Posts Tagged ‘small business’

Q: Is it me or is QuickBooks getting harder to use? A: Its you.

February 27th, 2016

Is it me or is QuickBooks getting harder to useAs a long time QuickBooks professional, I have to ask, “​Is anyone really saying that QB is getting harder to use?”

Everything you have learned over the years is pretty much the same. Sometimes the interface gets modified, but that’s an easy adjustment. You might not even need the newer features, and can almost certainly get by without them if nothing related has changed in your business. And unless to use payroll or other features that require an online interface, you might not ever need to buy the new version. I have clients still using QB 2010.

If you change to QB Online you will find the interface to be very different, but then of course, it’s a different program. None of my clients that made the switch had difficulty adjusting to it, maybe because I toured them through the features they need to use themselves. If you subscribe to one of the low end, less expensive versions, you might burn a lot of time looking for features and reporting that don’t exist. Frankly, it is my option that these limited low-end QBO versions are just a ploy to get you vested in the product. Intuit knows that you will upgrade before long, especially if you need common small business features such as being able to produce 1099s for your contractors.

The difference between finding QB easy or hard to use is all about learning the proper use of the program. Just like everything else you do. If you don’t learn how to use it, it will be hard for you to use properly.

The next issue is that even though you don’t need to be an accountant, it helps a lot to understand accounting/bookkeeping basics. If you don’t, then you will have some degree of difficulty using it, and even worse might be creating a mess out of your books. The best boost in business I ever received was back when Intuit ran advertisements (for many years) with the slogan, “With QuickBooks, you are only a click away from being your own accountant”. Thousands of small business owners believed that, bought QB, and proceeded to make a real mess out of their books.

Even to this day, I rarely take over the bookkeeping of a new client without having to start out by fixing a large amount of problems related to the miss-use of the program, and then proceed to edit their Chart of Accounts to make their QB a better reflection of the actual business and the kind of information the owner needs to make the best possible business decisions. That is the case even when they had a bookkeeper doing the work for them. So many bookkeepers have learned QB, but still don’t know basic accounting or how a business functions. There is a lot more benefit in the proper use of any accounting software than just keeping track of things so you can file tax returns. An awful lot.

 

Taking Action on Cash-Flow

December 28th, 2015

Cash Flow womanCash flow is the lifeblood of any business, and in any business there are cash flow dangers. There is a capacity for a business to accumulate costs. They gradually grow month-by-month and your cash flow gradually diminishes to a trickle and finally dries up. Your only defense is to watch, record, compare and trend your costs.

Understanding what the numbers mean is crucial to your cash flow. Are sales trending up or down? Are expenses rising faster than sales? Is one product more profitable or better selling than another? How much do I need to sell to meet expenses each month? The answers all lie in the numbers.

The best way to measure cost trends is by analyzing the expense categories in your accounting software, and ideally graphing them to get a better visualization of their impact. If your company’s chart of accounts is properly designed, you can produce the graphs for each cost item and quickly be able to see that your power bill, for example, is gradually rising. This new perspective can now lead to an informed change in behavior that will reduce those costs or at least reduce the increase in those costs.

Once you have established your costs, you should compare them against the industry average, or at least use your own common sense and business experience. If you keep your books accurate and up to date, you will be able to calculate the relationship between your gross sales and the expenditure in any category. For example, with the help of your historical accounting data, you may decide that your postage should be 2% or 3% of gross sales. When you look over your month-end reports, you may discover that it has risen to 5%. Catching it early, you can now take corrective action.

If you are able to control your expenses, you can develop a healthy constant cash flow. When your bills are greater than your sales/receivables, your first reaction is most likely that you need to increase sales and collections. Although that is always a good idea, even when there isn’t a cash flow problem, there is still very good reason to pay particularly close attention to your expenses. If when looking at your figures you see that it takes five dollars to put one dollar on your bottom line, it then takes $5,000 of sales to yield $1,000. This means that saving $1,000 in costs is exactly the same as generating $5,000 worth of sales.

You need to look at your cash flow from an informed perspective. Here are five areas to focus on:

1. Mismanaging Credit
There are two common ways to mismanage credit in small business; granting credit without specific credit policies, and using credit with no plan for how to pay for it.

Both have a huge impact on your cash flow and are often closely related. For example, you have an opportunity to work on a big project, for which you will need to order materials. Your supplier expects payment in 30 days, but you won’t receive cash for the project for 60 days. Right away you’ve put yourself into a cash flow crunch that could take months to recover from financially. In the meantime, you’ve passed on smaller jobs that would have provided quicker cash at less cost. And, if you’re unable to pay your supplier on time, you’ve endangered that relationship as well.

2. The relationship between Receivables and Payables
In a perfect world, what customers owe you would be paid just in time for you to pay what you owe your vendors. But, as any small business owner knows “stuff happens”. The customer you thought would pay this week, doesn’t. So the bills you thought you’d pay this week, don’t get paid. Are your payables in balance with you receivables? If what you owe to others is far more than what is owed to you, then you have a cash flow problem. And if your receivables are particularly old, chances are you’ll never see that cash at all.

3. Focusing on profit instead of cash flow
Is profit the ultimate goal of every business? Did you know that many businesses that fail are operating at a profit? How can that be? For the small business, cash flow is the ultimate goal. No cash flow. No business.

The difference is mostly in the decision making process. If you take on this big job, it will earn you a huge profit, but if you take on five smaller jobs, you’ll have cash to pay your bills. Yes, you want to be profitable, but every decision has to be measured against the effect it will have on cash flow.

4. Don’t forget your debt to the Tax Man
Some bills are easy to forget. Bills like sales tax, payroll taxes, estimated taxes. They just sit out there, almost off the radar. They don’t have to be paid right away. It’s easy to forget about them. But when they’re due, they’re due right now. And you better have the money to pay them or you’re in hot water with the Tax Man. That is not a place anyone wants to be. Pay them late or not at all and you end up with penalties and interest on top of what’s already due. Using the money that needs to go toward taxes to solve cash flow problems results in even more, and probably worse, cash flow problems when those taxes come due. It can take months or even years to recover.

5. Spending your company’s future on a sailboat
Haven’t you always wanted a boat, a fancy car, or a trip to Tahiti? It might be tempting to try to pass your personal purchases off as tax-deductible business expenses. But, it’s a bad idea for two reasons.

The people at the IRS are over-worked, but they weren’t born yesterday. The last thing you need is an audit that could reveal your transgressions and result in an unexpected tax bill plus penalties and interest. No company’s cash flow should have to suffer that indignity.

The other reason it’s a bad idea is that you are spending your company’s future on unnecessary expenses. Small businesses operate close to the edge. Unless you have a reserve to see you through the tough times, you’re always in danger of being on the wrong side of that edge. You must take care of the cash flow first. Then, you can pay yourself a properly taxed bonus and buy all the toys you want.

5 Ways to Avoid Tax Audits

March 19th, 2015

Tax Audit 1When you’re self-employed filing a Schedule C with your tax return, your chances of being audited are greater than if you were a wage earner.

This is because the IRS catches many such individuals that attempt to either hide income or write off personal expenses as business deductions. When all you are reporting on your tax return is income from a W2, what’s there to audit? Even if you enter the numbers wrong, the IRS will match it up with the copy it got from your employer and send you a correction letter along with the adjustment. So, with scrutiny of the self-employed on the rise, here are 5 things you can do to reduce the chances of an audit:

1. Use professional software such as QuickBooks

Track the income and expenses of your business with accounting software. Your credibility increases in the eyes of an IRS agent if your tax return is based on professionally-prepared financial statements, especially if maintained by an outside firm.

2. Document sources of all income

If you are audited, the first thing the IRS agent will do is add up all of the deposits from your personal and business bank accounts. If more money went into the bank than was declared on your tax return, the agent will want to know where the money came from and whether or not the income is taxable. If you use QuickBooks for your personal and business books, you will automatically tie out this income, but you still need proof. If the income you record is not taxable (e.g. gifts, inheritances, loans, transfers from personal funds) keep a copy of the check or document that accompanies the income to prove the source is not taxable.

3. Let a professional prepare your income tax return

Self-prepared returns are more likely to be audited because the IRS thinks a nonprofessional has limited knowledge. Tax law is complex. And if you are self-employed, no matter how small your business, your tax return is now a complex creature.

4. Rethink your legal form

Corporations, LLCs, and partnerships are less likely to be audited, but that should not be the sole reason to incorporate. Discuss this option with a tax professional and your attorney before making any changes.

5. Document the Red Flags

You are allowed to deduct all ordinary and necessary business expenses which means thinking in terms of “Would I make this purchase if I didn’t have this business?” If the answer is no, than you more than likely have a deductible business expense. But it’s important to know the rules and to have proper documentation to substantiate the deduction.

Some expenses receive considerably more scrutiny than others:

Automobile expenses

Taxpayers are required to keep a mileage log if they want to take these kinds of deductions, which can be a lot of work. The IRS loves to investigate these because very few business owners will bother with this. Fortunately there are other ways to substantiate the deduction to the satisfaction of the auditor.

  • If you use an appointment book or calendar, save it along with your copy of the tax return. A mileage log can be reconstructed from those pages.
  • Save vehicle repair receipts as the odometer reading is recorded on them and total mileage for the year can be extrapolated if there is more than one receipt.
  • Record your beginning and ending odometer reading in your appointment book on Jan. 1 and again on Dec. 31.
Travel, meals and entertainment expenses

These are also very common when it comes to tax audit scrutiny. Go to www.irs.gov and read Publication 463 to determine what you can and can’t deduct.

  • Travel, especially to vacation destinations like Las Vegas or Hawaii should be documented with more than purchase receipts to prove the business intent. Save anything that can substantiate your claim that you were traveling primarily for business; such as flyers advertising the trade show, or the continuing education seminar, or letters from prospective clients at that location in your tax file.
  • Write the name of the person entertained and a brief note describing the business purpose on receipts for meals and entertainment.
Home office expenses

These are another red flag for the IRS to take a closer look at your expenses.

  • Take photographs of the house and the office area. The photos will serve two purposes: they will show the proportion of the business area compared to the personal living area to substantiate the amount of space claimed as well prove that there is in fact a business area.
  • Know the rules: The home office must be your principle place of business and must be used exclusively and on a regular basis for business purposes.

 

Sole Proprietor Start-Up Tips

February 26th, 2015

Sole Proprietor

When starting a new business, many aspiring entrepreneurs will launch it as a side venture to their current career employment, a.k.a. their day job. So there may not be a big rush to create a complex and expensive legal entity such as a Corporation. In many situations a simple sole proprietorship is the most appropriate way to go.

 

KISS

Keep it simple starting out. The simplest form of entity for running your new business is a sole proprietorship. This form of ownership requires no special communication or filings to the Internal Revenue Service until you start paying employees and/or taxes.

Sole Proprietor

As a sole proprietor you are the owner of a business that might only need a business license/permit if your county or city requires it. If you are the owner of a business that sells items that require sales tax, you will need a reseller permit, and are liable to remit all state and/or city taxes on retail, and maybe wholesale, sales your business collects. Service businesses and most cross state sales are exempt from state sales tax.

Liability Insurance

If you are concerned about personal liability, then the simplest thing to do is to buy a personal liability umbrella policy. Additionally, the best way to avoid liability is to learn your trade well and keep accurate accounting records.

No Company Taxes, Just Yours

Profit from a sole proprietorship is reported on your personal tax return. The IRS won’t even know your company exists until after you file your first personal income tax return. This will include a Schedule C which reports all of the revenue and expenses your business has incurred. In most states, including California, certain state minimum taxes are not require of sole proprietorships. You will, however, have to pay any sales tax you have collected from your customers. And since sole proprietorship losses will offset income from you day job, you might even receive a tax refund. So concentrate on building your business, not communicating with the IRS

Just a Personal Bank Account Will Do, But Don’t

Although advisable as a sound business practice, you are not required to have a separate bank account which is a necessary compliance for a LLC or Corporation. As you get your business set up you could pay your startup costs out of your personal bank account, but once you’re in business and making sales, file a Fictitious Business Name Statement and use the paperwork to open a business bank account. Keep complete and accurate records so you can be sure to get the best possible tax advantage from those early-stage costs, and not get them mixed up with your personal expenses.

Simple to Start, Simple to End

Over 85% of small businesses fail or change ownership within the first five years. Plan your business to thrive but if it fails as a sole proprietorship, you simply stop doing business. No communication or special forms with the IRS, no additional taxes to get your investment returned and no high accounting fees to close out your company. Just mark the Schedule C in your next personal tax return as “final”.

Getting Paid

In a sole proprietorship you just take the money out as a draw. No payroll taxes or quarterly forms needed. Many startups lose money for the first year, and maybe longer, so keep your day job to pay your living expenses.

Evolving Beyond the Sole Proprietorship

As your business becomes profitable talk with a CPA about another entity type that might save you taxes. Just a simple bookkeeping entry transfers all of the business assets from the sole proprietorship into the new entity without any tax penalties.

Growing Your Small Business: Consider This…

January 16th, 2015

Coffee Shop OwnerAs a small business owner, you may have plans to grow your company. Before you put your foot on the accelerator, take the time to decide whether (and how much) you should grow your company.

What do you really want?

You believe you have the entrepreneurial drive to build your business into a larger one? Do you want to scale a business? Have more employees to help carry the weight? Have the potential to make more money? Create something that is worth a great deal of money, or that changes the world?

Do you need to grow to appear competitive in your market? To have the budget to get the word out, make more sales, and become an industry leader?

Can you be successful as a “boutique” operation? Sometimes less is more.

Do you want a business that comfortably supports you and also leaves time for you to be with family, pursue other interests or take vacations? You may want to grow but to control the growth so that you can enjoy what some people call a lifestyle business. While this term has been used condescendingly in entrepreneurial circles, there is also an increasing recognition that a solid lifestyle business can indeed be a great business to run.

Potential

What potential does your business have to grow? Some businesses are like finely tuned sports cars. They aren’t working at full capability unless they are on the track, racing forward. They are built to move fast and make things happen. Other businesses are engineered for steady travel instead. How about your company? And are you happy with that Chevy or Lamborghini your company is today? Or do you want to reengineer your business for a different driving experience?

Responsibilities

In a very small business, you do nearly everything yourself. As your business grows, you will delegate some tasks. As you grow even more, or scale the business, your responsibilities are likely to change from doing or a blend of doing-and-managing to higher level managing.

Before putting your dreams of growth into practical steps, consider whether you like doing or managing or some blend of the two, and also whether the satisfaction you get from business is from the rush of entrepreneurial growth or from the day-to-day running of the company you have today.

Money

Depending on how you grow and what type of business you have, you have the potential to make more money as the company gets bigger. Generally, this is one major motivation for growing a company.

It should be recognized that there are times when the larger business is not more lucrative for its owner. As you take on more employees, more infrastructure and more risk, you also have more potential areas for poor performance and resulting reduced financial returns. Which brings us to risk.

Risk

Big leases, big loans, shared equity, a larger staff, and other potential demands of a growing business carry with them higher risk alongside higher prospective reward.

A fast-growing business typically brings some loss of control as well as challenges maintaining quality, assuring profitability, and managing your (potentially also large) competition.

Be aware not only of your best-case scenario but also your worst. Are you ready to deal with risk?

Saleability of company

What will you do with your company when you are ready to retire or move on? Will your children run it? Will key employees buy it or take it over? Will you sell it? Will it end when you stop working?

Size is one consideration in this matter. Many small business advisors recommend that you fund your retirement while you are working, in the event that “you are the company” and that the business “dies with you.”

A business that is not overly dependent on you, and that can continue to make money after you move on, is typically a more saleable enterprise.

Unless you have a novel technology in hand, cash is king when it comes to selling a business, so if making a lot of money from the eventual sale of your company is a key consideration in your planning, you may indeed want to grow the business aggressively.

Small businesses that can run without you can be salable, too, since people frequently prefer to buy an existing business rather than starting their own. However, the proceeds are likely to be lower.

As a business owner, you have a unique opportunity to make conscious decisions about growth, based on the market for your services or products, and on balancing pros and cons of large versus small, considering your own management style, and reviewing how you want to blend business and life goals.

Whatever you decide, you have the privilege and the pride that comes with running a business. So many people would like to do what you are doing every day.