how often should small business owners be analyzing their finances?
At the very least, small business owners should be analyzing heir financial data monthly.
What are the most common financial oversights you see business owners making?
Some of the most common financial oversights small business owners make are:
1. Not understanding what taxes they are responsible for; example, WSIB, EHT, GST, Statutory Payroll deductions and remittances.
2. Not keeping adequate track of sales and expenses (for GST purposes)
3. Not analyzing their monthly budget against their actual sales and expenses.
Provincial taxes - WSIB and EHT: You have to register your company with the appropriate government bodies and then be prepared to remit to these regulatory bodies - either monthly, quarterly or annually. WSIB is based on your gross payroll and, depending on your industry, you will be giving a rate to pay per $100 of gross payroll. Also, depending on your volume of payroll, you will be required to remit either monthly or quarterly to WSIB. This means that your payroll records need to be accurate. Payroll can be difficult and it's best to have some understanding about statutory deductions and remittances. Some taxes, like EHT (Employer Health Tax) is a yearly remittance, based on your total annual payroll, and remitted yearly.
Federal taxes - GST/HST: Every company has to register with the Federal Government and get a GST number. Depending on the business, they will tell you how frequently you have to prepare and remit your taxes. This means that you need to keep track of all the HST you collect on all sales, and track all the HST you pay, and remit the balance to the government. This has to be done in a very timely manner. The forms can be filed online, and the payment to the Federal government must be received on time.
Payroll (All Source Deductions): Employers are responsible to remit the deductions they take from employees. Together with this, Employers are required to pay an Employer portion of CPP and EI. This can also be time-consuming because you need to track all payroll, as well as fill out forms, and get the remittances done on time to avoid costly penalties.
Further, if you have a realistic budget, you need to be comparing the actual numbers to the budget numbers to figure out where you are going. Ask yourself these questions - Do you need to cut back? Where are you overspending? Are you charging enough to your customers? Are you paying too much for a product? In short, you need to constantly be reviewing income and expenses, and you really need to keep an eye on cash.
What's the fallout for businesses when they ignore or undervalue financial analysis?
When financial analysis is ignored, simply put, you can't see where you cash is going. You need to know when you cash is coming in, and how much you need to make your monthly expenses and government remittances. It's too easy to fall behind on payments, or to overspend. If you don't have enough cash left over at the end of the month to pay your employees and your statutory tax remittances, it's easy to fall behind and hard to catch up.
What financial factors should small business owners be aware of when they're preparing to apply for a bank loan?
They need to prepare a realistic budget that shows monthly income and accurate expenses.
How can businesses make themselves look more attractive to lenders?
Be prepared. Key elements: know your market, know your clients and know who you your competitors are. Having marketing materials available tells potential investors or lenders who you are and why you're good at what you do. Ask the questions - Why should they invest in you? What makes you special? How are you better?
What should be the standard practices for a business when preparing to make a major investment? You need to review the timing - is the timing right you?
Have there been regulatory changes or government tax law changes that will impact your industry. What is the economic environment - are interest rates going up or down? Have you done a cost-benefit analysis? Have you looked at the long-term value of the investment?
What are the biggest mistakes you see businesses making when they're making major investments?
The timing isn't right or they simply can't afford it. Or, enough time hasn't been spent analysing that this is the best purchase for the company, at this time, and money gets spent on something that won't work for them far enough into the future. For example, leading-edge technology is expensive and becomes quickly outdated.
At what point should business owners be enlisting the help of a finance expert to help with financial decisions?
I recommend financial assistance be pursued at all stages, right from the initial set up of a company through financial review and on going. Best managed companies have strong financial guidance.
What are your favorite resources for small business owners for learning more about managing finances?
I often refer to the Employment Standards Act for any and all things payroll related. Also, the CRA has websites that can answer many questions about what's taxable, how to claim ITC's (Input Tax Credits) as well as how to remit taxes. The CRA website also has information on how to set up your business account on line so that you can tract your tax payments and view all historical transactions. As well, many accounting firms post papers on current regulatory information and changes in tax laws, as well as other relevant accounting related information.
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