Putting Your Commission to Work: How Good Accounting Practices Can Help Your Auction Business

Putting Your Commission to Work: How Good Accounting Practices Can Help Your Auction Business

As auctioneers, our jobs revolve around money. We work for consignors to whom we have a fiduciary responsibility to get as much for their consignments as possible. Our customers come to us looking for the best deal when buying an item. Where these two prices intersect, we found the right price. Now, our clients are happy. Our customers are happy. We made commission, so we should be happy. Here's the question I pose: do you know what's happening with your commission? Are you earning enough to continue running your business? Do you need to adjust your rates or types of consignments? Maybe you need to look at introducing or changing your buyer's premium. Maybe you need to make staffing decisions.

For new auctioneers AND those who have been doing this a while, understanding basic accounting practices is essential for managing finances, making informed decisions, and ensuring the financial health of your auction business. Here are some key aspects of basic accounting practices that every new business owner should know:

1. Bookkeeping: Bookkeeping involves recording and organizing financial transactions such as sales, purchases, expenses, and payments. It forms the foundation of accounting and provides the data needed to prepare financial statements and reports. Not to be confused with your clerking or receipts, but the actual bookkeeping for your COMMISSION and BUYERS' PREMIUM--your INCOME.
2. Financial Statements: There are three main types of financial statements:
3. Income Statement (Profit and Loss Statement): Summarizes revenues, expenses, and net income (or loss) over a specific period, typically monthly, quarterly, or annually.
4. Balance Sheet: Provides a snapshot of the business's financial position at a specific point in time, showing assets, liabilities, and equity.
5. Cash Flow Statement: Tracks the flow of cash in and out of the business over a specific period, categorizing cash inflows and outflows into operating, investing, and financing activities.
6. Accrual vs. Cash Basis Accounting: In accrual accounting, revenues and expenses are recognized when they are earned or incurred, regardless of when cash is exchanged. In cash basis accounting, revenues and expenses are recognized only when cash is received or paid. Most businesses use accrual accounting for its accuracy in matching revenues with expenses and providing a more comprehensive view of financial performance. However, I actually recommend Auctioneers, and really anyone who works on commission, to use a cash basis because commission is never guaranteed.
7. Accounts Payable and Receivable: Accounts payable (AP) represent amounts owed to suppliers or vendors for goods or services purchased on credit. Accounts receivable (AR) represent amounts owed to the business by customers for goods or services provided on credit. Managing AP and AR effectively is crucial for maintaining healthy cash flow. Use caution when allowing buyers to buy now and pay later. I recommend using a service that pays YOU upfront and the buyer pays the service. Obviously, livestock--especially cattle, is a different beast all together.
8. Budgeting and Forecasting: Creating budgets and financial forecasts helps business owners plan and control expenses, allocate resources effectively, and set realistic financial goals. It involves estimating future revenues and expenses based on historical data, market trends, and business objectives. Are you looking to expand your facility or services? Are you looking to hire more staff? Budgets and forecasting are how you plan from month to month, quarter to quarter, or year to year.
9. Tax Compliance: Understanding tax obligations and deadlines is essential for compliance with federal, state, and local tax laws. This includes income taxes, sales taxes, payroll taxes, and any other applicable taxes based on the business's structure and activities. Good bookkeeping practices will make your life, and that of your tax preparer much easier.
10. Internal Controls: Implementing internal controls helps prevent errors, fraud, and misuse of company assets. This includes procedures for handling cash, reconciling accounts, segregating duties, and maintaining documentation. This is particularly necessary if you have staff!
11. Software Tools: Utilizing accounting software can streamline financial processes, automate bookkeeping tasks, and provide real-time insights into the business's financial performance. Popular accounting software options include QuickBooks, Xero, and FreshBooks. You can even use something as simple as Excel or Google Sheets.
12. Professional Assistance: While it's essential for business owners to have a basic understanding of accounting principles, seeking professional assistance from an accountant or bookkeeper can provide expert guidance, ensure compliance, and optimize financial management practices. If you find yourself struggling with seeing where your earnings are going, an accountant or bookkeeper can be a good investment in your business.

By familiarizing themselves with these basic accounting practices, auction business owners can establish a solid foundation for financial management, make informed decisions, and set their businesses up for long term success!

What are some accounting practices you've implemented? What's worked for you? What hasn't worked? Do you have any recommendations for software or CPAs? Drop your comments and suggestions below!