Small Business Accounting in Toronto – Talk to the Experts

Here’s how a right accounting advisor can help with your small business’ success:

1. Prevent financial disasters, by reviewing financial statements regularly

It’s imperative that you review your company’s financial statements with an expert in small business accounting. Reviewing with an expert will help you answer the following questions:

• Is there sufficient cash to pay for operating expenses?
• Can my company meet its financial covenants on bank loans, or has there been a breach?
• Are revenues and expenses increasing or decreasing and why?
• How many months can my business survive based on current cash reserves?
• Why are profits decreasing and how can they be improved?

If you fail to address these fundamental questions with a professional who specializes in small business accounting in Toronto, then there’s a real financial risk to your business.

2. Monitor KPI’s to improve financial performance

A Key Performance Indicator (KPI) is a formula or ratio that measures the success of the most critical aspects of your business. The following key performance indicators should be reviewed periodically with an experienced accountant:

Gross margin

Gross margin is the profit realized on the sale of a product or service, and is computed as: selling price minus cost of product/service. Increasing gross margins mean that the product/services are priced appropriately and the cost of inventory purchases are being kept low.

Inventory turnover

Inventory turnover is a key performance indicator that measures how quickly inventory is selling and is computed as:

Cost of inventory purchases / Inventory

The higher the turnover, the faster inventory is selling. Companies with a low inventory turnover either have too much inventory on hand, obsolete inventory, or need to improve their sales and marketing efforts.

Days sales in receivables

‘Days sales in receivables’ is a formula that indicates the number of days in sales that are tied-up in accounts receivable. It is a measure of a company’s liquidity. This key performance indicated is calculated as:

Average Accounts Receivable / (Annual Sales / 365 days)

For example, 45 days sales in receivables means that your revenue are not normally collected until 45 days after the sale is made. The higher the number, the more company cash that’s tied up in accounts receivables, making liquidity a problem.

Number of new customers acquired

The number of new customers acquired in a given month should be tracked, in order to assess whether the company’s marketing efforts are paying off. This key performance indicator can be broken down further by tracking the number of new customers by product line, the number of new customers by income level, the number of new customers by age, etc.

3. Compare yourself to the competition

No one wants to be behind the competition. Therefore, it’s important that you review your company’s financial statements and key performance indicators against those of your competitors. This will tell you whether there is room for improvement or if you’re ahead of the competition.

An experienced small business accountant should have financial statistics available for various industries. Alternatively, this information can be purchased from companies specializing in statistical analysis of businesses.

4. Keep accurate records and receipts

Keeping accurate records and receipts may not seem like a top priority, but it should not be taken lightly.

Inadequate financial records and receipts will make it difficult for you to manage the financial aspect of your business, result in unreliable financial statements, and a lack of quality key performance indicators. In fact, keeping inadequate records and receipts is why many, many businesses fail.

For further information on the benefits of keeping accurate records and receipts, please see my article in which I discuss several ways poor accounting services hurt company profits.

5. Minimize income tax

One of a company’s biggest expenses is income tax, yet it is often overlooked until it’s time to pay the taxman. However, proper tax planning with a qualified tax accountant can help you reduce your company’s income taxes drastically.

A proper tax plan should be created at the beginning of each year and re-evaluated periodically or as circumstance change. The tax plan should address key areas such as:

1. All possible tax deductions (see 10 Best Tax Tips)
2. Whether or not to incorporate
3. Paying dividends vs. Salary (see Salary or Dividend article from the Globe and Mail)
4. Income splitting with family members
5. Tax savings strategies (see 5 Secrets to Saving Taxes for Canadians)

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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