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.

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. 

Ten Ways to Improve Profits in the Coming Year

In the U.S., the economy is thriving and expected to grow over the next few months. Businesses are expanding. The Federal Reserve has inched up interest rates, creating investment opportunities, and lenders are offering small business loans. All of this points to a promising outlook for the coming months. As a small business owner, this is the time to take a closer look at your profit and loss sheets to determine how you can make the most out of this current economy.

How Can You Increase Revenue and Profits in the Coming Year?
For most companies, increasing revenue and profit margins is a goal. Yet, there’s strong competition in most sectors. Here’s a look at ways you can boost your profit margins without having to invest heavily.

#1: Increase Pricing Marginally
Inflation is a key component of the current market. As the U.S. consumer increases confidence in spending, it becomes possible to increase prices. Re-evaluate your current price points. Are you getting enough from each sale to build profits?

#2: Don’t Overlook the Impact of Tariffs
The ongoing trade war with China has many business owners worried about cost. Plan now. Tariffs are impacting nearly all industries including construction, retail, restaurants, and manufacturing to name just a few. Work with your team to understand the impact on your business’s bottom line, such as the higher cost of goods, and build those costs into your prices.

#3: Get Rid of Tasks Not Adding Value to the Customer
Take a closer look at what you are spending on within your profit and loss. Is each one of these expenses directly contributing to your customers’ needs? Eliminate costs that do not contribute to customer value.

#4: Review Competitor Prices
Along with increasing your prices, take a closer look at what your competition is charging for services. There are two things to focus on here. If their prices are higher, why? Are they offering something better for their product or service that encourages a higher price point? Second, are your prices competitively aligned with theirs? If not, what can you do to offer something extra to your customer?

#5: Reduce Overstock
Carrying a significant amount of stock does not improve business operations and increases costs. It can drive up waste when product is lost or forgotten. It also hampers your company’s ability to keep inventory costs in line with your goals. Pair down stock.

#6: Find a Way to Increase the Value of Every Sale
Provide some last-minute addition your customer could buy to enhance their product or service. Ensure your sales team is speaking to each customer about this offer, right as they close the deal. If you sell cars, offer an add-on feature for a certain additional amount. If you sell professional services, determine if your customers could benefit from a monthly check-in or other add-on services.

#7: Expand Product or Services Lines With Care
Look for complimentary services and products that do not require a lot of investment to offer them to your customers. What additional products or revenue streams could enhance what you already provide? This may not require additional equipment or a large amount of inventory.

#8: Build Your Team’s Skillset
Beyond a doubt, in a sales-oriented business, your company cannot build revenue if your sales team misses their market. Invest in sales training for the modern audience. Focus on moving away from traditional methods toward more efficient and brand-building methods for sales.

#9: Get Your Numbers in Line Now
Hiring a team to help you explore your current profit margins is critical. However, bringing on a professional organization to help with managing your books is only effective if you apply the information and insights they provide to you. In other words, find a team you can sit down with and discuss opportunities you can apply right now.

#10: Build Your Customer Base
Use a variety of tools to help build your customer base. Complete a market analyses to better understand who your target customer is. Then, work to modernize your marketing efforts to attract that specific audience. When you do, you turn heads and capitalize on a new set of customers.

Building revenue and profits starts with knowing where you are specifically. Review your prices, financial accounts, and books with care. Then, look for small ways to reduce costs that don’t contribute to your profits and build up services, products, and prices for those that help your company to grow. Always have a focus on the bottom-line benefit of any investment you make.

If you have any questions about improving profitability in the coming year, please contact us for assistance.

The Most Common Accounting Mistakes Small Business Owners Make and How to Avoid Them

Most small business owners are an expert in their field, but not necessarily in the accounting aspects of building a business. And, with this comes a few common mistakes. Yet, even simple small business accounting mistakes can prove to be financially limiting and costly down the road. With the help of an accounting professional, it is possible to overcome at least some of these mistakes. Take a look at some of the most common mistakes and how to avoid them.

#1: Choosing the Right Accounting Software for My Business
You’ve purchased small business accounting software. You assume it will be ideally matched to your business and easy enough to jump into. It’s not. The problem is, each business requires a carefully selected and even customized accounting method. There are always risks related to regulatory compliance when the wrong accounting software is used or information is overlooked.

To resolve this, work with a professional that listens to your needs, learns about your business, and modifies your bookkeeping methods to meet your goals.

#2: Your Business Has Poor Organization and Recordkeeping
It’s quite common for small business owners to lack the time and skills to effectively manage small business recordkeeping and bookkeeping. There’s much to do and it takes time away from your business. And, there are dozens of apps and cloud accounting options present. Which do you use?

The good news is all of those options are a good thing. It means there are no longer excuses for not getting your business organized. With a bit of help, it is possible to set up a system that streamlines your business operations.

#3: Cash Flow Versus Profit-Loss Statement
Many small businesses are making money on paper, but they end up going under if their float to getting paid is too long. This is financially limiting and stunts your growth as well.

It’s important to understand how this impacts your business. Cash flow is a critical component of any business operation — it determines how much you end up borrowing and paying for, too. Learn the best methods for managing cash flow.

#4: Not Understanding Standard Accounting Procedures and Terminology
Many small business owners don’t understand key business accounting terms and procedures. What does setting up controls mean? What about bank reconciliation? What are your balance sheets and when are they updated? Profit and loss statements are filled with very specific terminology you need to get right.

It’s possible to learn these terms and methods on your own. There’s plenty of information available. However, it takes time to learn it all. More importantly, you may find applying specific procedures and tax laws to your business challenging. To overcome this, work with a tax professional you can depend on.

#5: The Small Business Budget
A budget provides financial insight. It offers guidance to you about where your business is right now and what your goals are. That’s because a budget — which many small business owners lack — creates key goals for your company to manage. Flying blind, on the other hand, is a common small business mistake.

Creating a budget takes some time and a good amount of dedication. Once it is in place, it can be modified each month to meet current needs. Software is available to help with this, but an accounting professional is also an option.

#6: Too Much DIY
To be frank, one of the biggest mistakes small business owners make is simply trying to save money by doing it themselves. Yes, it is true this will cut your accounting costs, but it also creates a scenario in which you have absolutely no control over “what you don’t know.” In other words, just because you can enter it doesn’t mean you should.

Working with a bookkeeping and accounting service capable of handling these tasks for you is the best option. In nearly every situation, these services will work to save you money, far overlapping any DIY savings you are creating.

#7: Lack of Tax Planning
Taxes are not something you should do just one time a year. Year-long tax planning for small businesses is necessary. It’s not just important to pay your taxes, but also to plan for them and plan for savings options.

If you lack a tax planning strategy, work to improve this by simply working with a tax professional. Create a plan for ways you can invest and cut your tax burden.

#8: Lack of Modernization
Are you still balancing your books using pen and paper? It is no longer considered ideal to do so. Yet, many small business owners see the investment in modernization and cloud accounting to be too costly. In fact, moving to a digital accounting system is likely to save you time and money. It doesn’t have to be challenging to implement this system either.

#9: Not Realizing True Profit and Loss
You may have a profit and loss sheet, but you may not have a lot of insight into what each line means. More so, you may not know enough about methods for reducing costs or viewing profit potential.

The investment in an accounting service can alleviate this. We are happy to talk to you about methods to save you money or boost your profit margins with simple changes to your methods.

Most small business accounting mistakes come from a lack of insight into the industry. The good news is solutions are available to help you overcome nearly all of them. Please call us if you have any questions.

How to Identify When the Time Is Right to Bring an Accounting Pro Into the Fold

Running your own business is a complicated affair with a wide range of different “moving parts” to concern yourself with, but many people don’t realize how many of them ultimately lead back to your finances until it’s far too late.

A large part of your ability to be successful in the long-term will ultimately come down to the rate at which you expand. Grow your business too quickly and you might spread yourself too thin. Grow too slowly and you’ll be passing up opportunities that are rightfully yours, leaving a lot of money on the table at the same time. Your control over your finances will dictate whether you’re able to strike that perfect balance the way you need to.

Marketing, paying vendors, paying employees, managing client relationships – all of it depends on the quality of your bookkeeping (or lack thereof). To that end, a large part of your success will ultimately come down to your ability to identify when the time is right to stop doing things yourself and bring a professional accounting provider into the fold. To do this, you’ll need to keep a few key things in mind.

The Warning Signs You Need to Know
As it does every year, Intuit recently released a survey outlining the state of small business accounting in the United States. The results are very telling in terms of when people should bring a financial professional into the fold – and what the consequences are of inaction.

Asset tracking, for example, is something that you may not immediately think impacts your bookkeeping, but it does in a fairly significant way. Ghost assets are fixed assets that have either been rendered unusable or are physically missing. However, “out of sight, out of mind” does not apply in this case – they still count toward a business’s tax and insurance liability, thus making it difficult to properly reconcile their books every year.

Of the people who responded to Intuit’s survey, 74% indicated that they didn’t understand this, and 49% said that they didn’t even know what ghost assets were in the first place. If you are among those numbers, congratulations on arriving at one of the biggest indicators that you need to bring a financial professional into your business (and also that you’ll likely want to conduct inventory on a regular schedule moving forward).

Other signs that the time is right to bring a accounting professional into the fold ultimately come down to the most pressing financial issues that most businesses face. 51% of people who responded to Intuit’s survey said that accounts receivable and collections were their most significant business challenge. 44% said that cash flow was always something they were concerned about, and getting a better handle on “money in vs. money out” was always a top priority.

Cash flow troubles, it is important to note, is the number one reason why most small businesses fail within the first four years of existence.

Other pressing issues included properly managing paperwork on a regular basis, accurately closing the books each month, and managing payroll. The major thing to understand is that a financial professional will be able to help with ALL of these things, taking the stress off your plate so that you can focus simply on running your business like you should be. If ANY of these things are ones that keep you awake every night, or you feel these issues are significantly affecting your ability to grow and evolve, guess what? It’s time to contact a professional to do as much of the heavy lifting as possible.

Never Underestimate the Power of Trust
Consider it from another perspective. Recently, small business owners responded to a survey outlining all of their most pressing accounting issues. The survey, conducted by Wasp Barcode Technologies, spoke to 393 small business leaders of nearly every organization size and industry that you can think of.

When asked to rank the professionals that they worked with on a regular basis in the order of importance, these business leaders overwhelmingly agreed that accounting experts were one of the single most valuable assets they had. They outranked attorneys, insurance agents, technology firms and even staffing services.

This is how important tax professionals are: Business leaders know that much of what they’re trying to do each day, along with what they hope to be able to accomplish in the future, would be impossible without the stable foundation that only an accounting professional can provide.

When It Comes to Accounting, Knowledge Is Power
At the end of the day, it’s important to remember what may be the single most important piece of advice for small business owners when it comes to accounting: It is far, far cheaper to hire an accounting professional today before things get out of hand tomorrow.

Think about it this way: A large part of the reason why you got where you are today is because you took the initiative and started to do things for yourself. You have a “can do” attitude that just won’t quit, and you’ve built something incredibly successful from the ground up as a result. But there are certain situations where you cannot let pride get in the way of making the right decision, and accounting is absolutely one of them.

You already have a full-time job: running your business. You don’t have the time to take on another one, let alone the expertise to guarantee that you’re making the best decisions at all times. Yet this is exactly what business accounting is – a heavily specialized, full-time job that requires a careful hand and attention to detail that is second to none.

Bringing in a professional sooner rather than later will not only help make sure that you have cleaner books and other records, it will also significantly reduce the chance that you’ll get hit with penalties for things like late taxes and allow you to be much, much more successful in the long term. These types of benefits, to say nothing of the peace of mind that only comes with knowing your accounting is taken care of, are things that you literally cannot put a price on.

Financial KPIs: What They Are and What You Need to Know

As a small business owner, the importance of making purpose-driven decisions is something that cannot be overstated enough. Every choice that you make must be one with a particular goal in mind – whether it’s to attract new customers, increase revenue, decrease expenditures, increase liquidity, etc. But simply making the decision itself is not enough – you also have to find a way to measure the result of your action against what you were trying to accomplish in the first place.

This, in essence, is what KPIs are all about.

Also commonly referred to as “key performance indicators,” they represent the best kind of measurable value that reflect how we’ll you’re doing in a particular context – the kind that is objectionable, black and white, and provides you with a clear indication of what you need to be doing moving forward. Thanks, in particular, to the evolution of cloud computing and the advent of real-time accounting, it’s easier than ever for business owners to monitor the health of their organization through financial KPIs.

When doing so, however, you need to keep a few key things in mind.

Financial KPI Considerations
Part of the reason why KPIs are so powerful in the first place is because they’re malleable – based on exactly what you’re trying to accomplish, you can take a micro look at a particular aspect of your finances to tell you how close or how far away you are from that goal.

With that in mind, it’s important to realize that there is no “one size fits all” approach to KPI selection. If you looked at the financials of your closest competitors, they might be tracking wildly different data than you are – even though you’re both operating in the same industry.

Because of this, you need to figure out the long-term goals that are most important to you first. Then, you can reverse engineer the KPIs that you should be watching to help guide you and your business in the right direction.

KPIs to Watch Out For
Now that you’ve got a deeper understanding of what KPIs measure in relation to your goals, it’s time to learn more about the specific KPIs that you should be paying attention to monitor those goals in real-time.

  • Operating Cash Flow. Also referred to as OCF, this points to the total amount of money your company is generating on a daily basis. This can be a great way to determine whether you’re able to maintain the positive cash flow needed for growth, or if you should start looking for external funding. OCF adjusts your net income for factors like depreciation, inventory fluctuations, accounts receivable changes and more.
  • Current Ratio. This KPI is an indication of whether or not your company can pay all of its financial obligations in one year. This takes into consideration all of your current assets and compares them with your current liabilities. A Current Ratio of less than one tells you that you will NOT be able to fulfill all financial obligations, thus requiring additional cash flow. For the best results, try to keep Current Ratio between 1.5 and 3.
  • Burn Rate. This clues you in on the rate at which your company is spending money on a weekly, monthly or annual basis. This is particularly helpful for companies that don’t necessarily go through extensive financial analysis, as it’s a quick look into whether or not your current operating costs are sustainable in the long-term.
  • Income. This, simply put, looks at how much money you’re generating. Based on how much money you’d like to be generating, you can then make a determination about how much you need to increase sales and, thus, set about trying to figure out how to do that.
  • Profit/Loss. This is a quick look into whether your company’s expenditures are MORE than your income.
  • Cash Flow Forecasting. Remember that improper cash flow is literally the number one reason why most businesses close prematurely. If you want to get better at cash flow management, you need to start taking a deeper look at what your cash flow is predicted to be both in the short and long-term. Diving deeper into this topic now can help you mitigate some fairly significant risks later on.

If you have any additional questions about KPIs that you’d like to see answered, or if you have other concerns that you’d like to have addressed in a little more detail, please feel free to contact our office today – someone is ready and waiting to provide you with the personalized level of care and attention to detail that you deserve.

6 Steps to Get Your Business Startup on Track For Long Term Success

It’s easy to think about startup businesses and consider the success or horror stories, but what about the average startups? The hard and bleak reality is that the majority of small business startups fail. So, to avoid being like the average startup, you need to create a plan for success.

Choose the Right Entity

One of the first steps to forge a solid start includes selecting the right entity for your business. This legal structure will affect the amount of paperwork you need to do and the legal ramifications you will face.

The right entity will help you reduce your liability exposure and minimize your taxes. You need to ensure your business can be financed and run efficiently with a method that helps ensure the business operations will continue after the death of the owner. Along with making the startup process more organized in an official capacity for the company, the formalization process will also solidify the ownership of participants who are participating in the venture.

To choose your entity, you will first need to consider what personal level of risk you face from liabilities that could arise from your business. You will then need to consider what the best angle is for taxation, finding ways to avoid layers of taxation that can increase unnecessary expenses. Then, you will have to consider what kind of ability you have to attract investors and what ownership opportunities will need to be offered to key stakeholders. Finally, you will have to consider the overall costs of operating and maintaining whatever business entity you choose.

There isn’t necessarily only one entity that can fit your business. The key in this process is looking at how each entity will alter your business’s future to select the one that is right for you. You might choose a sole proprietor, corporation or limited liability company if you are a single owner. If your business is going to be owned by two or more individuals, then you might choose a corporation, limited liability, limited partnership, general partnership or a limited liability partnership.

Sole Proprietorship: The most common entity type where a single owner is personally liable for financial obligations. This is the easiest type of business entity to form and offers complete control to you as the managerial owner.

Partnership: When two or more people want to share the profits and losses of a business, they can benefit in a shared entity that does not pass along the tax burdens of their profits or benefits of the losses. In this entity form, however, both partners are personally liable for the financial obligations of the business.

Corporation: A corporation is an entity that is separated from the founders and handles the responsibilities of the organization for which it bears responsibility. The corporation can be taxed and held legally liable for its actions, just like a person. The corporate status allows you to avoid personal liability, but you will have to provide the funds to form a corporation and keep extensive records to keep the corporation status. Double taxation can also be seen as a downside to the corporate status, but a Subchapter corporation can avoid this situation by using individual tax returns to show profits and losses.

Limited Liability Company (LLC): This is a hybrid form of a partnership entity that allows owner to benefit from aspects of the corporation and partnership forms of the business. Both profits and losses can be passed to the owners without taxing the business and while shielding owners from the personal liability factor.

Plan for Growth

Even though the number one reason startups fail is due to the production of a product no one wants, you can’t just stop with a great product. As an entrepreneur, you have to know about every aspect of your business. Even if you are not an expert in the process of business and aspects of your company, failure in those areas can still cost you your success. You have to know enough to catch key problems in your company’s startup process.

Too segmented, and your company will struggle with gaps and overlap. If the CEO believes it is his or her job to lead, but not to market, then he or she may miss an important connection between target audience and company direction. If the marketer believes it is his or her job to market, but not to develop the website, then he or she might find the website design does not appeal to the right audience. Each individual needs to be both responsible and organic in their approach to helping the company move in the right direction.

While you want growth, you need to be prepared to sustain it. In order to get your venture capital secured, you need accelerated growth; grow too slow and you won’t be eligible for the funds you need to keep growing. Yet, your company will have to be equipped for that growth. The shifting size will alter your ability to work as an agile startup, will force you to reconsider a variety of your tools and may even make you update your physical headquarters. This is just one more reason your current company leaders and employees need to be flexible in the nature of their coverage and thorough in the application of their talents.

The second major reason that companies fail is due to a shortage of funds. These companies run out of cash because their growth stalls. Stalling growth can kill a startup by making them lose to the competition, lose customers, lose employees and lose passion.

Growth Hack

Once you’ve gotten your business prepared for substantial growth at a very rapid pace, you will need to focus your attention on increasing that growth. A relatively new term, growth-hackers are professionals that are specifically focused on the rapid growth of startups. Since the second largest reason startups fail is directly related to money shortages (and indirectly related to growth), you will want to focus a lot of your initial attention on increasing growth in creative ways.

The growth hacker job is usually done by a professional who stands in the place of a marketer. The growth hacker has to understand your startup’s audience and how to appeal to them for faster growth. The growth hacker will also break your large end goal (increased growth at a rapid rate) into smaller, actionable and achievable tasks, like doubling your content creation, to reach that end goal.

Watch the Money

In order to help manage the funds that you do have, you will want to establish financial controls to provide your startup with a solid foundation. The internal controls will include accounting, auditing, damage control planning and cash flow. You will need to have disciplined controls to ensure solid growth and help you never run out of cash.

You will want to adjust and re-adjust your projections for cash flow, never allowing the cash to run dry. This also means you need to set maximum limits of purchasing authority to keep partners or employees from overspending. You will need to require all payments to be recorded on invoices to support audits and keep spending on track. Additionally, you will want to use an inventory control system and use an edit log to track changes made to your website. Don’t overlook your suppliers as sources of financing or assume that all shipments are accurate or in good condition. Ask for term discounts, pay on time and always create purchasing contracts to ensure your goods are delivered.

Measure Your Achievements

Key Performance Indicators (KPIs) are ways to measure the company’s success in achieving key business goals. You will want to establish KPIs on multiple levels in order to monitor your efforts on meeting your objectives.

You will want to use SMART KPIs that are Specific, Measurable, Attainable, Relevant and Timely. Goals that are too general, don’t have an end date and aren’t within your control are goals doomed to fail. To help your startup succeed, you need to discover the core objectives that will really improve your company status.

Work With Us

Finally, you need to spend more time growing your business than accounting for it. Remember, a misplacement of funds and lack of cash is the second biggest reason why startups fail.

Once you have a product that is worth taking to market and a plan in place to cultivate funding, you will be in a good place with your startup. Don’t let any of these points cause you to lose control of your business with a blind side hit that you could have prepared for.

Show Me the Money – Six Best Practices in Billings and Collections

One area where most small-business owners can improve their cash flow is in billings and collections. A thorough credit check before you offer payment terms is not enough. Here are six best practices that can make a real difference in your cash balance at the end of every month.

1. Get it right.

One legitimate reason for nonpayment is a confusing or inaccurate invoice. Make sure your invoices spell out in clear, plain English what was purchased, the price, the payment terms (or when payment is due), the customer’s PO number, when it was shipped, to where it was shipped, and any tracking number.

You may also want to tighten your sales process. Don’t start work without a formal PO from your business customers-many companies won’t pay against a verbal PO. When you receive a PO, make sure that it matches your quotation. Companies often put their payment terms on their paperwork, so if your customer tries to play this game, resolve any discrepancies before you start work.

Finally, make certain every shipment and invoice is 100% correct. Set up processes to assure the customer gets exactly what was ordered and that invoices are equally accurate.

2. Get it out.

See that four-day-old pile of shipping papers waiting to be invoiced? That’s a pile of cash you can’t collect.

Set a goal to issue all invoices within one working day of the ship date or completion of work. If your team struggles to meet this, give them the tools and/or manpower to make it happen. And if an invoice gets held up internally, make sure your supervision is immediately notified so the problem can be quickly resolved.

To further speed payments, try to invoice your customers by email. Some won’t accept emailed invoices, but getting even a portion of your billing done electronically will help overall cash flow.

3. Get it to the right person.

How many times has one of your employees called about a past-due payment and been told “we didn’t receive your invoice” or “that needs to be approved by the department manager”? It’s another game, one that can take weeks to play out. As part of getting an accurate customer PO, make sure your sales staff gets a valid address for invoicing.

Large sales deserve special attention. Where applicable, have your salesperson get the contact information for the customer employee that will approve payment. This might be a department or plant manager and maybe even the business owner. Also get the contact information for the customer’s finance-side people (accounting manager, accounts payable clerk), who will cut and approve the check. When your invoice goes out, make sure they all get a copy.

4. Get it sooner.

Offer a discount for early payment-for example, 2% off for payment within 10 days. Not all of your customers will take advantage of this, but it’s a great way to pull cash in.

5. Get friendly.

The best way to get paid on time is to build a positive working relationship with your customer before the money is due.

Have your salesperson call his or her customer contacts shortly after the invoice goes out. Confirm the product has been received or affirm that your assignment is now complete. Ask them if they’re satisfied with your work, what you can do better to improve, and if they’ve received your invoice. This communicates (in a nice way) that it’s time to start the payment process. If these calls uncover problems, it’s an opportunity to address them on the spot as opposed to when payment is past due.

Your employee responsible for collections should also make a call-in this case, to the customer’s finance-side people. Your employee should confirm the receipt of your invoice, remind them of any discounts for early payment, and check whether there are any administrative problems with the document. They should not ask for a payment date. If possible, they should also try to get to know their counterparts. A simple “How’s the weather where you are?” is a great opening that can lead to a long conversations about, well, everything. Your customer’s payables team can be your best friend later in the collections process, but it won’t happen if you have not built a working relationship.

There’s one other person who needs to get friendly: you, the business owner or general manager. As your company develops large customers make sure you get to know your customer counterparts. A phone call from you asking “How’s my team doing?” is a great way to initiate a conversation and assure customer satisfaction. For very large projects, make a face-to-face visit. It will pay off later. If the time comes when a payment problem needs to be escalated, you will have an established relationship on which to call.

6. Make it fun.

Some companies take the “get friendly” notion to the next level. From putting silly “Thank You!” notes on their invoices, to handing out promotional swag, to sending little stuffed animals for on-time payment, it’s amazing how these goofy gimmicks can change the atmosphere around the collection process.

You want your customer to smile and shake his head as he signs the check to pay your bill. And if the day comes when your customer needs to decide whom to pay and whom to put off, chances are he will pay you first.

In Closing

What about the actual collections process? Good companies contact their customers if a payment is more than five working days late. You should do the same.

What’s different is that you’ve laid the foundation for a successful endgame. Any excuses for non-payment have been addressed. Your people know whom to call, and you have working contacts who will give you straight answers. Above all, you’ve strengthened the relationship with your customer and have built a basis for future business.