5 Resolutions QuickBooks Online Users Should Make for 2021

A painful year is drawing to a close. We’ll still be dealing with COVID-19 and a struggling economy in early 2021, but there’s hope on the horizon. There’s a lot you can’t control about the difficulties facing our country, but you can take control of your corner of it, especially in terms of how you manage your finances. 

If you’re already using QuickBooks Online, you know how it’s solved the past paperwork confusion. But are you taking advantage of all of its capabilities? As you turn your digital calendar to January, consider expanding your use of the website to set yourself up for success in the new year. Here are five features to explore if you haven’t already. 

Practice Proactive Reconciliation: 

QuickBooks Online’s Banking screen display registers for the bank and credit card transactions that have been posted by your banks. Do you review these frequently? It’s easy, and it’s essential. It will save time when you do your monthly reconciliations with your bank statements. Hover over Transactions in the toolbar and select Banking. You can see some of your transaction management options in the image below. 

 

 

Once QuickBooks Online has downloaded a transaction from your bank, you have multiple options for dealing with it and clearing it. 

When your statement comes, and you’re ready to reconcile, you can use QuickBooks Online’s tools that take you step by step through the process. Hover over Accounting in the toolbar and select Reconcile. Let us know if you need help with reconciliation or with managing downloaded transactions. 

Start Accepting Online Payments:

This is probably the #1 way to encourage customers to pay you faster. When you set up a merchant account through QuickBooks Payments, you’re able to accept credit cards, debit cards, and ACH bank transfers. Your invoices will include a Pay Now button and contain the information your customers need to pay electronically. Their funds will go into your bank account. 

There are other ways they can pay you directly. You can take their card numbers over the phone. You can also get a free card reader from Intuit and swipe their cards on your mobile device. And you can set up recurring payments that will occur automatically. There are no base fees – you pay per transaction. 

Set Weekly and Monthly Report Schedules: 

You may just run reports in QuickBooks Online as you need them. However, some reports should be created every week at a minimum, like Accounts receivable aging (detail or summary)Accounts Payable AgingOpen invoices, and Unpaid Bills. There are many others, but you need to keep a close watch on what you owe and who owes you. 

 

We can help you create and analyze the standard financial reports that should be produced regularly. 

It’s essential to run some other reports on a monthly (or, sometimes, quarterly) basis, including Balance SheetProfit and Loss, and Statement of Cash Flows. Rather than just providing snapshots of where you stand with money coming in and going out, they give you a more comprehensive view of your finances that can help you make better business decisions. They’re complex and often difficult to analyze, though, which is why QuickBooks Online categorizes them as For my accountant. We can create and interpret these for you. 

Expand QuickBooks Online’s Features by Using Apps: 

QuickBooks Online is generic enough that a wide variety of small businesses can use it. But that flexibility may mean that it’s not quite robust enough in one area or another, like inventory management or time tracking. There are hundreds of apps that you can integrate with QuickBooks Online to fill in the gaps. Some are free. Click on Apps in the toolbar. Again, we’re available to help if you need assistance. 

Evaluate the Cost-effectiveness of Your Vendors: 

It’s easy to stick with the same old suppliers because it’s a hassle to change. Many companies are hurting because you may find you can get what you need for less because of the pandemic. To go over your whole list, hover over Expenses in the toolbar and click on Vendors. You might clean up your list while you’re at it. Click the down arrow at the end of each row and select Make inactive if you haven’t ordered from specific suppliers over the last year. 

If you have any further questions, please contact us

Renting Your Home or Vacation Home for Short Periods

Article Highlights: 

  • Airbnb, VRBO, and HomeAway 
  • Rented for Fewer than 15 Days During the Year 
  • The 7-day and 30-day Rules 
  • Exceptions to the 30-Day Rule 
  • Schedule C Reporting 

Many taxpayers rent out their first or second homes without considering tax consequences. Some of these rules can be beneficial, while others can be very detrimental. If you rent your home to others, you should be aware of some special tax rules that apply to you. 

Even if you rent out your property using rental agents or online rental services that match property owners with prospective renters (such as Airbnb, VRBO, or HomeAway), it is still your responsibility to properly report the rental income and expenses on your tax return. 

Special (and sometimes complicated) taxation rules can make the rents that you charge tax-free. However, other situations may force your rental income and expenses to be treated as a business reported on Schedule C, as opposed to a rental activity reported on Schedule E. 

The following is a synopsis of the rules governing short-term rentals. 

Rented for Fewer than 15 Days During the Year – When a property is rented for fewer than 15 days during the tax year, the rental income is not reportable. The expenses associated with that rental are not deductible. Interest and property taxes are not prorated. The full amounts of the qualified mortgage interest and property taxes are reported as itemized deductions (as usual) on the taxpayer’s Schedule A. 

The 7-Day and 30-Day Rules – Rentals are generally passive activities, which means that losses from these activities are usually the only deductible up to the number of gains from other passive activities. However, an activity is not treated as a rental if either of these statements applies: 

A. The average customer use of the property is for seven days or fewer—or 30 days or fewer if the owner (or someone on the owner’s behalf) provides significant personal services. 

B. The owner (or someone on the owner’s behalf) provides extraordinary personal services without regard to the property’s average period of customer use.

If the activity is not treated as a rental, it will be treated as a trade or business. The income and expenses, including prorated mortgage interest and real property taxes, will be reported on Schedule C. IRS Publication 527 states: “If you provide substantial services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C.” Substantial services do not include the furnishing of heat and light, the cleaning of public areas, the collecting of trash, or other such general amenities. 

The exception to the 30-Day Rule – If the personal services provided are similar to those that generally are provided in connection with long-term rentals of high-grade commercial or residential real property (such as public area cleaning and trash collection). If the rental also includes maid and linen services that cost less than 10% of the rental fee, then the personal services are neither significant nor extraordinary for the 30-day Rule. 

Profits and Losses on Schedule C – Typically, if you own and operate a business that isn’t set up as a corporation, your business’s income and expenses would be reported on Schedule C as part of your income tax return. You would pay self-employment tax (Social Security and Medicare taxes), as well as income tax, on the profit. However, suppose you have a profit from a rental activity. In that case, it is not subject to self-employment tax even when reported as self-employment income unless you are a real estate dealer. Suppose you have a loss from this type of activity. In that case, it is still treated as a passive activity loss unless you meet a material participation test—generally by providing 500 or more hours of personal services during the year related to the rental or qualifying as a real estate professional. Losses from passive activities are deductible only up to the passive income amount, but unused losses can be carried forward to future years. A special allowance for real estate rental activities with active participation permits a loss against nonpassive income of up to $25,000. This phases out when modified adjusted gross income is between $100K and $150K. However, this allowance does not apply when the activity is reported on Schedule C.

These rules can be complicated; please contact us to determine how they apply to your particular circumstances and what actions you can take to minimize tax liability and maximize tax benefits from your rental activities.

Preparing for 2021: Tax Planning Strategies for Small Business Owners

If you are a small business owner, every penny of your income counts. This means that you want to optimize your revenue and minimize your expenses and your tax liability. Unfortunately, far too many entrepreneurs are not well-versed in the tricks and tools available to them and end up paying far more than they need to. You don’t need an accounting degree to take advantage of tax-cutting tips. Here are a few of our favorites. 

Think About Changing to a Different Type of Tax Structure 

When you started your business, one of the first decisions you needed to make was whether you wanted to operate as a sole proprietor, partnership, LLC, S corporation, or C corporation. But as more time goes by, the initial reasons for structuring your business the way that you did may no longer be applicable or in your best interest from a tax perspective. There is no requirement that you stick with the business structure you initially chose. 

Ever since the Tax Cuts and Jobs Act of 2017 (TCJA) changed the highest corporate income tax rate from 35% to 21%, sole proprietorships, LLCs, partnerships, and S corporations can realize significant tax savings by electing to be taxed as a C corporation. This simple change can make sense if these pass-through businesses’ owner is taxed at a high tax bracket. If so, all you need to do is fill out and file Form 8832. Before doing so, make sure that the tax savings you can realize are a reasonable tradeoff for the other reasons that you may have initially selected the structure you are currently in. 

Pass-Through Businesses Can Get a 20% 

One of the most impactful changes that the TCJA made for pass-through businesses whose income is passed-through for taxation as their owners’ income is a valuable tax break known as the qualified business income (QBI) deduction. For eligible recipients, this deduction is worth a maximum 20% tax break on the income they receive from the business – but determining whether or not you qualify can be a challenge. 

There are several restrictions on taking advantage of the deduction, particularly regarding specified service trade or businesses (SSTBs) whose owners either earn too much income or rely specifically on their employees’ or owners’ reputation or skill. Though architecture and engineering firms escape this limitation, other business models – including medical practices, law firms, professional athletes and performing artists, financial advisors, investment managers, consulting firms, and accountants – fall into the category that loses out of their income is too high. In 2019 single business owners of SSTBs began phasing out at $160,700 and are excluded once their income exceeds $210,700, while those who are married filing a joint return phase out at $321,400 and are excluded at $421,400. To calculate the deduction, use Part II of Form 8995-A

Businesses that are not SSTBs are eligible to take the deduction even when they pass the upper limits of the thresholds, but only for either half of the business owners’ share of the W-2 wages paid by the business or a quarter of those wages plus 2.5% of their share of qualified property. 

These limitations and specifications for what type of business is and is not eligible are head-spinning. Though it is tempting to take the deduction simply, it’s a good idea to confirm whether you qualify and how to claim it with our office before moving forward. 

Know How You’re Going to Pay Your Taxes

It is gratifying to live the dream of owning your own small business, but the hard work required to generate revenue makes paying taxes extra painful. This is especially true because of the “pay as you go” tax system that the United States uses, asking business owners to make estimated quarterly payments. While employees pay their taxes ahead via payroll deductions withheld by their employers, no such automatic system is set up for small business owners. That leaves many with the temptation of delaying making payments to maintain liquidity. 

Unfortunately, failing to pay taxes quarterly can put you in the uncomfortable position of still having to pay at one point, with the additional burden of penalties and interest resulting from your delay. Though setting aside the money to pay taxes requires discipline, doing so will save you from the penalties charged by the IRS. These are calculated based on the amount you should have paid each quarter multiplied by your shortfall and the effective interest rate during the specific quarter (established as 3 percent over the federal short-term rate – C corporations pay a different rate). Even if you don’t calculate your quarterly estimated rates correctly, the safe harbor rule allows small businesses to pay the lower amount, which is either 90% of the tax due on your current year return or 100% of the tax shown on your last filed tax return. For those whose AGI was over $150,000 in the previous tax year, the safe harbor percentage is 110% of the previous year’s taxes. 

It is always a good idea to increase the amount you send in if you have a higher-income year. By doing a simple calculation of your safe harbor number and dividing it by four, you have a reasonable quarterly payment that you can safely send in on the due dates (April 15th, June 15th, September 15th, and January 15th of the following year). By setting aside the appropriate percentage that you will owe from each payment you receive, you can easily set aside the money you will need to pay and entirely avoid concerns about penalties or interest. Payment is most easily submitted using the online link for IRS Direct Pay, though many people opt for sending in the paper vouchers for IRS Form 1040-ES, along with a check. There is also an EFTPS system available for C Corporations’ use. 

Choose Your Accounting Method Carefully

Each small business owner calculates their income and revenue differently, with many using a method of accounting that is based on when money is received rather than when an order is placed and counts expenses when they are paid rather than the item or service ordered. This is known as the cash method of accounting. 

Whatever method of accounting you use, smart business owners can strategically adjust their approach—reporting their annual income based on cash receipts to reduce their end-of-year revenues, especially if there is reason to believe that next year’s income will be lower or they anticipate being in a lower tax bracket. 

An example of how this approach would be helpful can be seen in a business that expects to add new employees in the new year. Between that expense and other improvements planned, it makes sense to anticipate that net income will be down. The tax bracket for the business will be lower, so any work is done or orders placed towards the end of the current tax year should be accounted for when payments arrive so that the income can be taxed at a lower rate. The contrast to this is if you anticipate your business revenue to increase and be forced into a higher tax bracket in the new year. In that case, it makes sense to try to collect monies for work done in the current year early so that you can take advantage of your current, lower tax rate. This can be done for business expenses such as office supplies and equipment, which can be deferred and accelerated in the same way so that you can take advantage of tax deductions in the most advantageous way. 

Establish and Make Deposits Into a 401(k) or SEP 

One of the smartest ways to lower your taxable income is to contribute to a retirement account. Not only does doing so reduce your business’ tax liability, but it also ensures a more secure future. As a small business owner, either a 401(K) plan or a Simplified Employee Pension (SEP) plan will do the trick while benefiting both you and those who work for you in the future. 

While a 401(k) that is established before year-end will let you deduct any contributions you make (with contributions limited to the lower of $57,000 or the employee’s total compensation), business owners who fail to set up this type of plan by December 31st can still turn to the SEP as an alternative. Though SEP contributions are restricted to 25% of the business owner’s net profit, less the SEP contribution itself (technically 20%), a SEP can be established, and contributions made up until the extended due date of your return. Suppose you obtain an extension for filing your tax return. In that case, you have until the end of that extension period to deposit the contribution, regardless of when you file the return.

If You Took Out a PPP Loan, Plan on it Being Forgiven 

Many small businesses took advantage of the PPP loans that were offered by the government in the face of the COVID-19 crisis. While these loans were attractive because they are forgivable and gave businesses a chance to survive the dire circumstances, in April of 2020, the IRS issued Notice 2020-32, which indicated that even though the forgivable loans can be excluded from gross income, the expenses associated with the money received cannot be deducted. This effectively erases the tax benefit initially offered because losing the employee and expense deduction increases the business’ income and profitability. 

There is some chance that this issue will be resolved by Congress, as it contradicts the original intent of the tax benefit that accompanied the PPP funds, but that action has not yet been taken. It’s a good idea to talk to our office about this as soon as possible. Having to pay taxes on expenses incurred may be particularly challenging in the face of the difficulties the pandemic has imposed. Being financially prepared to pay more taxes than you originally intended may be a bitter pill to swallow. However, it will still be better than paying penalties and interest if you fail to pay what the government says that you owe. 

Though all of these strategies can be helpful, they may not all be appropriate for your situation. Keep them in mind as you go into the end of the year, and be prepared to ask questions to determine which apply to you when you speak with our office. Contact us to discuss tax planning for your business today.

How Do You Create Price Levels in QuickBooks?

You may know that when you create a product or service record in QuickBooks, you must assign a sale price to it. But did you know that QuickBooks gives you a great deal of flexibility when to comes to pricing items you sell? The software allows you to create one or more additional Price Levels that you can access for invoices, estimates, sales receipts, credit memos, and sales orders. 

There are three ways you can use these. Once you’ve created them, they’ll be available in a drop-down list in the Rate field. This allows you to assign them manually to individual transactions. The second option is to assign them globally to specific customers or jobs. Once you’ve done so, that price will apply every time you create a transaction for one of them. Finally, you can create price levels for selected items. 

Here’s how it works. Let’s say you want to create a price level that’s 15 percent below the actual price that you can use in individual transactions. You open the Lists menu and select Price Level List. Click the arrow in the lower-left corner next to Price Level and choose New. A window like this will open:

You can create price levels in QuickBooks and assign them to individual sales transactions. 

Fill in the field next to Price Level Name, and then click the arrow next to Price Level Type. Select Fixed %. Select decrease from the drop-down list on the next line and enter your percentage number. Round up to the nearest is an optional field; click OK when you’re done. The next time you create a sales transaction, your new price level will be available as an option when you open the drop-down list in the Rate column. 

When you need to edit or delete a price level, go to Lists | Price Level List again and click the arrow next to Price Level in the lower-left corner. You have several options here. For example, you can make a price level inactive, so it doesn’t appear on the list. The field next to Price Level is labeled Reports. Click on the arrow to see what’s available there. 

Customers and Jobs 

You can also apply a price level you’ve created to a specific customer or job, perhaps to reward a customer for frequent purchases. When you do so, that rate will appear every time you enter a sales transaction for the customer or job you selected. 

Open the Customers menu and select Customer Center. Double click on a customer or job’s name to open the record. Click on the Payment Settings tab. Click the arrow in the field next to Price Level and select the right one, then click OK. 

 

You can assign a Price Level to specific customers or jobs. 

Per Item Price Levels 

QuickBooks also allows you to set custom prices for specific items associated with preferred customers or jobs (this option is only available if you’re using QuickBooks Premier or Enterprise). Let’s say you want to give a 10 percent discount to specific customers who purchase your website development services. Go to Lists | Price Level List and click the arrow next to Price Level in the lower-left corner again, then select New (you can also get to the New command by right-clicking anywhere in the window). 

Give your price level a name (like Web Development 10 Off), then select Per Item from the Price Level Type drop-down list. Click in front of the Item you want to include. The next line’s fields should read as pictured in the image below: 10% | lower | standard price. Click Adjust. You’ll see your reduced prices in the Custom Price column in the table above. 

You can establish a Price Level for specific items in QuickBooks.

Again, the rounding field is optional. When you’re finished here, click OK. The next time you create a sales transaction for a customer eligible for the lower price, you’ll select Web Development 10 Off from the drop-down list in the Rate column. 

Feel like you’re outgrowing your current version of QuickBooks, or is it several years old? Contact us about upgrading. We’re here to support you and help you more effectively use the software as your business changes and grows.

12 Financial Metrics Small Business Owners Should Track

Operating a small business is an exhilarating and, at times, overwhelming endeavor. There are so many details and daily tasks, and it’s essential for you to stay on top of your organizations’ finances. Whether you’re assembling your financial reports or hiring a professional to do it, it’s crucial to understand which numbers are most important and what they mean in terms of the decisions you make and your health assessment of your overall business. In this article, we review a list of 12 of the most important elements of your financial report.

1. Profit and Loss 

Every quarter, you should refresh your business’s profit and loss report to understand your bank and tax reporting needs. It is the single, at-a-glance snapshot of your bottom line that you can use to drive your own decisions and that you can show to an outsider for them to gauge your strength. If you have a reconciled balance sheet, it will ensure that everything in your profits and losses has been accounted for. 

2. Average Cost of Customer Acquisition 

We all want customers, and especially high-paying customers. Though it’s tempting to assume a ‘whatever it takes’ attitude, you need to know the average cost of acquiring profitable customers and then assess whether you can cut those costs to make them even more profitable. Knowing the average cost of customer acquisition can also help you figure out what to spend on customer retention and the value of upselling. 

3. Budget Versus Actual 

Think you’re sticking to the plan based on what you see in your bank account? The truth is that if you compare what you’ve budgeted with what you’ve spent, it will give you a far better sense of whether you’re staying on track and what kind of adjustments you need to make. 

4. Cash Flow 

Most people consider cash flow the most telling metric of all, and cash certainly is the lifeblood of any company. If you’re not keeping an eye on your cash flow, you could find yourself unaware and flatfooted when making essential payments. During your regular business health check, make sure you measure your cash flow, your cash burn (the amount you go through monthly), and your runway (how much you can operate based on your cash on hand).

5. Fixed Burn Rate 

No matter how well you are doing, there is always the chance that you’re going to encounter some unforeseen circumstance or drop in business that is going to drive the need to cut costs. It’s crucial to take a close look at your fixed burn rate and make sure that it isn’t too high. As tempting as it may be to sign on to a long-term contract to save a little money, if you commit yourself to a payment that you can’t afford at all in the future, you’re putting your business at risk. You may be better off taking some of those expenses off of a contracted status so that you can eliminate them if you have to. 

6. Employee Productivity 

Though it’s a given that your employees are your most valuable asset, that doesn’t mean that you should be operating without ensuring that you are getting enough value out of them to justify what you are spending. The best way to do that is to monitor each employee’s productivity to ensure that each staff member is pulling their weight. 

7. Operating Cash Cycle 

When a business wants to expand, it can’t move forward blindly. Business owners need to have a good handle on how long it takes for the cash to become available to the business after their capital investment to feel confident in their ability to go through with their plans. Those who fail to understand their operating cash cycle risk joining the ranks of the 82% of businesses that fail due to poor cash flow management.

8. Churn Rate 

When you think about how hard you work to acquire new customers, knowing how long you’re holding on to them is a key metric. If you’re churning through your customers too quickly, it means that your product or service isn’t valuable enough for them to stick around for more. Addressing why your customers are leaving quickly is the first step in making your business more profitable for the long term. 

9. Regulatory Requirements for Your Industry

It’s easy to forget about renewing your industry license or maintaining a minimum capital in keeping with regulatory requirements. However, failing to keep track leads to unnecessary and costly non-compliance penalties. Make sure that you include your regulatory requirements within your financial report and calendar. 

10. Projected Profit Loss Versus Actual 

A significant part of your annual financial plan should include a projection of what you believe your profit and loss will be, as well as a budget for each of your expense areas. This will allow you to compare what you projected to your actual profit and loss and then review where things went askew. Some may be explainable and worthwhile, and others may be warnings of things getting out of control. 

11. Profit Goals and Profit Per Customer 

One of the most effective ways to promote profitability is to take a granular, analytical approach to your profit goals. By determining your short-term and long-term profit goals, you can then break it down to your profit goal based on your existing customers or the number of new customers you need to acquire. All of these numbers can drive internal processes and help you get where you want to go. 

12. Financial Ratios 

Ratios are among the most useful metrics that a small business owner can use to determine their organization’s overall financial health. Among the most important are their liquidity ratio (how much cash you have on hand to pay the monies you owe); your efficiency ratio (how much it costs you to bring in a single dollar); and your profitability ratio (profit as it compares to revenue). 

These twelve elements are extremely beneficial in helping you understand where your money is at all times. If you would like to discuss how we can help you run a successful business, please contact us for more information.

Actually, a Recession is a Great Time to Launch That New Startup

Many people are worried about an impending global recession due to the economic slowdown that the COVID-19 pandemic has brought with it – and your average entrepreneur and startup founder is chief among them. It makes sense to assume that with so many people watching what they spend and with so much uncertainty in the air, it’s too risky to launch that business of your dreams anytime in the near future. 

But at the same time, that idea and reality may not line up quite as nicely as you’d think. Some argue that entrepreneurs actually should not worry about a potential recession for the simple reason that the state of the global economy doesn’t directly impact startups on a large scale. 

Some factors will determine whether or not a startup will succeed, but they have less to do with the coronavirus or an impending global recession than you might think. 

The Positives of Founding a Startup in a Recession: What You Need to Know 

One of the significant reasons why founding a startup in a recession isn’t necessarily the issue you thought it was going to be, has to do with the fact that products and services are generally cheaper during these periods of economic downturn. Smart entrepreneurs aren’t scared by this – they’re ready and waiting to take advantage of it

While larger companies are looking for any opportunity to retract and shed costs, those struggling businesses will likely sell off many of their assets at bargain-basement rates. Retailers and other organizations will usually drop their prices to move as much inventory as possible before it’s too late. Interest rates fall to their absolute lowest, meaning opening new credit lines or taking out loans has never been easier. 

Sure, none of this is precisely positive for those larger organizations – but it’s good news for your new startup that couldn’t have come along at a better time. Provided that you already have a plan in place, you can save on costs and still bring your vision of the perfect company into reality at the same time. 

Top Talent Will Always Be Looking for Opportunities 

Along the same lines, your startup will need high-quality employees, though depending on the financial side of your business, getting to that point may often be easier said than done. 

If a global recession occurs, this is another primary reason this could be good news for your efforts. As soon as the worldwide recession sets in, those larger companies will begin shedding workers – and fast. As unemployment rates rise across the country, it means that there will be a far larger number of qualified, passionate, and talented people available to fill whatever positions you have available. 

By putting in the effort to build a secure hiring plan, you’ll know what type of candidates to go after as soon as they become available. Not only that, but you’ll likely be able to secure these people at lower rates than you would have if the job market were more vital in your industry. 

Many people agree that this is an excellent opportunity to bring in a co-founder to complement your skillset. Never forget that a big part of your success will ultimately be determined less by what you do and more by whom you are surrounding yourself. If you’re able to attract qualified individuals who A, believe in what you’re trying to accomplish, and B, who possess the desired skills, you’ll be in a far better position, significantly earlier on in your company’s lifecycle.

Entrepreneurs Solve Problems. That Will Always Be True (and Necessary) 

In the end, the same factors that will impact whether a startup can succeed are as real today as they were before any of us had ever heard about the coronavirus. They are and will always involve your founding team and their ability to solve a problem for a paying customer. You cannot overstate the importance of starting your business with a qualified, well-balanced, and experienced team.

People will always have problems, and they will always look to new and innovative companies to help them. Yes, the issues may change given what is going on around the world – but the fact that people are looking for real, efficient solutions will not. 

In other words, it’s still all about the product-market fit. If your startup was founded on a genuinely innovative idea that speaks directly to the heart of a universal problem that many people are experiencing, it will be successful. It may take a bit longer in a global recession, sure – but the odds are very much in your favor. 

Many times, achieving this product-market fit has little to do with broader macroeconomic trends, which is precisely why a recession is probably a far better time to launch your startup than you thought. Once you remember that all recessions eventually come to an end – and the startups founded on a stable foundation during this time are in the best position to rebound – you’re looking at a stimulating position for any entrepreneur.

Please contact us if you are considering launching a business and would like assistance, or if you have any questions. 

10 Tips for Better Budgeting

If you already have a budget, it’s probably been difficult for you to stick with it for the last several months. Unless you provide products or services that have been in high demand since the COVID-19 pandemic took place, you’ve had to adjust your budget significantly. 

Now is an excellent time to start doing some planning for 2021. While there are still uncertainties next year, creating a budget will give you a starting point. A budget increases your awareness of all of your projected income and expenses, which may make it less likely to find yourself always running short on funds. 

Here are some ways you can make your budgeting process more practical and realistic. 

Use what you already know. Unless you’re starting a brand-new business, you already have the best resource possible: a record of your past income and expenses. Use this as the basis for your projections. 

Be aware of your sales cycle. Even if you’re not a seasonal business, you’ve probably learned that some months or quarters are better than others. Budget conservatively for the slower months.

Distinguish between essential and non-essential expenses. Enter your budget items for bills and other costs that must be covered before you add optional categories.

You can use data from a previous year to create a new budget in QuickBooks Online.

Keep it simple. Don’t budget down to the last paper clip. You risk budget burnout, and your reports will be unwieldy. 

Build-in some backup funding. Just as you’re supposed to have an emergency fund in your personal life, try to create one for your business. 

Make your employees part of the process. It would be best if you weren’t secretive about the expense element of your budget. Try to get input from staff in areas where they have knowledge. 

Overestimate your expenses. Doing so can help prevent “borrowing” from one budget category to make up for a shortfall in another. 

Consider using excess funds to pay down debt. Debt costs you money. The sooner you pay it off, the sooner you can use those payments for some non-essential items. 

Look for areas where you can change vendors. As you’re creating your budget, think carefully about each supplier of products and services. Can you find less costly alternatives? 

Revisit your budget frequently. You should evaluate your progress at least once a month. You could even start by budgeting for only a couple of months to allow yourself to learn a lot about your spending and sales patterns that you can use for future reference. 

How QuickBooks Online Can Help 

QuickBooks Online offers built-in tools to help you create a budget. Click the Gear (also known as the wheel) icon in the upper right corner and select Budgeting under Tools. Click Add budget. At the top of the screen, give your budget a Name and select the Fiscal Year it should cover from the drop-down list by that field. Choose an Interval (monthly, quarterly, or yearly) and indicate whether you want to Pre-fill data from an existing year. 

QuickBooks Online supplies a budget template that already contains commonly used small business items.

The final field is labeled Subdivide by, which is optional. You can set up budgets that only include selected Customers or Classes, for example. Select the desired divider in that field, choose who or what you want to be included in the next. Click Next or Create budget in the lower right corner (depending on whether you used pre-filled data) to open your budget template. If you subdivided the budget, you’d see a field marked View budget. Click the down arrow and select from the options listed there. 

To create your budget, you enter numbers in the small boxes supplied. Columns are divided by months or quarters, depending on what you specified, and rows are labeled with budget items (Advertising, Gross Receipts, Legal & Professional Fees, etc.). You enter numbers in the boxes that apply. When you click on a box, a small arrow appears pointing right. Click on this, and your number will automatically appear in the rest of that row’s boxes. When you’re done, click Save in the lower right. You can edit your budget at any time. 

QuickBooks Online provides two related reports. Budget Overview displays all of the data in your budget (s). Budget vs. Actuals shows you how you’re adhering to your budget. 

We know creating a budget can be challenging, but it’s so important – especially right now. We’d be happy to look at your company’s financial situation and see how QuickBooks’ budgeting tools—and its other accounting features—can help you get a better understanding of your finances. Please contact us with any further questions. 

How Business Owners Can Improve Cash Flow By Thinking Profit First

Entrepreneurs don’t necessarily need to be ‘numbers people’ in order to succeed. You need drive, passion, the ability and will to follow things through, and the hustler’s spirit that enables you to constantly try new things or relentlessly chase big opportunities.

Whether you’re a serial entrepreneur or simply looking to grow your small business to a sustainable level to reassess your goals, it’s crucial to have an understanding of your venture’s financial results. While small businesses don’t require the same horsepower in their accounting department as large companies and quickly-growing startups, it’s still integral for entrepreneurs of all calibers to have an iron grip on their financial controls, processes, and results to prevent roadblocks.

The profitability of your business is not solely reliant on how much revenue the company has brought in stacked up against your expenses, or how many strategic maneuvers can be deployed to minimize your business tax burden. Understanding your key ratios, terminology, and the stories behind your numbers, and having the right accountants and advisors who can help you interpret them, will take you from simple compliance to long-term stabilization and growing your business.

Where Is Your Money Coming From? And Where Is It Going?

It can seem like operations are running smoothly because cash is regularly deposited, the bills are paid, and imminent tax filings don’t feel like a shakedown where you have to scramble to get the funds together. But while your bottom line might look good on your next attempt to raise capital, you could find yourself in hot water if it turns out that only one revenue stream and/or client constitutes most of your revenue. If that client goes out of business or otherwise decides to stop or reduce their payments, it could be significantly harder to pay back the loan you took out or demonstrate to your investor that you’re worth going past seed stage.

Demonstrating that you can make a profit is important for raising capital, but raising capital isn’t an end-all be-all. The time that you spend trying to qualify for loans, grants, and outside investments might be better spent getting more clients, users, views, income-producing property, or other important revenue drivers first. This could prove to be even more important than trying to keep your burn rate, or cash outflow, under control. Constrained cash flow is usually why most companies fold within the first two to three years of operation, and often gets overlooked by busy entrepreneurs focusing primarily on raising funds or posting an impressive profit.

Financial Transparency — More Than Just Compliance

In your quest for capital, your focus is likely to be directed toward the numbers investors are going to pay attention to: margins, profit generated relative to the capital you already invested, and how many users you have. But in being transparent about your finances, you’re not just being compliant with the law. You’re also giving a more accurate picture of where your business currently is and where you expect it to go. Early stage companies are more likely to get investments when they show promise with their product and sturdy business model. Banks, on the other hand, have stricter requirements for loan repayment and will be more stringent concerning financial compliance. They will want to see a proven track record and put more emphasis on your profit than growth potential, especially if you’re not a very capital-intensive business with significant collateral such as vehicles or real estate to secure the loan.

Improve Cash Flow Management by Putting Profit First

Regardless of whether your business decides to take dynamic risks through investor funding, or a more predictable repayment process with a business loan, all external capital sources will want to see proof of proper cash management even more than having stellar revenue numbers.

The ability to adequately control your cash inflows and outflows is what will help your company weather any storm. One train of thought to help drive profits, is to look at concepts like Mike Michalowicz’s “Profit First” model that changes the Revenue – Expenses = Profit expression into Sales – Profit = Expenses. While this is not an official figure to report on financial statements, it’s an excellent cash flow management mindset that helps business owners prioritize their personal and business savings so that operating expenses, expansion, taxes, and personal income are always being paid.

By “paying yourself” first, it ensures that your financial results are based on having enough cash on hand before you pay any expenses.

Any small business accountant is required to furnish a cash flow statement to most investors and some banks, but you shouldn’t wait until you have one at the end of the month, quarter, or year. It’s a good idea to go over your cash flow every week. In addition to expenses that could be cut or revenues that could be added or bolstered, you might have bottlenecks in your cash collection processes that could be eliminated and you hadn’t even realized it. If you have questions about managing your cash flow, please contact us.

All the Expert Tips You Need to Properly Manage Cash Flow for Your New Business

Handling the cash flow for your new business is exactly what it sounds like ‒ you’re trying to get the clearest level of visibility into “money coming in versus money going out.” However, managing cash flow is about a lot more than that, too. It’s about making sure that you not only have the funds on hand to remain operational, but that you can capitalize on opportunities as they arise. To properly manage cash flow, it is necessary to prepare for any financial challenges that may develop in the future.

The importance of gaining a precise understanding of your cash flow cannot be overstated.

Indeed, running out of money is also one of the most common ways that new businesses are forced to close their doors ‒ usually very quickly after their initial launch. But while this is certainly an essential topic, it isn’t necessarily a difficult one. Properly managing the cash flow for your new business is a lot more straightforward than you might fear. Keep the following key factors in mind:

The “Breakeven” Point

By far, one of the most important metrics for you to understand about your new small business is your “breakeven” point. That is the point at which your current (or projected) revenues will allow you to meet all of your operating expenses. This is the bare minimum amount of money you need to keep your employees paid, keep your bills up-to-date, and keep your doors open. Unfortunately, it usually changes on a regular basis.

As your business continues to scale, your revenue should increase, but your expenses will increase, too. Therefore, it is of paramount importance that you don’t make finding your “breakeven” point something you “do once and forget about.” For the best results, you should return to this figure on a regular basis to make sure you: a) understand what it is in the literal sense; and b) understand what actions you need to perform to achieve that.

Once you have a handle on your breakeven point, you will, at the very least, be able to remain functioning. This means you can start to devote more of your attention to growing your new business.

The Importance of Cash Reserves

If you look at some of the other reasons why small businesses usually fail, you’ll quickly see that they’re closely related:

  • About 79% of businesses fail because they start out with too little money, according to one study.
  • 77% run into trouble when they fail to price properly, or don’t include all necessary items when establishing prices.
  • 73% fail because they were either too optimistic about achievable sales, or about the money required to generate those sales, or both at the same time.

These types of issues are common with small businesses, and particularly with those controlled by an entrepreneur who is running their first small business. As much as all of these ideas ultimately tie directly back into cash flow management, they also underline another very important best practice:

The Value of Maintaining a Cash Reserve

  • Absolutely every new business, regardless of its size or the industry it’s in, should expect problems on a regular basis. Working hard to keep a quality cash reserve will not only help to reduce the ultimate impact of those problems, but it can also help reduce stress and distractions too.
  • If you have no cash reserve, every problem becomes a major cash flow problem. If, at the very least, you have something to fall back on, you will have the clarity you need to learn from the situation, maintain your focus on growing your business, and keep moving forward.

Take Control of Those Receivables

Typically, new businesses do not have a problem with the “money out” side of cash flow management. Even if business leaders do start to spend money too quickly, hopefully, they are able to recognize it so that they can make adjustments as soon as possible.

But it’s difficult to make adjustments if you’re not bringing any money in, which is why taking control over your receivables is so important.

For example, if a client owes $1,000, but you have no idea when they are going to pay it, do you really have $1,000? No, not really ‒ which is why you should try to make invoices “due immediately.” If someone needs additional time to pay, try to make sure the terms give them no longer than a week or two at most.

Depending on your specific circumstances, you may even want to offer discounts for clients who pay early. This can be a great way to incentivize them to pay their invoices and get essential money into your bank account.

At a bare minimum, you should have a staff person tasked with maintaining visibility into receivables and this employee should follow-up with clients who have outstanding invoices.

The more money you bring into your business, the more money you can spend on those initiatives that will continue driving your organization forward.

Every Dollar Spent Has a Purpose

Everyone knows that you should only spend money on essentials, but in the fragile early days of a new business, you need to take that concept one step further.

With every purchase you make, you need to be able to see the verified return on investment that it will bring. For example, if you’re buying a new piece of equipment, what does it get you? Will it speed up your production, allowing you to more quickly achieve a larger volume of higher quality finished products? In that case, the return on investment absolutely justifies the initial money you need to spend.

However, if you really want that new piece of equipment simply because it’s the “latest and greatest,” that isn’t really the “good idea” you thought it was.

Another example of this would be investing in a new payment solution that allows you to accept online payments. It may not be a “fun” purchase, but if it allows you to expand into a true e-commerce solution and if it creates new opportunities to introduce your products to a larger audience and sell them online, it becomes an “essential,” and is a step worth taking.

In absolutely no uncertain terms, you cannot afford to spend money “just for the sake of it.” Determine your essentials and make sure you have the cash on-hand to support them. Then, eliminate the costs for any non-essentials, at least until your business is in a fully profitable state.

In the end, remember that you need to be proactive about properly managing your cash flow. Not only do you need to know your current cash flow status at all times, you also need a clear plan and “line of sight” where you’re headed tomorrow. When everything is functioning as it should, your cash flow best practices support the former while making the latter possible. If they aren’t, there could be a serious issue with your current process that you should find and eliminate as quickly as possible.

If you have any questions, or need assistance managing your cash flow, please contact us.

Small Business Owners May Qualify for a Home-Office Deduction

Article Highlights:

  • Qualifications
  • Actual Expense Method
  • Simplified Method
  • Home Office Expenses for Renters vs. Homeowners
  • How Moving Affects the Home-Office Deduction
  • Other Issues
  • Gross Income Limitation

“Home office” is a type of tax deduction that applies to the business use of a home; the space itself may not actually be an office. One of the following must apply to be able to deduct home office expenses. The home office:

  • Must be the taxpayer’s main place of business. OR
  • Must be a place of business where the taxpayer meets patients, clients or customers. The taxpayer must meet these people in the normal course of business. OR
  • Must be in a separate structure that is not attached to the taxpayer’s home. The taxpayer must use this structure in connection with their business. OR
  • Must be a place where the taxpayer stores inventory or samples. This place must be the sole, fixed location of their business. OR
  • Under certain circumstances, must be where the taxpayer provides day-care services.

Generally, except when used to store inventory, an office area must be used on a regular and continuing basis and be exclusively restricted to the trade or business (i.e., no personal use).

Two Methods – There are two methods to determine the amount of a home-office deduction: the actual-expense method and the simplified method.

  • Actual-Expense Method – The actual-expense method prorates home expenses based on the portion of the home that qualifies as a home office, which is generally based on square footage. Aside from prorated expenses, 100% of directly related costs, such as painting and repair expenses specific to the office, can be deducted. Unlike the simplified method, the business is not limited to 300 square feet.
  • Simplified Method – The simplified method allows for a deduction equal to $5 per square foot of the home used for business, up to a maximum of 300 square feet, resulting in a maximum simplified deduction of $1,500. A taxpayer may elect to take the simplified method or the actual-expense method (also referred to as the regular method) on an annual basis. Thus, a taxpayer may freely switch between the two methods each year.Additional office expenses such as utilities, insurance, office maintenance, etc., are not allowed when the simplified method is used. Prorated rent or home interest and taxes are not either, although 100% of home interest and taxes are deductible if the taxpayer itemizes deductions.

    To determine the average square footage when using the simplified method, no more than 300 square feet for any month can ever be used, even if the taxpayer has multiple businesses for which he or she uses space in the home. If there are multiple businesses, a reasonable method to allocate between businesses is used. Zero is used for months when there was no business use or when the business was not operating for a full year. Don’t count any month when the business use was less than 15 days.

    Example: Sandra begins using 400 square feet of her home for business on July 20, 2019 and continues using the space as a home office through the end of the year. Her average monthly allowable square footage for 2019 is 125 square feet (300 x 5 months = 1,500/12 = 125).

Home Office Expenses – There are differences as to which prorated home expenses are deductible by renters and homeowners when computing the actual expense method, as illustrated in the table below.

Prorated Expense Own Rent
Mortgage Interest X
Property Tax X
Rent X
Homeowner’s Insurance X
Renter’s Insurance X
Utilities X X
Depreciation X
Home Maintenance X X

Note that the principal payments made on a home loan are not eligible expenses. Instead, homeowners claim a deduction for depreciation on the office portion of the home’s basis.

Rent vs. Own: What Happens If You Move or Sell the Home?

Rent – When you pay rent for your home and use part of it for business, move and then use space at the new location as a home office, for the year of the move, you’ll need to figure out the deduction separately for each home office based on the specific expenses and business use area of each home. If you don’t use space at your new living quarters for business purposes, then your home-office deduction for the year of the move will need to factor in just the expenses for the time you lived in the first home.

Own – On the other hand, if you own the home, sell it and had lived in it for two of the five years prior to the sale date, you can exclude up to $250,000 of gain ($500,000 for a married couple). However, you cannot exclude the part of any gain to the extent of depreciation you claimed for the home after May 6, 1997. For exclusion purposes, it makes a difference whether the home office was within the home itself or in a separate structure on the same property. If within the same structure, the exclusion will apply to the entire gain from the home (other than the depreciation component). If the office was within a separate structure, then the sale must be treated as two sales – one for the home and one for the office – and the gain from the office portion cannot be excluded.

Additional Issues That May Apply – As with everything tax, there are always special rules.

  • Multiple Businesses – If there are multiple businesses, only one method may be used for the year – either the regular or simplified.
  • Mixed-Use Property – A taxpayer who has a qualified business use of a home and a rental use of the same home cannot use the simplified method for the rental use.
  • Taxpayers Sharing a Home – Taxpayers sharing a home (for example, roommates or spouses, regardless of filing status), if otherwise eligible, may each use the simplified method but not for a qualified business use of the same portion of the home.As an example, a husband and wife, if otherwise eligible and regardless of filing status, may each use the simplified method for a qualified business use of the same home, for up to 300 square feet of different portions of the home.
  • Depreciation Rate When Switching Methods – When the simplified method is used and the taxpayer subsequently switches to the actual expense method, there are no special adjustments, and the depreciation is determined in the normal manner.

Final Notes – Even if you qualify for a home-office deduction, your deduction is limited to the business activity’s gross income. For this purpose, it is defined as the activity’s gross income, reduced by the home expenses that would be deductible if there were no business use (e.g., mortgage interest, property taxes, certain casualty losses), and the business expenses unrelated to the home’s use. When using the actual expense method, the disallowed amount will be carried over to the next year subject to the same limitations. However, there is no carryover when using the simplified method.

Business use of the home is deducted on a self-employed individual’s business schedule.

If you have questions or concerns about how the home-office deduction applies to your specific circumstances, please contact us.