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Using Q3 Numbers to Make Q4 Notable

By Jesse Butts | August 24, 2012

As the nation transitions from fun in the sun to homework in homeroom, now is the ideal time for entrepreneurs to hit the books. The good news is there’s no need to spend a fortune on classes or textbooks considering all you can glean from your business’s financial books.

Unfortunately, many small business owners allow the third quarter to pass without ever glancing at their financials. Because most entrepreneurs prefer spending their time in the field rather than in the financials, they're missing valuable learning experiences that can improve business. Neglecting the books and administrative tasks can hinder growth and, too often, serve as the catalyst for business closure.

Make the most out of Q3 by following this quarter-end guide. Sprucing up on your bookkeeping basics can help ensure solid fourth quarter results and compliance for years to come.

Are Your Bookkeeping Practices Up to Snuff?

Before digging into your Q3 numbers, do you have all the necessary data entered into your bookkeeping system? The sad truth is many small business owners don't stay current with their recordkeeping. And poor recordkeeping leads to limited insights into your Q3 financials.

Ensure you’re able to produce:

  • Gross profit margins and profit margins per unit. Knowing your gross profits is one of the most important financial health indicators at a small business owner’s disposal. Producing these margins requires dutifully recording costs for raw materials, labor and production costs as well as detailed sales records. If you’re not recording this information, upgrade your bookkeeping system to accommodate these components in Q4.
  • Expense tracking. Instead of dutifully entering every transaction shortly after the point of sale or purchase, many entrepreneurs slack in this department. They review monthly bank statements to retroactively track expenses. Unless you have a mind like a steel trap, this method can only indicate how much you’re spending at various vendors, not how much individual expenses are adding up to. And forget about tracking cash transactions. Make Q4 the quarter when bank statements are simply for reference, not the backbone of your expense tracking system.
  • Detailed sales documentation. Aside from helping you calculate gross profits, recording sales details will also keep you on the good side of the law. Every state requires most businesses that sell goods to submit sales tax reports, usually on a monthly basis. Failing to report will often result in penalties and interest. When businesses further neglect their sales tax reporting obligations, states can—and frequently do—revoke sales tax IDs. If this happened to your business, you would have to pay sales tax when purchasing from wholesalers. Reinstating a sales tax ID demands much more paperwork and proceedings than regularly documenting your sales.

Bookkeeping Procedures for Q3

Whether you maintain a part-time bookkeeper or handle the day-to-day entry of transactions yourself, review the books on a quarterly basis. Once you’ve retroactively filled in the recordkeeping gaps to the best of your ability and established controls to keep accurate records from this point forward, you can dive into your numbers at the close of Q3. Analyzing Q3 numbers will not only show if your business is on track to finish the year according to expectations, it will also help you anticipate your tax burden if you haven’t made any quarterly estimated payments.

You may want to brush up on bookkeeping basics before you begin your Q3 bookwork. But if you know your way around your financials, follow these steps:

  1. Ensure all Q3 transactions have been properly entered.
  2. Prepare a preliminary trial balance to ensure all debits equal all credits (assuming you’re using a double-entry system).
  3. Enter adjusting entries to account for any discrepancies in your ledgers.

For the vast majority of small business owners, closing the books and preparing financial statements can wait until the end of Q4. But acting upon your financial information to date could mean the difference between hitting your numbers and a dismal Q4.

Digging into Q3 Results

Brian Kim, a Chicago-based CPA specializing in the SMB market, identified Q3 as one of the most revealing quarters for your financial health. You can not only see if you’re on track to meet projections but also determine if you're maintaining enough or too much cash on hand.

Once you compare your revenue and sales projections against the numbers, you’ll be able to determine if you’re on track to hit your quotas or if now is the time to invest more heavily in sales and marketing before year-end.

While many entrepreneurs are competent in devising sales strategies and executing the tactics to achieve them, they often forget to keep an eye on their cash reserves. When an emergency strikes, cash on hand—not a strong sales pipeline—will come to the rescue.

To illustrate the importance of adequate cash reserves, Kim suggests an exercise to his clients: Pretend you have no income coming in for a month. Could your business survive? “The answer shocks a lot of people,” Kim said. “And a lot of times, the answer is pretty scary.”

The amount of cash surplus on hand will vary by business and industry. Generally speaking, you’ll want three to six months of cash on hand at all times. Any less, you likely won’t survive the unexpected. Any more, you’re probably not making smart investment decisions.

Overcoming a cash shortage. If business is strong but you don’t have much in the bank, poor planning is often the culprit. Unfortunately, starting to plan better now won’t mean more cash in the bank tomorrow. Achieving a healthy cash reserve will likely necessitate enacting some austerity measures, including limiting your advertising expenditures, reducing employee hours and delaying investments.

Before enacting any of the above methods, check your accounts receivable. You may find that certain accounts are months past due. If so, you’re actually in luck. You can overcome your cash shortage by taking a more aggressive stance with delinquent accounts and enforcing stricter collection policies. Of course, that might not make up for all the cash you need to raise—and not every small business owner has outstanding accounts receivable to save the day.

To help avoid a cash crunch in the future, examine your operating budget to ensure you’re including the expenses many small businesses neglect. For example:

  • Miscellaneous expenses should comprise a very small portion of your budget. If these expenses keep growing or demand a sizable portion of your budget, conduct more industry research. There may be even more expenses necessary to compete in your line of work.
  • The laptop you’ve been using for four years probably won’t make it another four. Even the smallest businesses need to allocate funds for technology expenses.
  • Employees cost more than their wages. Once you hire your first part-time employee, you’re on the hook for workers’ compensation premiums, FICA contributions, unemployment insurance and a host of other expenses that add up quickly. According to some estimates, an employee paid $10,000 annually can easily cost your business $11,500 or more.
  • Annual payments must be figured into your monthly budget. Most secretaries of state charge annual renewal fees ranging from under $100 to several thousand dollars for large partnerships. Amortizing annual costs across your monthly budget will help you avoid a cash crunch when those costs are due.

Capitalizing on a cash surplus. How much cash on hand constitutes a surplus? Like many things in life, it depends. But in most situations and industries, any cash exceeding more than six months’ worth of budgeted expenses is a surplus.

In the event of a cash surplus, many entrepreneurs invest in everything from capital assets to more employees to new equipment. And as the end of the year draws near, the more expenses you can rack up, the more you can deduct.

Discussing your cash flow position and investment ideas with your accountant is your best bet. Each choice you’re weighing will likely carry tax burdens or incentives you’re unaware of. However, considering the current economy and the multitude of tax changes on the horizon, you accountant may tell you the best investment you can make is preparing for the unknown.

Beyond the Books

Whether your Q3 number-crunching reveals a healthy cash surplus or dire financial straits, many small businesses can improve their business operations and finances by taking a few preventative measures, such as:

  • Backing up data on a routine basis. Kim said it best: “Nothing puts my clients’ businesses to a halt like lost data.” Laptops and technology can be easily replaced, but lost data can mean lost sales, payroll records and the inability to report to the government. Whether you choose to back up information manually or opt for an online back-up service, start now. Make it a habit. Your business can’t afford for you to postpone this procedure.
  • Filing extensions. It’s free. It takes a few minutes to complete. It’s a painless way to avoid penalties and fees if you need to file annual returns late. The form varies depending upon your entity type, but the IRS offers a library of extension forms.
  • Weighing the pros and cons of making quarterly estimated payments. This may sound a bit unorthodox. But in a tough and uncertain economy, being able to keep cash on hand is a top priority. If you or your accountant estimate your annual tax obligation is $30,000, you will have remitted roughly $25,000 to the IRS shortly after the end of Q3. If, on the other hand, you wait to pay your taxes until filing the annual return, you might face $200 in penalties and interest. You’ll have to decide which is advantageous: Keeping more cash on hand and paying the price, or keeping up with your quarterly taxes and having less cash on hand. Always consult your accountant before considering your tax liabilities and payment plan.

While nothing can guarantee a strong Q4, capitalizing on the learning opportunities from Q3 is one of the best steps you can take for a promising year-end.

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