5 Neglected Business Accounts - And How to Fix Them

Neglected Business Accounts
Neglected Business Accounts. Marius Hepp / EyeEm/Getty Images

These business accounts are neglected by many business owners. But all are important to the financial health of your business. Neglect them at your peril.

In this article, we'll look at these accounts on your business balance sheet and profit and loss statement, why it's important to pay attention to them, and how to fix things. 

Sorting Out Inventory

For businesses that make products, inventory is the heart of the business.

Keeping track of inventory is important because the value of your inventory determines your gross profit on the income statement, and the sale of inventory contributes to your profits. Neglecting your inventory can result in a loss of value that goes unnoticed until someone comes in and discovers the problem. 

How to Fix it: 

Keeping track of inventory involves making sure that you accurately record inventory coming in and going out in sales. Taking a physical inventory periodically, at least once a year, is important to give you an idea of the status of your inventory. Look for: 

  • Losses due to obsolescence, both in wear and in being outdated. Get rid of old inventory that has no value; it's just taking up space on your shelves. 
  • Losses due to employee theft. You may have to keep a closer eye on your inventory or institute policies and procedures to make sure inventory is secure from theft. 
  • Losses due to poor record keeping. This is a place for your CPA to step in and help you figure out how to do things better to make sure inventory is reported on your balance sheet correctly.                            

How Goodwill Works for a Business

What if you don't have inventory? If you sell services, you still have a value in your customer data base.

That's goodwill. The definition of goodwill is; the difference between the selling price and the price of all the business assets and property. Unfortunately, goodwill doesn't show up anywhere on your business balance sheet. It doesn't come into play until you decide to sell the business or it changes hands for some other reason.

When you sell your business, goodwill is an intangible asset that takes into account the loyalty of your customers or clients and the way you run your business. But when you sell your business is too late to try to increase your customer numbers or loyalty.

How to fix it: 

Keeping your customers happy and getting new business from recommendations is the key to having goodwill in your back pocket during the negotiations of the sale of your business. Keep all the systems in your business running smoothly, so a potential owner (or an appraiser) can see immediately that your business has high goodwill. 

Petty Cash Isn't So Petty

It's the little things that count. All the little transactions in your day-to-day business operations - petty cash items - add up. All of those expenses, captured and added to your business tax return, can mean a significant tax savings for your business.

Retail businesses used to have a petty cash box, and some still do. But even if you don't have a physical box, you need to keep track of the little expenses. 

For example, if you have coffee on hand in the office for employee use, count up all the cups consumed in a week's time. Multiply that by 52 and you'll get an idea of how much that expense could help you. 

How to fix it:

Set up a petty cash system. Make a list of all the small items you spend money on (parking, tolls, food for employees, small gifts for customers), and record them for your end-of-year accounting. Use apps and receipts so you have a record. 

Make Accounts Receivable Your Top Priority

The single biggest amount of money lost by businesses is (by my personal estimation) from unpaid amounts by customers, aka accounts receivable on the balance sheet.

If customers owe you money, remember that the longer the bill is unpaid, the less likely it is that it will be paid at all.

How to fix it: 

Use an accounts receivable aging report to track unpaid amounts by date. 

Work on the amounts longest overdue and pursue them rigorously, with collection agencies and small claims court, if necessary. Also work on the newest overdue amounts, with gentle reminders and continuing pressure to pay.

One suggestion: Hire someone to work on your receivables issue, and give the worker a percentage of the amount collected. You may see wonders you never imagined. 

Watch Owner's Equity

You wouldn't think I would need to add owner's equity to a list of neglected accounts, but you would be surprised how many business owners don't pay attention to it. 

Owner's equity is a major consideration in the health of your business and also of your personal financial health. I'm a business owner myself, and I know how easy it is to take money out of the business. I just transfer money from my business checking to my personal checking. Voila! Instant money for me. I worked hard for it, and I earned it, right? 

When you take a draw or a salary from your business, you may be taking money out that could be better spent on the business. 

How to fix it: 

Make your withdrawals from owner's equity part of a larger, long-range plan for the business. Only take what you actually need to live on and practice patience so your business can grow and provide you with more income later. 

The Bottom Line

All of these accounts, if neglected, have a negative affect on your business valuation. But, improved they all can have a huge positive effect on your business value at the time you sell the business.