Tuesday, November 20, 2012

Managing Business Expenditures and Avoiding Unauthorized Expenditures

Effectively managing the financial health of a business is one of the most important tasks for a small business owner/manager. All activities of the business affect, for good or bad, the financial health of the business and the financial management of that business affects all other business activities. Without adequate financial resources - you are OUT OF BUSINESS!

In addition, responsible and disciplined financial management can protect the small business or LLC from attacks as well as attacks against the personal assets of the owners by outside interests, shareholders, and others with an economic interest. One of the best defenses against attacks on the business is to have a proper business structure, including a strong financial position.

Responsible and disciplined financial management requires a good working knowledge of financial statements, especially the cash flow statement, as well as the cash cycle of the individual business. While many small business owners are never going to become experts in this discipline, all should gain a good knowledge of the company finances and then in cooperation with a good CPA effective financial management is relatively straightforward.

All financial management begins with a carefully prepared, well supported, operating budget. In the case of a start-up business a start-up budget will precede the operating budget but both are required. Thereafter, a management control system must be instituted to oversee the financial activities of the business and see that the budget is followed.

One of the issues business owners experience, and one that can lead to claims that can pierce the corporate veil, is that of unauthorized expenditures. What this means is expenditures that are unnecessary for, and outside of the, normal business operations. This issue is closely related to co-mingling of funds but extends beyond that issue.

The issue of unauthorized expenditures can be an challenge for businesses of all sizes but can pose a particular problem for small businesses and LLC's that have only one owner or very few owners and no employees. In the case of a single member business, where is the oversight and control to come from? First and foremost the protection must come from the owner(s) having a high level of commitment and discipline to the proper financial management of the business. Thereafter, working closely with a good CPA can assist in providing additional and valuable oversight.

The question the single owner business must ask is "Do I really want to expose all of my personal assets to risk because of lack of business discipline"?

If there is more than one owner and employees are involved, all, especially the owners, have a responsibility to see that the small business or LLC is being managed in a manner to ensure success and protect against unnecessary liability.

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