A Beginner’s Guide to Bookkeeping

If you’re a new business owner, you might not remember the last night you slept more than four or five hours. Your days may be filled with developing marketing strategies, screening potential employees and trying to figure out how to set up a bookkeeping system. If working with numbers isn’t your favorite pastime, the latter activity may be posing quite a challenge. If you can relate to this common scenario that new entrepreneurs face, the following beginner’s guide to bookkeeping might calm your frayed nerves and set you on the right course.

Cash Versus Accrual Basis of Accounting
A pivotal first step when setting up a bookkeeping system is deciding whether to use the cash or accrual basis of accounting. Cash accounting requires you to record transactions at the time cash changes hands. Both actual money and electronic funds transfers constitute cash. If you’re a sole proprietor working from home or at a one-person office, opting for cash accounting can make sense. However, if you’re going to extend credit to your customers or request credit from your suppliers, you must utilize accrual accounting. Accrual accounting dictates that you record sales or purchases immediately, even if you receive cash from a customer or pay cash to a creditor at a later date.

Single- Versus Double-Entry Accounting System
Single-entry bookkeeping is similar to maintaining a check register. You record transactions when you make deposits into your business account or pay bills. This method only works if you own a small company with a low volume of transactions. If you own a mid-size or large business that is complex, a double-entry bookkeeping system is needed. With this type of system, at least two entries are made for every transaction. One account is debited, while another one is credited. A simultaneous debit and credit system is the key to a double-entry bookkeeping system.

Balance Sheet Basics
Before you can successfully develop a bookkeeping system, you must understand the basic balance sheets accounts: assets, liabilities and equity. If you don’t carefully track these items and ensure the transactions that deal with them are recorded in the right place, your books won’t balance. The accounting equation is a simple formula you can use to ensure your books always balance. This handy equation is: assets = liabilities + equity.

Assets
Assets are things your business owns, such as accounts receivables and inventory. On the balance sheet, assets are typically listed in order of their liquidity. For instance, the assets section of a balance sheet might begin with cash followed by marketable securities, inventory and accounts receivables. These accounts are referred to as current assets. Fixed assets, or tangible assets, round out the first portion of the balance sheet. They include things you can touch such as land, buildings and equipment.

Liabilities
Liabilities are things a company owes to third parties such as suppliers and banks. The liabilities section of the balance sheet comprises both current and long-term accounts. Current liabilities, those expected to be paid within a year, typically include accounts payable and accruals. Accounts payable contains amounts owed to suppliers. This account may also encompass credit card and bank debt. Accruals consist of taxes owed, including:

  • Sales taxes
  • Social security taxes
  • Medicare taxes

Long-term liabilities, such as bonds and mortgages, aren’t expected to be paid off during the next year.

Equity
Equity represents the ownership a business owner and other investors have in a company. If you’re the only person who has put money into your business, the equity section of the balance sheet will only have one account in it.

Income Statement Basics
In addition to being familiar with balance sheet accounts, understanding income statement basics is critical to setting up a superb bookkeeping system. The income statement consists of revenue and expense accounts.

Revenues
Revenue represents all the income received when selling goods or services. On the income statement, revenues are classified as either “operating” or “non-operating.” Operating revenues stem from your business’s main operations. Sales is an example of this type of revenue. Non-operating revenues are earned from some other activity such as rent or interest revenue.

Expenses
Expenses are the costs incurred to run your business. On the income statement, expenses are classified as either cost of goods sold, operating or non-operating. Cost of goods sold represents the cash a company spends to manufacture or buy the products or services it sells to customers. Operating expenses are the costs a company incurs as part of its regular business activities excluding cost of goods sold.

Examples of operating expenses include:

  • Supplies expense
  • Wages expense
  • Rent expense
  • Utilities expense

Non-operating expenses are incurred for reasons outside the scope of normal business activities such as interest expense.

Benefits of Working With a Bookkeeping Professional
Besides familiarizing yourself with the aforementioned beginner’s guide to bookkeeping, working with a professional accounting expert is a smart idea. Numerous details go into managing your enterprise’s bookkeeping. Even a trivial mistake such as putting a decimal point in the wrong place can wreak havoc on your books. In addition to assisting you in setting up and managing a bookkeeping system, our professionals can help you raise financing, develop a pricing structure for your goods or services, and discover ways to save money on operations, which may decrease your stress levels and increase your odds of long-term business success.

Startups: Research Credit Can Offset Payroll Taxes

A little-known tax benefit for new, qualified small businesses is the ability to apply a portion of their research credit – no more than $250,000 – to pay the employer’s share of their employees’ FICA withholding requirement (the 6.2% payroll tax). This can be quite a benefit, as in their early years, start-up companies generally do not have any taxable profits for the research credit to offset; quite often, it is in these early years when companies make expenditures that qualify for the research credit. This can substantially help these young companies’ cash flow.

Research Credit – The research credit is equal to 20% of qualified research expenditures in excess of the established base amount. If using the simplified method, the research credit is equal to 14% of qualified research expenditures in excess of 50% of the company’s average research expenditures in the prior three years.

Qualified Research – Research expenditures that qualify for the credit generally include spending on research that is undertaken for the purpose of discovering technological information. This information is intended to be useful in the development of a new or improved business component for the taxpayer relating to new or improved functionality, performance, reliability or quality.

Qualified Small Business (QSB) – To apply the research credit to payroll taxes, a company must be a QSB and must not be a tax-exempt organization. A QSB is a corporation or partnership with these criteria:

  1. The entity does not have gross receipts in any year before the fourth preceding year. Thus, the payroll credit can only be taken in the first 5 years of the entity’s existence. However, this rule does not require a business to have been in existence for at least 5 years.
  2. The entity’s gross receipts for the year when the credit is elected must be less than $5 million.

Any person (other than a corporation or partnership) is a QSB if that person meets the two requirements above after taking into account the person’s aggregate gross receipts received for all the person’s trades or businesses.

Example – The taxpayer is a calendar-year individual with one business that operates as a sole proprietorship. The taxpayer had gross receipts of $4 million in 2016. For the years 2012, 2013, 2014 and 2015, the taxpayer had gross receipts of $1 million, $7 million, $4 million, and $3 million, respectively; the taxpayer did not have gross receipts for any taxable year prior to 2012. The taxpayer is a qualified small business for 2016 because he had less than $5 million in gross receipts for 2016 and did not have gross receipts before 2012 (the beginning of the 5-taxable-year period that ends in 2016). The taxpayer’s gross receipts in the years 2012-2015 are not relevant in determining whether he is a qualified small business in taxable year 2016. Because the taxpayer had gross receipts in 2012, the taxpayer will not be a qualified small business for 2017, regardless of his gross receipts in that year.

The research credit must first be accrued back to the preceding year, where it must be used to offset any tax liability for that year. Then, the excess (up to $250,000 maximum) can be used to offset the 6.2% employer payroll tax. Any amount not used is carried forward to the next year.If you have questions related to the research credit or if your business could benefit from using the credit to offset payroll taxes, please give us a call.

How An Accountant Can Help Your Small Business Boom

One of the most positive qualities that many small business owners share is a burning desire – an insatiable willingness – to “do it all.” It’s what separates entrepreneurs from employees in the first place. An employee is more than willing to set out on the path that someone else has carved for them. An entrepreneur has a need to carve a path for themselves.

Unfortunately, this mentality can also get even the most passionate small business owners into a bit of trouble – particularly when it comes to their finances. Being able to balance your own checkbook and running the finances of a small business are NOT the same thing, nor should they ever be treated as such. To that end, the importance of finding the right accounting professional to help support your small business as it continues to grow and evolve cannot be overstated enough.

There are a number of essential ways, in particular, that an accounting expert can help your small business.

When You’re Just Starting Out
Perhaps the most important role that an accounting professional will play in terms of your small business takes place when you’re just starting out. One of the most common mistakes that many business owners make involves selecting the wrong business entity – a small problem that can have major ramifications when tax season rolls around. A accounting pro who is intimately involved with the makeup of your business from a basic level can help make sure this doesn’t happen to you.

Along the same lines, an accounting professional can also help make sure that your accounting system is properly set up in the first place. They can make sure that you’re picking the right accounting system that actually supports your long-term goals for your business and can create a chart of accounts to offer superior visibility into money coming into and out of your organization.

The Day-to-Day Grind
Another one of the hugely invaluable ways that an accounting expert can help your small business comes by the small, yet critical, decisions they make on a daily basis. A financial expert can help give you greater visibility into cash flow (including accounts payable and accounts receivable), for example. Cash flow and other instability issues are one of the major reasons why most small businesses fail in the first place, and having the right person at your side can help you avoid them altogether.

An accounting professional can also help make sure your security controls are properly set up and executed, particularly in terms of factors like compliance. Remember that we’re living in an era where the average cost of a data breach has ballooned to almost $4 million. If the security aspect of your finances is not properly accounted for, it could be putting your entire business at risk. Even one small data breach could expose the personal records of multiple clients, something that opens the door to things like lawsuits, and that could eventually close the door on everything you’ve worked so hard to build.

Other Benefits
A financial professional will also play an important role when it comes to growing your small business. Remember that both an inability to scale up as fast as you need AND growing your business faster than you can sustain are additional reasons why many small businesses fail. Because such a large part of your growth and expansion pace has to do with personal finances, it stands to reason that bringing someone into the fold who can leverage their years of experience to your advantage is a very good idea.

A financial expert can help you raise money – particularly helpful if you’re getting ready to bring a new product or service to market. If you ever decide that this chapter of your life is closed and that it’s time to look for new opportunities, these professionals can also help sell your small business as well. Selling a business is a process filled with potential mistakes just waiting to happen, and the expert hand of someone who has been in this position before is something that you literally cannot put a price on. It isn’t just an investment in your organizational ability – it’s an investment in the future of your business as a whole.

In the End
The fact of the matter is that there really is no “one size fits all” approach to small business accounting. Every business is a little bit different, which will require a certain level of care and finesse when it comes to finances in particular. Only by consulting the help of a professional as early on in the process as possible will you be able to avoid the normal pitfalls of running a small business and create a financially stable foundation from which to work.

If you are considering starting a new business, it may be appropriate to consult with this office before you get too far through the process. Please call for assistance.

8 Financial Tips to Help Save Money While Building Your Startup

Starting a new business is one of life’s most exciting adventures. However, in order to build a successful company you need to start turning a profit as soon as possible. In the beginning of any business, expenses are unavoidable, but you can increase your profits by minimizing these expenses as much as possible. Here are eight tips you can use to save money while building your startup company.

1. Be careful with perks.
As a new business, you want to attract the best employees to your company. However, trying to offer the same perks as a venture capital startup can put you in debt quickly. Many successful businesses started in a garage, and there is no shame in keeping things simple at first. Once you’ve made it, you can start thinking about adding cappuccino machines, ping pong tables, and other perks to your office environment.

2. Use free software programs.
As you begin building your new business, resist the urge to invest in the latest, most expensive software programs. Instead, look for inexpensive software programs, or find programs that offer a lengthy free trial period. For example, instead of investing in Microsoft Office, you may consider using the free software programs offered by Google or Trello.

3. Make the most of your credit cards.
If you already have credit cards, make sure you are getting the most out of any perks they offer, such as frequent flyer miles or cash back. If you are planning to apply for a business credit card, research your options carefully, and choose the card that will give you the best benefits.

4. Hire interns from local colleges.
Instead of looking to the open market to find all of your employees, consider hiring interns from a local college instead. These individuals work for much less than a seasoned professional would, and they are often eager to prove themselves in the workplace.

5. Barter for services.
As you work to grow your business, you may need a variety of services from independent contractors or other companies. Instead of offering to pay cash for the services you receive, try to offer a different type of benefit that won’t impact your bottom line as much. For example, you may offer some of your own products or services, or you may allow the other party to collect a small amount of the profits you earn because of their services.

6. Minimize your personal expenses.
Because you will likely be investing a lot of your own money into your startup, you can increase profitability by reducing your personal expenses. Be careful about how you spend money, especially when you start bringing in revenue. Avoid making large purchases, such as a new house or car, unless they are absolutely necessary. Consider working with your accountant to keep track of all of your expenses so you can identify opportunities to cut back.

7. Outsource some of your projects.
To save more money while your business is getting off the ground, consider outsourcing some of your smaller projects, such as building or updating your website. Outsourcing one-time projects to independent contractors or consulting companies can be much more cost-effective than trying to hire a full-time employee to handle the job.

8. Use LinkedIn for recruitment.
Recruiting new employees can be expensive, especially if you are determined to find the best people. To cut down on these costs, consider using LinkedIn to recruit new people for your startup. Although you will have to do some of the legwork, you won’t spend as much as you would with other recruiting strategies.

Regardless of the steps you take to save money as your business grows, you will still need to manage your funds carefully to ensure that your financial situation is improving over time. A professional accountant can help you set up a realistic budget and cash flow forecast to keep you on the right track. Contact our office today to learn more.

Why Do Small Businesses Fail, and How Can I Prevent This?

Many people dream of starting a small business. This is a dream that can become a reality, or — as happens to about 33% of prospective business owners, according to the Small Business Administration — it can result in dismal failure within two years. There’s no magic-bullet solution to ensure a successful business, but if you don’t want to be in that 33%, you should be aware of the common reasons that small businesses fail.

1. Poor cash flow.
Uneven, unstable, or nonexistent cash flow is the #1 killer of small businesses. New business owners are liable to run into this problem because they have few or no paying customers and because they must overcome an onslaught of new expenses to keep their doors open. Depending on the type of business, the impact can be severe (particularly for brick-and-mortar businesses that must pay rent).

Heavily project-based businesses are also apt to run into cash-flow problems if getting paid takes too long, as the bills don’t stop coming due. Before trying to predict income, sit down with an accountant to forecast your expenses so that you know how much savings you should have on hand and how much capital to seek.

2. Lack of managerial experience.
Say that you have decided to open a specialty bake shop because you’re an incredibly talented pastry chef. You may know how to pipe a macaron better than the old French masters, but that doesn’t mean you know how to run a bake shop. Many talented individuals are fantastic at the chief service or product that their business offers but lack the business insight they need to make it succeed.

An MBA is not needed to run a business, but it certainly helps to take business courses dedicated to the appropriate industry and to enlist a small-business consultant to help draft a business plan and put it into action. Talk to other business owners of all types and learn from them; ask them what they would and wouldn’t do again when running their businesses.

3. Not providing what the market wants.
There’s a reason that small-business ownership is just a dream for some people; often, a person’s dream career just is not realistic because it does not have a market. If you live in a small town and want to open a formal dress shop, you should ask, “Do the people in this town have the income and tastes to present sufficient demand, or would a big city have a better market?”

Whether businesses target local or general markets, the inability to find a customer base is often what causes them to fail, despite their owners’ love. Do some market research first before deciding to invest in a business or start a new product line. Such research takes time and money, but it can prevent a major loss—or reveal a major opportunity in a different place or another line of work.

4. Not keeping up with the pace of growth.
Have you ever heard of “the law of diminishing returns”? It refers to the inability to keep up with growth—both forecasted and unexpected. This problem causes a lot of business owners to crash and burn. When a business has been in famine mode for years because of cash-flow issues but suddenly begins to take off, it can be difficult for its owner to change his or her attitudes about money.

When a business grows, it eventually needs to hire help to keep up with the number of customers, as the owner can’t do it all; if this doesn’t happen, the business will start to lose money. Is that slow, old computer taking up too much time on high-value gigs and preventing work from getting done faster? Invest in both people and equipment when the time comes. Don’t fall victim to the law of diminishing returns.

5. Not Learning From Failure
Even the wealthiest business owners in the world have had failures, whether they are projects or entire companies. They got to where they are by learning from their failures.

Based on the common causes of business failure outlined above, if the market doesn’t want your product, you must adapt. If a lack of time or poor-quality equipment are holding you back, you must hire help or invest in faster computers and more efficient machinery.

It’s only truly a failure if you do not learn from your mistakes.

By getting a proper handle on your finances and properly managing of all of your resources (including labor), you can drastically increase the chances that your business will succeed. Sometimes, the market is just fickle, requiring you to adapt to changing demands and technologies. By being prepared for all the intricacies of running a business and by having the wisdom to learn from failure, your business won’t be among the 33% that fail in the first 2 years.

10 Questions to Ask Your Financial Team When Starting Up

Starting up your business is an exciting time, but it is also a time with many questions. While it may seem initially very easy to create a product, open a store, and start selling, the financial aspects of being successful are a bit more challenging. As you consider the process of starting up, work with a local financial planning team and tax professional to ensure you get your financial footing in place now. Ask these questions.

#1: What should be in a basic business plan?
A business plan should outline each detail of your company including who will run it, how much you’ll charge, and what you expect to earn. Putting time into creating a thorough business plan is important. Work with your team to ensure your plan is accurate and represents your business well.

#2: Who will you need to pay taxes to?
Your local jurisdiction and state have specific taxation requirements. You’ll likely have to pay taxes on sales, but also costs associated with payroll. Ensure your accountant not only talks to you about who you need to pay, but payment deadlines as well.

#3: What is a projected cash flow for the business?
How much cash does your company need to keep on hand? The key here is to be able to anticipate how much it will cost you to operate your business. Most companies should not expect to have positive cash flow for at least a year, often longer. Your professionals can help you decide what your cash flow projections are.

#4: How much of an investment do you need to put into your company right now?
Your financial team can help you project the cost of setting up your new business. This will include costs related to establishing the physical business and paying for supplies. Your initial investment generally will be the highest amount put into the company by the founder, but it changes significantly from one company to the next.

#5: What is your break-even analysis?
This may be an important question to ask early on. How much do you need to make to break even? You’ll want to talk to your financial team about the timeline for this and what can be done to help ensure you break even as soon as possible.

#6: What liability insurance do you need?
While most tax professionals don’t offer recommendations here, having adequate policies to cover potential loss is important. Work with your team to ensure you have comprehensive protection to minimize risks against your company’s financial health.

#7: What will interest cost you?
Interest on loans is not something to overlook. You’ll want to ensure you have an accurate representation of how much you are paying in interest so you can make adjustments to pay off any borrowed debt sooner, make better decisions about borrowing, or factor in the cost.

#8: How will you manage payroll?
This is a very big component of starting up since it can be troublesome for most startups to actually know how to pay employees and meet all federal and state requirements. Working with a payroll provider is often the easiest option (and most financially secure since paying an employee to do this work tends to be more expensive).

#9: How can you reduce your taxes?
Tax professionals will work with you to determine if there are any routes to reducing taxation on your business including local incentives that may be available. You’ll also want to talk about projects taxes, investments that could reduce taxes, and having all possible deductions in place.

#10: What’s the right profit margin?
Working with a financial team often comes down to this question. How much should you charge to make the best profit possible while still ensuring your company can grow? It’s not a simple question, but having the right team by your side ensures it will be clarified as much as possible.

Working with tax and accounting professionals is the most important decision any startup founder needs to take long before any commitments are made. It is here that you will formulate the success for your company.