I recently explained why a debtor might want to file a chapter 7 New York business bankruptcy, but I thought it might help business owners to recognize some accounting pointers businesses can use to stay out of bankruptcy court. Here are eight.
(1) Start your small business small. Many people starting out their businesses think about what kind of corporate entity will work best for them. This usually isn’t necessary unless there’s a fact about the business (like legal liability) that might make it worthwhile, and even then, one can buy an insurance policy to cover that. One of the primary advantages of a sole proprietorship is that it keeps bookkeeping and taxes simple. The accounts are the same (at first) and you won’t need to file a separate tax return. If your small business fails, then it’s no different than losing money, and no separate business bankruptcy is required. You might want to incorporate sooner if you’re forming a partnership, depending on your trade.
(2) Separate business accounts from personal accounts. This might sound like it contradicts the first point, but it doesn’t. Even if you’re operating a sole proprietorship, it’s still very important to separately account for your business’ income. It will certainly make taxes easier to handle. Knowing if you’re running into problems is necessary to avoid bankruptcy, and that might not work if you can’t distinguish your business’ income from your own.
(3) Cash flow is not profitability. It’s easy to estimate profits once you’ve been paid, but in many cases, invoices to customers might still be outstanding. Your business might be moving briskly but if you don’t have cash in hand…
(4) …Then you need to insist on regular payments. If money isn’t flowing in on time, then you might miss payments needlessly, including those to creditors. Keeping up on invoices also ensures customers, vendors, etc. take you seriously.
(5) Diligently track receivables. This just means noting when invoices are paid. The point is not getting overwhelmed by paperwork to avoid making mistakes when tax time approaches or when figuring out whether you’re making money to cover your overhead.
(6) Obtain expense receipts. A bank statement is just a record of transactions. An entry may not break them down sufficiently, like multiple checks deposited at once, and some parties’ names might not correspond with whoever you thought you were dealing with. Also, ask for receipts for cash transactions because not doing so overstates income.
(7) Track your inventory. Particularly for service providers who sell some goods on the side, it’s crucial to make you know how much of your products you have laying around, even if it means taking a tedious physical inventory occasionally.
(8) Make sure employees aren’t in charge of both the cash and the books. This is a simple principal-agent conundrum, but the easiest way for an employee to embezzle your business’ money is by making it appear it never received the money in the first place. Some of this point comes down to trust, but internal controls are important.
The objective of most of these tips is clarity. Sloppy accounting should not be a cause of a business bankruptcy. However, even if despite your best efforts your business is experiencing financial hardship, then talking to an experienced New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.