Profit versus Cash Flow

Every small business financial advisor has heard it before, “If my business is profitable why don’t I have any money?” The way cash flows in and out of your business is a lynchpin for understanding business finance.  There is also a huge difference between making money and managing it.  So often entrepreneurs start a business because they love creating a new widget, or offering a leading-edge service, but they have little to no business management experience. Terms like forecasting, budgeting and cash flow are meaningless until the monthly bills come due and payroll can’t be covered. Rather than waiting until there’s a problem, let’s make a pact to learn the basics for how profits and cash flow operate.

Lesson #1 Profit and Cash Flow are Different

Profit is revenue minus expenses. That means any monies left over after all the bills are paid is considered profit. Conversely, cash flow refers to the influx and outflow of cash in the business, i.e. where is the money going and why. If you go to the store to buy milk and you have no money, you have a cash flow problem. If you have money expected to you in two months, that makes buying milk nearly impossible now even though profitability is promised at a later date.

 

The other crux is that a business selling additional widgets (i.e. increasing sales) does not necessarily immediately increase cash flow, in fact, more often than not, the increased sales will immediately reduce it. Now you’re thinking, if sales help to generate revenue, why wouldn’t I want more sales?  Sales, especially where widgets are concerned will require an immediate additional cash outlay to manufacture, package, and distribute the item(s). All of these steps must occur well in advance of delivery and invoicing and another ten to 45 days or more can go by before the company is paid for the products. That timeframe between production of the widget and payment of the widget is where cash flow management lives.

Lesson #2 – Look at your options.

Precise cash flow management, much like a synchronized swimming routine, must occur in a timely, well-choreographed dance in order to keep the business operating, expenses covered and employees paid. Part of this monetary routine can include:

Collections – Where are your current account receivables? Are they current or in arrears and if so, how far? By placing your attention on existing receivables and making efforts to encourage payments, cash flow will be improved. For invoices that are more than 90 days past due, consider a collection agency or some other type of arrangement.

Delaying cash payments – Review how your orders are placed for materials with vendors. Can you set contracts for orders where a percentage is paid up front and the remaining balance paid in 15 or 30 days? This will improve cash flow as it will remain in-house longer.

Raising Additional Capital – If you cannot meet your financial obligations within the necessary time, it may be necessary to solicit additional cash through loans, issuing capital stock, employee ownership or some other type of arrangement.  Again, planning and attention to cash flow can help with strategic timing and more attractive interest rates and loan agreements. Covering debts in a crisis mode will inevitably mean less attractive interest payments and possibly selling more ownership than originally intended.

 

Lesson #3 – Too much competition can kill revenue.

That’s right, the one thing that makes capitalism work is competition, yet competition can be the very thing that can take a business under the quickest. How? When businesses are constantly bidding for business and trying to shave off profit margins in order to win the contract, those pennies, nickels and dollars can all add up to no actual profit at the end of the day. Yes, the business has lots of money moving through the business, but not much staying in the bank accounts. Try to be brutally honest with yourself and your bidding so that you know up-front if your business can afford to take a reduction in costs or even a loss in order to gain business.  Make sure that you are working from real numbers and in partnership with your finance team in order plan for losses on one contract and profits on another.

There are volumes of books and doctoral theses on the process of cash flow and cash management which can be consulted. If you don’t have that kind of time, it may be time to bring in some additional financial advisory assistance. Reach out to a PASBA Small Business Advisor and learn how they can help you make sense of your business.

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.

 

IRS Tax Notices Explained

You filed your taxes, processed all of your W-2s and 1099-Cs and think your federal reporting is in great shape – until you receive the dreaded IRS tax letter. Your stomach knots, your mouth goes dry and suddenly a clammy panic takes hold. “Be calm!” says Appletree Business Services owner Steven Feinberg, CPA.  “There are all kinds of notices and letters the IRS can send, so take a deep breath and review the letter carefully,” he continues.  Often there are ample instructions on what the IRS needs a taxpayer to do.  In the event you have questions, you can always reach out to the IRS directly or contact your local Professional Small Business Advisor.

 

The IRS sends notices and letters for a variety of reasons. The most common are:

  • There’s a balance due.
  • The taxpayer is due a larger or smaller refund that what was originally filed.
  • There is missing or unreported income from another source.
  • The IRS has a question regarding the tax return.
  • Random selection – that’s right, each year the IRS randomly selects taxpayer reviews based on a statistical algorithm.
  • The IRS needs to validate the taxpayer’s identity – i.e. the SSN doesn’t match the name.
  • The IRS made a correction or change to the return.
  • The IRS is notifying of a delay in the return.
  • Final notice of intent to levy and notice of your right to a hearing.

If your correspondence indicates that a response is requested, it is in your best interest to respond within the given time frame to help reduce or eliminate additional penalties, or preserve your right to appeal if you don’t agree with their findings.  If you are required to respond or take action in the letter, you will want to include the CP or LTR number found on either the top or bottom right-hand corner of the correspondence. Be sure to take down the agent’s ID number, name and the date and time you spoke.

Let’s review the most common types of IRS letters and what they might mean for your situation.

CP2000 Notice – issued when the income and/or payment information doesn’t match information reported on the tax return.

CP11 – This letter is sent when there are changes to a tax return or a balance due.  The IRS has made a change to the tax return and there is now a balance due.

CP12 Notice – This notice is issued when the IRS corrects one or more mistakes on a taxpayer’s return and a payment has become an overpayment or an original overpayment amount has changed.

CP-90 – Final Notice of Intent to Levy and Notice of Your Right to a Hearing – This is the only notice that permits the IRS to take action against a taxpayer. If you have received this notice, you have already received several other communications from the IRS. Once this notice is delivered, you have 30-days before the IRS is legally entitled to take action. You can request a meeting with an IRS appeals officer or start collection due process.

If you are required to pay additional taxes to the IRS and you agree with their findings, you still have a few options available to you:

  • Pay the amount due in its entirety
  • Pay a portion of what you owe
  • Apply for an Online Payment Agreement or Offer in Compromise.

A note about IRS letters: Beware of suspicious notices or letters that were designed to look like they came from the IRS. If you are suspicious, you can call the IRS hotline at 1-800-829-1040. Remember that the IRS will never ask taxpayers for personal information via email or social media sites.

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.

 

 

 

Generational Shifts in the Workplace

Baby Boomers are delaying retirement and continuing to stay in the workforce. This trend in postponed retirement can have substantial impact on other generations within the workforce seeking advancement and career changes. According to the ADP Workforce Vitality Report released in June 2017,  “[the boomer] age group experienced 4.8 percent job growth during the first quarter of 2017, more than any other age group.” Additionally, the Pew Research Foundation found that “nearly two-thirds of workers older than 65 hold full-time jobs” of 35 hours a week or more.  While there are many reasons for the delay in retirement, four primary catalyst include:

Finances – Baby Boomers are concerned that they do not have enough cash to last for their entire retired years. Shifts in employer pension programs to self-funded or corporate match 401k retirement programs means that less money is guaranteed or available in retirement years.  Plus, the more years worked, the fewer years need to be pulled in taking retirement dollars out of an account. Retirement accounts can continue to grow (yes, money must start being taken out by age 70 ½ ) but waiting longer can increase those payouts. Additionally, delays in retirement can also mean a delay in collecting Social Security. Waiting to take Social Security from age 62 to age 70 can mean an additional growth of 8 percent annually. In a recent Employee Benefit Research Institute study found that “26 percent of workers plan to work until age 70, and another 6 percent say they will never be able to retire.”  With less and less workers able to save for retirement or have not nearly enough to carry them through their retirement years, they continue to work full time and extend their careers well into their 70s.

Healthcare – Staying on the company health plan can mean better health plans as well as other ancillary benefits like group and voluntary life and disability insurance and even access to critical illness, accident, hospital or whole life plans, not to mention the ongoing employer contributions to a 401k.  Studies have also found that continuing to work has health benefits, too.  Researchers at Oregon State University found that in an ongoing study of individuals age 50 and older, those who continued to work had an 11 percent lower chance of death from all causes than their ‘retired’ counterparts.

Demand – Employers need the experience and institutional knowledge of the baby boomer generation. Much of this knowledge has not been passed down to younger generations, leaving a large gap in training and experience that employers are willing to pay to keep.

Lifestyle – The average life expectancy has increased substantially allowing baby boomers a healthier life and more productive time to continue working. Older employees who once targeted 55, 60 or 65 as a retirement age are now looking to 70 or 75. Employers wanting to keep those experienced workers on hand are offering more creative ways to stay engaged at the organizations while providing flexibility and even reduced work weeks.

How can you keep your baby boomers engaged? Think about developing a talent retention program. Like Millennials who have certain expectations from their employers, baby boomers may need a few tweaks to their employment terms to stay happy and focused. Flexibility is the biggest request. Consider providing a flexible work schedule or even offering full-time 30+ employment benefits so baby boomers can ease into a slightly shorter work week while still providing experience, leadership and a great work ethic to the organization.

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.

Steps to Closing Your Business

Closing a business is never an easy decision, but the speed in which it can occur depends on your tactics. If you are a sole proprietor, you could close up shop without consulting any other parties. That’s not necessarily the wisest move, especially if you value your reputation both personally and professionally.  Take the time to devise a closure plan that takes all aspects of the business into account.

 

Business type will dictate how quickly you can move closure along. If you have a limited liability corporation (LLC) or partnership, you will need to review your articles of incorporation to determine how dissolution must be handled, partners must be consulted and even potential buy out plans must be considered. The buy-out is when your partner(s) may choose to purchase your portion of the company allowing you to walk away while they maintain ownership of the brand and all of its assets. You’ll need to put the final dissolution agreement into writing as well.

 

The more complicated your business, the more likely you will need to enlist outside counsel.  Even if you are a sole proprietor, if you have employees, a large book of business/clients, or vendors you’ll want to work out a solid plan for communicating the business’ closure. This will help ensure that all concerned parties are notified and involved in conversations about how and when the business will halt operations. For employees, there are local, state and federal employment laws to be reviewed and abided.

 

Collect outstanding debts – before you tell anyone you’re closing the business make every effort to collect on accounts receivables. To spur payments along, consider offering a discount for prompt payments, but remember, you don’t want to tip your hat that the business is closing, so try not to put new early payment deep discounts in the forefront or your clients and vendors will catch on quickly.

 

Sell off the inventory. You’ll want to sell as much of your inventory as possible. If you are a retailer with roots in your community, a going out of business sale may become a large event. Prepare for all aspects of the sale including possible large crowds and crowd control. You may even need to contact the local police department to manage traffic and crowds. If after all of the sales and final closing you still have inventory, you can consider several options:

·        Internet auctions on sites like eBay or craigslist.com.

·        Hire an auctioneer to sell off the remaining inventory

·        Bring in a liquidator. This may be a last resort but can help you sell of the remaining stock for pennies on the dollar.

 

Notify your vendors. In some instances there will be contractual or legal requirements on how to notify your suppliers, vendors, and creditors of the business’ closure.  Send a certified letter notifying them of the date of the closure and how you will handle any outstanding debts. Include information on the deadline for submitting claims and a statement that claims will be barred if not received by the deadline, a list of information that the creditor should send in order to file a claim and a mailing address.

 

File dissolution documents including a Certificate of Dissolution, certificate of cancellation or other such type of form. If your business is an LLC or corporation, you will need the partners or board to meet and vote on the dissolution including a written consent form which should be included in your corporate record. Corporations will also need to file IRS Form 966, Corporate Dissolution or Liquidation.

 

Cancel registrations, licenses, permits and business names. If your business has registered to do business in other states, you’ll also need to file cancellation forms in each state.

 

Take care of your employees and comply with all local, state and federal labor laws. This will be a multi part process that should include:

·        Issuing final paychecks

·        Reimbursement of expenses – including a process for employees to file expense reports after they have completed their last ‘official’ day of work.

·        Collecting any company property such as laptops, cell phones, credit cards or other assets.

·        Continuation of benefits – If your business has more than 20 employees and you offer group health insurance, you’re legally required to provide information on continuation of health benefits in compliance with the Consolidated Omnibus Budget Reconciliation Act (COBRA).

·        Deactivate all company passwords, door security codes and other electronic access to the business.

File your final IRS Form 940 and Form 941.  Depending on your state, you may need to obtain a tax clearance, also called a consent to dissolution which provides your business a good standing with regard to taxes. You cannot receive a tax clearance unless all of your tax payments are current and paid in full.

 

There are many more steps to closing a business, but this brief list will help to point you and your business in the right direction. As with any major business decisions, it is always wise to seek guidance and advice from experts.

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.

Retirement Plannning for Small Business

Business owners, especially those born between 1946 and 1966, are at a higher risk of not saving for retirement. In fact, the 2016 Retirement Preparedness of the Boomer Generation by the Insured Retirement Institute showed that “American’s today are less prepared and less confident about their prospects for a comfortable retirement than ever before.” The issue isn’t a lack of wanting a retirement savings, for everyone wants a secure future, rather it’s more about how to parse limited available dollars to start and maintain a retirement savings. More important is the critical need to change the entrepreneurial mindset from the sale of the business as the retirement nest egg to actively saving now.  Selling the business is a dangerous plan as market volatility can shift quickly and at all the wrong times. What if there’s another recession or an industry shift inhibiting a profitable sale of the business? Often the contingency plan is to ‘delay retirement’ which brings its own set of issues related the owner’s health, quality of life and business sustainability.

 

One way employers can build confidence in their futures is to establish a business retirement plan for themselves and their employees using one of four available small business retirement plan options:

·        SEP IRA

·        SIMPLE IRA

·        Solo 401(k)

·        SIMPLE 401(k)

 

Which retirement savings plan is best for you and your business?

SEP Plans – Simplified Employee Pension (SEP) plans are a tax-deductible retirement plan and are a good choice if you are the company’s only employee.  Employers typically set up an Individual Retirement Account (IRA) or annuity for each plan participant. You can contribute up to 25 percent of your compensation, up to $53,000. If you have employees, you will also need to fund SEP-IRAs for them as well.

 

SIMPLE Plans – If your business has 100 or less employees who received at least $5,000 in compensation last year, a SIMPLE IRA plan may be a good business fit. Under the SIMPLE plan, employees can choose to make salary reduction contributions rather than receiving these amounts as part of their pay. As the employer, you will make matching or non-elective contributions to the plan as well. Two types of SIMPLE plans are the SIMPLE IRA and SIMPLE 401(k).

 

Qualified / Defined Benefit Plans – These plans involve a more complicated set of rules than the SEP and SIMPLE plan rules. Defined-Benefit Plans have employees’ retirement benefits pre-determined by their compensation, years of service and age.  For example, the plan may specifically outline that an employee will receive $100 per month at retirement or provide a graduated retirement benefit based on the employee’s last five years of employment wages.

 

Qualified plans have an adoption agreement and basic plan document which outline how the plan must operate. The employer formally accepts the plan by passing a resolution, completes the adoption agreement, and notifies the employees with a summary plan description (SPD). Note that defined-benefit plans are becoming increasingly rare.  If you have a third party administrator (TPA) handling your 401(k), they should provide the SPD and many of the administrative requirements of the plan.

 

Qualified / Defined Benefit Plan advantages:

·        Increase contribution amounts

·        Increased deduction limits

·        Increased flexibility in plan designs

Contributions to qualified and defined benefit plans must be paid in quarterly installments, due 15 days after the end of each quarter.

 

Solo 401(k) plans – Only available to self-employed individuals without any employees the Solo 401(k) plan can be a good option for sole proprietorships The IRS allows a contribution, pre-tax up to 25% of your compensation pus an employee’s contribution of up to $18,000 (or $24,000 if you’re 50 or older). Total contributions cannot exceed $53,000.

SIMPLE 401(k) –A group retirement plan available for businesses with 100 or fewer employees, the SIMPLE 401(k) is a versatile savings program. The nice feature of this plan is that employees can borrow against the money in the account and make penalty-free withdrawals due to financial hardship. Just remember that any ‘borrowed’ amounts must be repaid or penalties will be enforced. Maximum contribution amounts for 2017 are $12,500 and $15,500 for people age 50 and older.

The limit on elective deferrals, other than catch-up contributions is $18,000. The limits apply for participants in SARSEPs, 401(k) plans (excluding SIMPLE plans), section 403(B) and section 457(b) plans.

 

A Few More Details

The defined contribution limit, other than for catch-up contributions is $54,000 for 2017. The catch-up contribution maximum for 2017 is $6,000 and $3,000 for SIMPLE plans. Additionally, the catch-up contribution cannot exceed the lesser of the catch-up contribution limit, or the excess of the participant’s compensation over the elective deferrals that are not catch-up contributions.

There are tax credits for starting a new plan, too. The credit equals 50 percent of the cost to set up and administer the plan and educate employees about the plan up to a maximum of $500 per year for each of the first three years of the plan. To take the credit, use Form 8881, Credit for Small Employer Pension Plan Startup Costs. Retirement savings contributions credit is also available for those employers, including self-employed individuals, who make contributions to their plan. Maximum contribution eligible for the credit is $2,000. To take this credit, use Form 8880, Credit for Qualified Retirement Savings Contributions.

From sole proprietors to small business owners with less than 100 employees, there’s a retirement plan that can fit your needs and your budget.  The important message is to start a plan, continue to invest and build the retirement you envision.

 

To find a trusted accountant in your area, visit www.SmallBizAccountants.com. 

 

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.

 

New to Small Business?

If you started a new business in 2016, then April of 2017 is a first big milestone for your company. That’s the month when your first reported tax documentation is due to the IRS. Depending on your business type, you may be responsible for not only the business’ filings, but also other shareholders or partners involved in the enterprise.  If you have employees, then you’ll have another layer of documentation such as W-2 and 1099s.  What are all of these requirements and how do you know if your business is ready to prepare and distribute them correctly? Let’s review some of the basics starting with your company’s business entity.

Business Type Matters

If you haven’t already met with a small business advisor to discuss the business entity type, you should.  While you can’t change your entity type from the preceding year, you can impact next year’s taxes by making a change, if necessary.  There are many differences between sole proprietorship, partnerships, limited liability corporation (LLC), S corporation and C corporations. 

Sole proprietors can deduct “ordinary and necessary” business expenses like any other business entity, however, more in-depth tax deductions and advantages aren’t always available. It is essential that sole proprietors keep separate and distinct bookkeeping from personal and household expenses including separate checking accounts and credit cards.

Partnerships are formed by two or more individuals. For tax purposes, income and losses from the partnership are reported on Form 1065.  Income taxes are paid on the partnership directly, rather the partners are taxed on their share of the partnership income, regardless of whether they take money out or reinvest it back into the business. Additionally, partnerships have personal liability for any financial debts the business incurs.

A limited liability corporation (LLC) has varying rules from state to state. The IRS has the option to treat the LLC as either a corporation, partnership or in a single-member LLC, a sole proprietor.  The benefit of an LLC is that if offers the protection of a corporation from personal entanglement in debts accrued by the business (unless the loans or debts are personally guaranteed).

Corporations are the most complicated structurally and are not the best option for new business start-ups.  Over time, as the business gains revenue and growth, shifting to a corporate structure may make sense. Remember that both S and C corporations require shareholders, a board of directors, and very involved set of taxation rules.  The transition to corporate status is not something that should be done lightly or without outside advice and counsel.  S corporations offer small business owners the advantage of paying taxes at the shareholder level, rather than being subject to higher corporate rates.  C corporations can deduct a wider range of expenses but must also deal with the double taxation issues.

 

Business Licenses

Certain industries are required to obtain a business license on a federal level. Business types included in the requirement are agriculture, alcohol, aviation, firearms, ammunition and explosives, fish and wildlife, transportation, mining and drilling, nuclear energy, and broadcasting. Additionally, there are business licenses required for certain professionals. This is to protect the public and ensure that the professionals providing the products or services have the correct educational degrees and qualifications. 

 

Tax / Employer Identification Number (TIN/EIN)

Often the same none-digit tax identification number, these numbers can be the same or different. Sole proprietors often use their own Social Security Number as their TIN for tax purposes.  Other businesses, such as C-Corps, S-Corps, partnerships, and LLCs are required to obtain an EIN. Any business that pays wages, files pension or excise tax returns or simply wants to avoid using their personal SSN can sign up for an EIN by completing Form SS-4 or apply online via IRS.gov.

Estimated Tax Payments

Start-up business owners are exempt from making quarterly tax payments in the first year of the business’ operation; however, they are responsible for submitting them for subsequent years.  If you are filing quarterly payments for the first time, you’ll want to review last year’s income, tax credits, and deductions to calculate your expected tax burden.  If you anticipate owing more than $1,000 for the tax year, you must begin paying quarterly tax payments.  If you fail to submit at least 90% of the taxes owed, you may be subject to penalties.

Self-employment tax

Comprised of Social Security and Medicare, self-employment tax is paid by individuals whose income is not subject to employer withholding. Self-employed individuals are responsible for both the individual portion of the self-employment tax and the half traditionally paid by an employer (also you). To reduce this financial impact on the business owner, the IRS allows the deduction of the employer-equivalent portion of the self-employment tax.  For example, if you owe $10,000 in self-employment tax, you can deduct half, or $5,000, which reduces your overall taxable net income.  

W-2 and 1099s

If you have employees, even just one, then you are responsible for providing each employee Form W-2  which outlines what the employee received in wages and any contributions to health care, federal and state taxes and other payments. As an employer, you are also responsible for collecting the federal and state tax withholdings and making quarterly payments to the federal and state agencies on behalf of the employee. If you don’t have employees but do utilize the services of an independent contractor, then payments for services rendered can be provided on a Form 1099-MISC. The red Copy A of the 1099-MISC must be filed with the IRS. Bear in mind that you can only send an original copy of this form, not downloads from the IRS website. The black and white Copy B and C versions can be downloaded and completed for distribution to your independent contractors.  

If you would like to learn more about how to prepare your small business for its first tax filing or obtain guidance on future years, talk with a Small Business Advisor by clicking on the Find an Accountant link on this page.

 

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

 

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.

Cash Flow Q&A for Start-ups

One of the most difficult balances to maintain in any business, but particularly small business, is the constant tug of war that happens between cash in and cash out. The nuances of how to keep enough cash on hand to pay expenses and cover the ebb and flow of sales seems more art than science. For small business start-ups who have little in the way of experience, and even less in savings and cash on hand, managing cash-flow can be confusing and challenging. Early business growth brings advice from all sides often leaving entrepreneurs scratching their heads and ultimately guessing at how to keep it all flowing.  Here’s a few of our most frequently asked questions with answers from our best small business advisors.

Q: What’s the best way to see how cash is flowing through my business?

A: Try using a cash flow chart. This visual tool can help you see the big picture of how money enters and leaves your business.  Start by making a list of all the start-up costs and one-time expenses, monthly fixed and variable expenses, and projected sales. The end results from the charting will help determine if the business is viable and how long you will need start-up funding.

 

Q: Are there tools I can use to better track cash flow?

A: The good news is that yes, there are all kinds of online, easy-to-use, and even some free applications that can be a great way to help you keep tabs on cash flow. The Small Business Administration website has a Start with the Cash Flow Template from SCORE.

Pulse is an online app dedicated to tracking cash flow.  With this easy-to-use app, you’ll be able to monitor cash flow, invoices, project future cash needs and even attach files to transactions to keep everything all neat and tidy.

If you’re already using Quickbooks, take a look at the Cash Flow Forecast Report that is imbedded in the software’s reporting features. It can provide you with a great deal of data on accounts receivable, accounts payable, bank accounts, and projected balances.

 

Additional key areas of cash flow include other key areas of your business such as the break-even point, inventory management, and handling overdue invoices. Let’s review the basics.

Know your break-even.

The break-even is the point where expenses out meet cash into your business – in essence, the point where your cash flow levels off. To find your break-even, create a spreadsheet that lists all income from sales on a daily, weekly, monthly and yearly basis.  Now put in all the of the expenses that must be paid out. After that deduction, you’ll find your breakeven point – when expenses and sales converge.

Breakeven Point = fixed costs / (unit selling price – variable costs)

 

Inventory management

The key to most wholesale and retail businesses is in the inventory. Too much inventory and you risk staling (if it is a food or expiration based product), or locking up cash flow. Too little inventory and customers can become turned off if they cannot purchase immediately.  If your lines of credit dry up, selling the inventory off is one way to increase cashflow, but if no one wants to buy the inventory you’re stuck holding it with little or no cash alternatives.

 

Overdue invoices

Small business wait time on accounts receivables are increasing.  According to a Wall Street Journal Survey, “64 percent of small business had unpaid invoices of more than 60 days old while 20 percent say the problem worsening.” Slow or no collections are one of the most difficult areas of small business to rein in. Try incentivizing clients to pay early or on time with a net 10 discount and a percentage charge for late payments.  If after implementing the above recommendations you still aren’t seeing cash flow improvement, it may be time to consider a collection service.  Collection agencies can take as much as 30 percent of the total amount due, so you’ll want to weigh your efforts to get the client to pay versus the cost of using collections.  Offer extended credit terms or credit card payments as an option.  If the client or company doesn’t have the funds to pay, the only other option is to take back the merchandise and return it to your inventory. Again, this may be a difficult process.

 

How can you speed up invoice payments? Invoice promptly after work is complete. Provide a detailed invoice including your work order, contract or other documentation, contact information, purchase order, Tax ID and account number.  Send the invoices electronically for even faster delivery. Reconsider your acceptable payment options such as Amazon Payments, PayPal, or other merchant services that can include credit cards.

 

Rule of Thumb

Business experts advise businesses to always try to have a cash reserve of 3-6 months to cover the slow months.  While this is the golden rule, like many rules, it often isn’t realistic when it comes to small business start-ups and managing limited cash flow. If you find that business is taking a dramatic turn and cash flow is severely restricted, don’t attempt to wait out the storm, says Van Ballantyne, EA owner of Counting House Associates in Greenland, NH.  “Knowing where your business stands at all times is the best small business advice we give,” continues Ballantyne.  “If a business owner can see that cash flow is shifting, she can make a strategic move to correct the issue or seek temporary funding before the deficit becomes too damaging to the company.”

If you would like to learn more about how to prepare your small business for its first tax filing or obtain guidance on future years, talk with a Small Business Advisor by clicking on the Find an Accountant link on this page.

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.

Why Do Businesses Fail?

Recent surveys show that the survival rate of new businesses average about 20% over a five-year period. In other words, if you start 100 new businesses today, 20 of them will still be in business five years from today. The other 80 will have gone out of business sometime during that five-year period. These are generally well-known statistics. What isn’t as well known, however, is that of the 80% of new businesses that failed, over 60% were profitable when they went down!

How can that be? It sounds counter-intuitive that a profitable business would fail. However, it becomes easier to understand when you consider the impact of a small business accounting term called, “payment terms.” Payment terms are a measure of the number of days between the time a service is provided or a liability is incurred and the time payment is actually made. What are the average “effective” payment terms in a typical small business?

Cash in:

  • from Customers – “average” 45 to 60 days

Cash out:

  • Rent – in advance
  • Employees – 7 to 14 days (regulated by federal law)
  • Other Vendors and Suppliers – 15 to 30 days

In other words, there is a distinct timing gap between the terms on money coming into the business and money going out of the business. When you combine that with rapidly increasing sales, you find the most common reason that the rapidly growing, “profitable” businesses failed to survive — they just ran out of cash. They had to pay their landlord, employees, and suppliers BEFORE their customers paid them — and they didn’t have enough “Working Capital” in their company to bridge that gap!

However, they didn’t fail simply because they ran out of money. According to the research, that cash shortfall was just a symptom of the real problem. The real underlying problem was that they didn’t have the management information they needed to successfully manage a dynamic business. In other words, they failed to maintain bookkeeping and accounting systems to provide them with critical management information — such as how much they had in the bank, which customers owed them and when it was due, which suppliers they owed and when it was due, etc. — the type of information required on a day-to-day basis to successfully manage a business in a changing business environment!

An Example:

Think of it like this. Imagine what it would be like to go bowling if they put a curtain at the end of the alley in front of the pins and turned off the projector for the scoreboard. How successful would your bowling game be?

You would hear the pins clattering, and someone would tell you that you have another turn — at least until the game is over. And you might have a wonderful time exercising and socializing with your friends. But what do you think your final score would be? You wouldn’t know how many pins went down. You wouldn’t know whether your ball needed to go more to the right or to the left. And at any given point, unless you’ve been keeping track in your head, you probably wouldn’t know how much more time was left in the game. Nobody would want to go bowling in that situation. Yet this is, effectively, what happens when you run your business without good accounting information!

A small business accounting firm can help you get the information you need to run your business effectively!

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations. To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice.  Any information contained in this article does not fall under the guidelines of IRS Circular 230.

Copyright Information 2011 Professional Association of Small Business Accountants

Help! I’m Being Audited

After just a few short years in business for herself, it was her first run-in with the IRS and she was panicking.  Thankfully, she had used a certified public accountant (CPA) to help her set up the business and file her taxes each year.

Once she calmed down she placed a quick call to her accountant and faxed over a copy of the letter. She and her accountant supplied the additional documentation and answered a few clarification questions, the auditor’s concerns were answered and the matter was cleared. Susan was lucky and her situation was resolved quickly. Other business owners may be facing a more complicated process.

Who gets selected for an audit?
Generally, taxpayers are selected for an audit for a few reasons. Possible triggers could include a simple random draw of the taxpayer’s filing, several items on the return were questionable or exceeded acceptable thresholds, or the IRS has an interest in a particular business or industry and your business fit the profile. Whatever the reason, a taxpayer’s best defense is to seek immediate expert advice and quickly response to the audit notification.

Before Susan started her freelance graphic design business, she had a lucrative position as an advertising executive. After her second child she decided to leave her full-time position to start a home-based business. She had experienced a significant downward shift in her income from the previous year and had increased her deductions and itemizations to include equipment purchases, several business trips and client meals. All of these instances appearing separately wouldn’t raise a red flag, but together are more likely to trigger an audit.

The IRS is also increasing the number of random audits it performs in order to generate more revenue for the government’s operations. That being said, right now the IRS audits approximately 1.5 percent of all taxpayers each year. For taxpayers with income between $50,000 and $100,000 the odds are about one in one hundred to have a tax return examined. That number nearly doubles for business returns claiming over $100,000 in income. Rest assured that if you receive an audit notice that you are not alone.

There are four different types of audits typically requested by the IRS. These include the Correspondence Audit, Notice of an Office Audit, the Field Audit, and the Taxpayer Compliance Measurement Program audit (TCMP). Each audit type will require a different action on your part.

The correspondence audit is a letter from the IRS Service Center and will arrive by regular mail. The questions asked by the IRS can usually be answered by providing simple documentation in response. Most business audits do not occur in a correspondence audit and are reserved for small, simple tax returns.

The office audit notice will also arrive by mail. The letter will include details on specific items of your return that are in question. You can and should bring a tax representative with you to explain any documents you and answer questions posed by the IRS agent. A tax representative such as a certified public accountant, tax attorney or enrolled agent (EA) is the only legal representative you can bring into the process with you. The office audit is typically used for small, sole proprietors with annual sales under $500,000.

Taxpayers selected for a field audit will receive a personal phone call from the IRS agent who will want to select a date and time to visit the business. Representation at this meeting is highly recommended as the IRS often sees these site visits as an opportunity to review not only your tax year in question but also business operations. Your representative will be better able to advocate on your behalf and keep the auditor contained to your conference room rather than wandering about your business.

The last type of audit is the Taxpayer Compliance Measurement Program (TCMP) audit. The primary purpose for this type of audit is to help update the data used in the IRS scoring program. The audit will require a total review of the entire return including all forms of documentation. This is a highly time consuming and rigorous process,as the auditor will literally review the return line-by-line and all supporting documentation will be required. Your tax representative will be invaluable in the process.

Whatever the reason for the audit there are a few simple steps you can take to prepare your response.

1. Call your tax preparer or accountant and review the tax filing in question.

2. Call the IRS and request an extension of the time to respond to the audit. This
will allow you a little more time to gather your data and have a solid response
prepared. Generally extensions are granted for an additional 30 days for the first
request.

3. Collect all of your supporting documentation including:

a. W-2s

b. 1099’s

c. Meals, travel and entertainment receipts including mileage logs and calendar

d. Bank statements

e. Credit card summaries

f. Interest statements

g. Business expenses and any home improvement receipts

h. Bring only the documents and receipts that apply to the tax year in question.

An audit can be a terrifying process if you try to face it alone. With a skilled and trusted tax representative on your side, the whole event can go quicker and less painfully.

 

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants,  Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations. To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

 

Copyright Information 2011 Professional Association of Small Business Accountants

 

Should I Hire My Spouse In My Business?

Your spouse may spend a considerable amount of time helping out at the office. Sooner or later, you will probably ask yourself the question, Are there any tax advantages to making my spouse a formal employee? While the answer depends on your individual circumstances and the structure of your business, there are a few important areas to consider before putting your spouse on the payroll.

Probably the major drawback to making your spouse an employee involves payroll taxes and workers’ compensation insurance. As with any employee, your business must pay employment taxes and workers’ comp on any wages paid to your spouse. And it must withhold Federal Insurance Contributions Act (FICA) and pay Federal Unemployment Tax Act (FUTA) taxes on all wages paid – including Social Security and Medicare taxes. For example, if your spouse is an employee in 2011, your company and your spouse must each pay a 1.45 percent Medicare tax on all of your spouses wages with 4.2 percent Social Security tax deducted from the employee’s paycheck on the first $106,800 of wages and the company being responsible for 6.2 percent. The silver lining to this scenario is that typically the payment of these taxes will be a deductible business expense.

If the combined income of both spouses exceeds the Social Security maximums ($106,800 for 2010), then you may want to have the income on only one family member, so you can reach the maximum sooner. It also can make sense to have the spouse receive even a small salary, even a few thousand per year, to maximize Social Security benefits, since benefits are normally based on the higher of the two incomes or equal to one half of the spouses income. Another benefit of being on the payroll is that the couple has access to the child and dependent tax credit, which requires that both spouses work to qualify.

If you’re a sole proprietor or you and your spouse are partners in a limited liability company, you may not need to pay FUTA and SUTA, but must withhold for FICA and Medicare. Corporations are not allowed these tax breaks, so consider your options carefully and see if what you pay your spouse in salary will outweigh the potential tax repercussions.

Income shifting:

Assuming your company is a C corporation, any compensation paid to your spouse would normally be left in the corporation. In other words, if your corporation is in a higher tax bracket than you and your spouse, you may save tax overall by paying your spouse a salary. Otherwise, there is no benefit (and possibly a detriment).

On the other hand, if you operate your business as an S corporation or a sole proprietorship, you do not have to worry about corporate taxes. The income from your business is reported on your personal return, whether or not your spouse is paid a salary. Result: In this case, there is no income tax advantage to putting your spouse on the payroll, although this should be reviewed carefully, since some states ldo not recognize the S corporation. Also note that the IRS is very specific about a reasonable salary. If they believe that you are paying your spouse an excessive salary for the position or title they hold, they will scrutinize both the salary and your tax statements.

If you operate your business as a C corporation, paying a salary to your spouse allows you to take earnings out of the corporation without paying a double tax. For example, if you take money out of a C corporation as a dividend, you’ll pay a tax on the original earnings by the C corporation and then another tax on the shareholder’s return when you receive the dividend. Money you take out of a C corporation for salary is taxed only once to the employee.

Retirement planning:

If your spouse was not working or earning a salary in the business previously, adding him or her to your payroll will increase the Social Security benefit upon retirement. Additionally, if your business has a qualified retirement plan in place, it may provide retirement benefits to your spouse as an employee.

For example, if you have a 401(k) plan, your spouse can contribute a portion of his or her salary to the plan on a tax-deferred basis. Or the business may make contributions on behalf of your spouse to a pension or profit-sharing plan. A plan like this can be very useful when a business owner wants to put more into his or her retirement plan, but is hitting the maximums with an existing retirement plan.

Another reason to add your spouse to the payroll is the ability to deduct business travel expenses. Under current law, you may deduct your spouses travel expenses only if he or she is a formal employee of the business. By putting your spouse on the payroll, you may be able to claim extra travel deductions if your spouse accompanies you on a business trip or makes separate business travel arrangements.

There are other factors that can affect whether or not you pay your spouse a salary. Be sure to look at the big picture with an accounting or business tax professional in order to see all your options.

 

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants,  Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations. To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

 

Copyright Information 2011 Professional Association of Small Business Accountants