Does Your Business Have a Safety Net?

One of the most important parts of managing a business is making sure there is enough cash to keep the business going. As a business owner, you probably have a very good idea how much cash you have in the bank at any time. The smaller your business is, the more likely you are to keep a close eye on cash.

Checking your cash balance is a daily function you should be on top of. Yet there is another often-overlooked responsibility that many business owners don’t spend enough time on, and that is managing your future cash, especially in light of unplanned situations. Looking ahead helps reduce your business risk and allows you more time to correct any upcoming dip in your cash balance.

Having enough cash is akin to having a safety net for your business. It can sometimes even mean the difference between staying in business and going out of business. To plan how much you might need for your safety net, you can use a few different methodologies.

One way to plan your safety net is to prepare for the worst-case scenario. How long would your cash hold out if no revenue were to come in but all expenses kept going out? Some questions you might ask:

  • At what point will your cash run out? How many weeks or months of cash do you have?
  • Do you have a line of credit you can tap at a bank?
  • Do you have other loans or sources of cash that you can tap quickly in case of emergency?
  • What expenses could you shut down without hurting your business if you had to?

Another way to plan your safety net is to do what the average business does: acquire the amount of cash you need for two to three months’ worth of operations and keep it on hand. Alternately, you can make a plan to liquidate that much cash on a very fast basis and only put your plan in place if it’s needed.

An easy way to get these numbers is to look at your bank statements in conjunction with your average accounts receivable and accounts payable balances. If that’s all Greek to you, no worries. Feel free to contact us and we can help you figure out a safety net number that you’ll feel comfortable with and that will keep your business risk low.

Once you have a safety net in place, you’ll gain peace of mind for your business. It’s one step in an overall disaster preparedness plan that you can make for your business.

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Why Having a Budget Is Important

As an entrepreneur, you likely place a high value on freedom. When the word “budget” is mentioned, you might cringe and feel like it hampers your freedom. But it’s really the opposite. Here’s why.

According to a 2019 article in Small Business Trends, “Startup Statistics – The Numbers You Need to Know,” 82 percent of businesses that fail do so because of cash flow problems. Even if your business is no longer a startup, the failure rates for businesses started in 2014 were as follows:

  • 20 percent failed to make it to their second year,
  • 30 percent failed to make it to their third year,
  • 38 percent failed to make it to their fourth year, and
  • 44 percent failed to make it to their fifth year.

Many of the reasons for business failure can be prevented with good budgeting and planning. Here are some benefits of making a budget and managing to it.

  • A budget helps to control spending by seeing what’s available beyond your cash balance at the time.
  • Impulse spending can be curbed by avoiding spending on anything that is not budgeted for.
  • If a loan is needed to finance the business, you have a better idea of how much you need and how to best schedule the loan payments.
  • Your chances of business success increase with a budget.
  • You can see future revenue shortfalls so that you can take proactive steps to boost sales.
  • You can better manage growth.
  • You have a better idea of your profit level so you can make pricing changes, tax predictions, appropriate compensation, and other strategic changes.
  • You can plan for large expenditures such as asset purchases and time them better for cash flow, loan acquisition, and other considerations.

Getting started with a budget is easy. If you’ve been in business for more than one year, you can start with last year’s actual figures and then adjust for the growth and changes you want. The numbers can be input into your accounting system so that you can get reports that measure actual progress versus the budget numbers. You can then make good business decisions based on your variances.

When you take a little bit of time to create a budget, you really can enjoy the freedom of knowing you’re on track to make your numbers. If we’re not already working with you on your budget, feel free to reach out to find out more.

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Cool Tech Tools: Zoom

More and more small businesses are finding virtual meetings useful. Virtual meetings have many advantages:

  • No travel time is needed for participants, so you’ll save on gas and auto maintenance.
  • They create an ability to visually connect with remote employees, customers, vendors, partners, job candidates, and other stakeholders.
  • They are better than a phone call because of the visual element.

Before you climb into the car or book a flight, think about whether a virtual meeting could save you time and deliver the same result. It’s a very big change in habit to get used to, but when you do, you’ll find it saves you time and money.

To hold a virtual meeting, you’ll need a software app that works in your browser. There are many choices available, and one popular one is called Zoom. You can find them at https://zoom.us/.

It’s easier than you might think to hold a virtual meeting. The learning curve is more psychological than any skill or equipment needed. You’ll need a computer, and you can use your phone or your computer for audio. If you use your computer for audio, you’ll need a microphone and speakers.

For best results, you should also have a webcam built in to your computer, or you can purchase one separately and connect it. Everyone is camera-shy, or webcam-shy, but don’t let that stop you! You can always host a meeting without video.

Zoom has a free account that you can use to try out virtual meetings. Once you’ve set up your account, you can schedule a meeting or host a meeting on the fly. Setup choices include whether you’ll use computer or phone audio, whether you want the video to be on or off, and whether you want to record the session, which can be very handy. You can also mute and unmute participants, so that it can be used for classes as well as meetings.

Here are a few tips to make sure your virtual meetings go off without a hitch:

  1. Treat a virtual meeting with the same importance as a face-to-face one: be on time, have an agenda, and make sure everyone is heard.
  2. Audio quality is probably more important than visual quality. If you are new to the software, do a test run before you start inviting clients to meetings so you can get through any learning curve. Consider using a microphone headset for higher quality sound. Apple EarPods work great if you have an iPhone.
  3. For good video results, face a window or light source so that your face is not in shadow. The brighter the better; everyone looks better with more lighting because the light erases wrinkles! If possible, the webcam lens should be at eye level or above. You can use books under your computer to raise it if you need to.

Try virtual meetings in your business, and invite us to your next meeting.

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Is There Still a Marriage Tax Penalty?

The term “marriage penalty” in taxes refers to the situation that two people with the same income would pay more tax if they married and filed a joint return (MFJ) than if they stay single and file separately as single taxpayers.

In order to avoid a marriage penalty, the tax bracket income thresholds for married couples must be exactly double those for single taxpayers. With the tax bracket reorganization, taxpayers with a taxable income of $0 to $200,000 for filing single and $0 to $400,000 for MFJ pay the same percentage of tax at each level as you can see in the tables below.

Brackets* – Single

TCJA (2018-2025)

$0 – 9,525

10%

$9,525 – 38,700

12%

$38,700 – 82,500

22%

$82,500 – 157,500

24%

$157,500 – 200,000

32%

$200,000 – 500,000

35%

$500,000** and up

37%

 

Brackets* – Married Filing Separately

TCJA (2018-2025)

$0 – 9,525

10%

$9,525 – 38,700

12%

$38,700 – 82,500

22%

$82,500 – 157,500

24%

$157,500 – 200,000

32%

$200,000 – 300,000

35%

$300,000** and up

37%

 

Brackets* – Married Filing Jointly / SS

TCJA (2018-2025)

$0 – 19,050

10%

$19,050 – 77,400

12%

$77,400 – 165,000

22%

$165,000 – 315,000

24%

$315,000 – 400,000

32%

$400,000 – 600,000

35%

$600,000** and up

37%

Under the TCJA, if a couple is married filing jointly and has the following attributes there is a very low chance of any marriage penalty:

  • Neither partner can claim children as dependents.
  • Neither partner qualifies for the Earned Income Tax Credit.
  • Neither partner qualifies for food stamps or any other welfare program.
  • The combined income does not exceed $600,000.

Single filers receive an extra $200,000 each at the lower 35% rate while married couples filing jointly must pay tax at a 2% higher rate (37%) for the first combined $400,000 they make over $600,000 in taxable income. This is a maximum $8,000 marriage penalty, increasing income taxes for married couples by up to 2.59%.

The IRS published that the reason the marriage penalty was imposed at the top tax rate was to help raise more revenue and enable Congress to fund other tax reductions in the TCJA.

For married taxpayers, it makes sense every year to calculate tax liability both ways:  MFS and MFJ to see what’s optimum for the couple. 

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Five Key Reports for Your Business

Each month, your accounting system yields actionable information for you to run your business better. Here are some key reports that all business owners should review every month.

Balance Sheet

A quick review of the balance sheet can tell you the balances of your current assets and current liabilities. Current assets should always be larger than current liabilities; if it’s not, you may have liquidity issues.

You can also take a look at these accounts: cash, accounts receivable, and accounts payable. They should look reasonable to you based on your business history.

Accounts Receivable Aging

Your gaining report can alert you to who has not paid their invoice, so that you can take action to collect that money. Any balances over 30 days should trigger a collection process since the older the receivable gets, the less likely it is to collect.

Accounts Payable Aging

Hopefully, this report is clean and you are able to pay all of your bills on time. If you have an unusually large amount in this account, you’ll want to make sure you have the future cash to pay the bills.

Income Statement

The first number most entrepreneurs look at on the income statement is profit. It’s a good idea to review every account balance on this report to see if it is what you expected. Some questions to ask yourself include:

  1. Did I generate the amount of revenue that I expected? If not, should I ramp up marketing for the next few months?
  2. Do all of my expenses look reasonable? Are there any numbers that look too high?
  3. Are my payroll expenses in line with what I was expecting?
  4. Which accounts caused me to generate more or less profit?
  5. What I can I do next month to improve performance and increase profit?

Sales Reports

There are many excellent sales reports to dive deeper into your revenue so you can see what sold and what didn’t. Sales by Item and Sales by Customer are two good options for you to get more detail about your revenue balances. By analyzing your revenue, you can see what promotions worked and how you might take action to increase sales.

These five reports are very basic, but they are also very key to your business. To profit from these reports, it’s up to you to take action in your business to improve your success.

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Understanding Cost of Goods Sold

The account on your income statement called Cost of Goods Sold can be confusing to non-accountants. In this article, we’ll attempt to de-mystify it and explain how it works.

Cost of Goods Sold is an account in your Chart of Accounts that is a very special type of expense. It is the amount of direct costs of items that were sold by the company. It is related to inventory, and it helps to see the flow of transactions to understand the big picture.

When you purchase an inventory item for sale, it’s considered an asset (not an expense yet) in your company. When you sell an inventory item, the asset is reduced and the Cost of Goods Sold account is increased, moving the item from an asset to an expense. It’s no longer an asset once it’s sold, and the cost of the item sold reduces your profit and is expensed into the Cost of Goods Sold account.

Some accountants will abbreviate the Cost of Goods Sold account to COGS, and you might hear them call it that.

In the case of wholesale and retail businesses, the cost of goods sold is the amount that was paid for the inventory items to be sold. In the case of a manufacturer, the costs can include the cost of raw materials, labor to produce the item, and sometimes additional allocations of other related costs. Construction businesses may have a Cost of Construction account or Contract Costs instead of COGS. Service businesses will typically not have a balance in the Cost of Goods Sold account. If they do have direct costs, the costs are often coded to a Supplies account under expenses.

At any point in time, the cost of items you purchase are in two different accounts:

    1. The unsold items are reflected in the asset account, Inventory, on your Balance Sheet report.
    2. The sold items are reflected in the Cost of Goods Sold account, on your Income Statement report.

It’s important that the Cost of Goods Sold balance is accurate, because there are many good things you can learn from it when you compare it with inventory. You can learn how fast your inventory is selling, and you can determine your gross profit margin.

If your inventory purchases have not been coded correctly, you can take inventory and arrive at the correct cost of unsold items. If your physical inventory does not match your books, your accountant can make a correcting entry between Cost of Goods Sold and the Inventory account so that both of them are accurate.

If you have further questions about the Cost of Goods Sold account, feel free to reach out any time.

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Tax Scams – Protect Yourself

There are many tax scams out there with the purpose of stealing your identity, stealing your money, or filing fraudulent tax returns using your private information. Tax scammers work year-round, not just during tax season, and target virtually everyone. Stay alert to the ways criminals pose as the IRS to trick you out of your money or personal information.

IRS-Impersonation Telephone Scam

An aggressive and sophisticated telephone scam targeting taxpayers, including recent immigrants, has been making the rounds throughout the country. Callers claim to be employees of the IRS, but are not.

These con artists can sound convincing when they call. They use fake names and bogus IRS identification badge numbers. They may know a lot about their targets from information gathered from online resources, and they usually alter the caller ID (caller ID spoofing) to make it look like the IRS is calling. Also, if the phone is not answered, the scammers often leave an urgent callback request.

Victims are often told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation, or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting. Alternatively, victims may be told they have a refund due to try to trick them into sharing private financial information.

Phony IRS Emails — “Phishing”

Scammers copy official IRS letterhead to use in email they send to victims. Emails direct the consumer to a web link that requests personal and financial information, such as Social Security number, bank account, or credit card numbers. The practice of tricking victims into revealing private personal and financial information over the internet is known as “phishing” for information.

The IRS does not notify taxpayers of refunds or payments due via email. Additionally, taxpayers do not have to complete a special form or provide detailed financial information to obtain a refund. Refunds are based on information contained on the federal income tax return filed by the taxpayer.

The IRS never asks people for the PIN numbers, passwords, or similar secret access information for their credit card, bank, or other financial accounts.  If you receive an email from someone claiming to be from the IRS and asking for money, take the following steps:

  • Do not reply to the email message.
  • Do not give out your personal or financial information over email.
  • Do not open any attachments or click on any of the links. They may have a malicious code that   will infect your computer.
  • Forward the email to the IRS at phishing@irs.gov.
  • Delete the email.

Ways to Protect Yourself from Scams

  • Personal information should not be provided over the phone, through the mail, or on the internet unless the taxpayer initiated the contact or is sure he or she knows with whom he or she is dealing.
  • Social Security cards or any documents that include your Social Security number (SSN) or individual taxpayer identification number (ITIN) should not be carried around.
  • Do not give a business your SSN or ITIN just because they ask — provide it only if required.
  • Financial information should be protected. Do not give out any financial information over the phone or via email.
  • Credit reports should be checked yearly.
  • You should review your Social Security Administration earnings statements annually.
  • Protect personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for internet accounts.
  • Report any instances of tax scams to the IRS.
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Mid-Year Review

Can you believe that half of 2019 is gone already? That means it’s a great time to take stock of how your business has done for the first half of 2019 so that you can meet your financial goals for the entire year. 

On Track for Sales

Are you on track to make your 2019 revenue number?  The first step is to check your 2019 budget numbers for total revenue. (Don’t have a budget? – Check with us; we’d be delighted to discuss that service with you.)

Next, get your Income Statement for June 2019 Year-to-Date and check the revenue figure. Are you on track with your budget, or are you halfway there revenue-wise, accounting for seasonality? If so, pat yourself on the back!  If not, what promotions will you put in place to boost your growth for the rest of 2019?

On Track for Profit

Looking at the same Income Statement, check your net income figure. Are you on track with what you planned?  If so, great!  If not, the reason is simple: it will be either lower sales than expected or higher expenses than expected. 

If your expenses are too high, you’ll need to drill down into each of your expense accounts, including cost of goods sold, to see which ones are higher than expected. Were there some unanticipated costs?  Does your pricing need adjusting? Do you need more volume to cover your costs?  This is where we can help you with an analysis of where your opportunities are to increase profit. 

On Track for Cash

One more place to look is your cash balance. It can be uncomfortable when you are running short of cash for your business. If your balance is lower than you’d like it to be, it could be because of some of the factors mentioned above.  It could also be because you just purchased an asset like a truck.  If you need help with improving your cash flow, that’s another thing we can help you with. 

Mid-Year Review

This mid-year review can help you head off any small problems before they grow into big ones throughout the rest of the year. And it can keep you on track so you can meet your 2019 business goals.

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How to Avoid IRS “Red Flags”

Undergoing the scrutiny of an IRS audit is liable to put any taxpayer on edge. While it may seem like the IRS randomly hands out audit notices like candy to unlucky victims, there are some best practices you can put in place in order to avoid inadvertently putting up any red flags.

There are several myths you may have heard when it comes to triggering an audit, like you are more likely to be audited when you efile versus paper file. Or if you file an extension you are less likely to get audited and if you claim deductions, credits and expenses you are more likely to be audited. One of the most common worries is that IRS audits are everywhere and are always terrible and could destroy your life and finances.

IRS audit statistics show that audits are not as commonplace as they may seem. In March 2018, the IRS published its 2017 data book reporting that they received 149,919,416 individual tax returns for the 2017 tax year. Of those, only 933,785 were audited. That means that less than 1% of taxpayers who filed an individual return were audited – 0.6% to be exact. This is the lowest audit rate since 2003.

The IRS has ascribed this decrease in audits to its reduced budget and staff levels. With the limited number of audits, the IRS focuses on looking at certain inconsistencies. That is to say that the timing of when a taxpayer files, whether it be on extension or not, does not affect the likelihood of an audit so much as other hot topic items included on a return.

There are audit trends that manifest based on the feedback from tax professionals. One area that seems to be under more scrutiny is real estate professionals. There are two tests one must past in order to be deemed as a real estate professional. One must also materially participate in order to deduct any real estate losses against nonpassive income.

The IRS is also paying close attention to Schedule A medical expense deductions. Auditors will be looking for expenses that do not qualify as medically necessary such as cosmetic treatments or the installation of a swimming pool for someone whose doctor prescribed swimming as a form of exercise. It is predicted with the changes to Schedule A miscellaneous itemized deductions under the Tax Cuts and Jobs Act that this area could be another red flag to trigger an audit should the IRS suspect any incorrect deductions.

While an audit may seem overwhelming, make sure to communicate clearly with the IRS. Many times, an audit is to check if a taxpayer can substantiate their claims. Keep organized records and make sure to understand the numbers that are submitted to the IRS so you can explain your reasoning if needed.

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Do You Know Who Your Top Customers Are?

Every business has customers, and while all customers are important, most entrepreneurs will agree that some customers are more important than others. This may be due to the amount of revenue the customer brings in, their ability to refer new clients to you, the interesting challenges of the customer, or another factor. It makes sense to identify these clients so you can spend more time with them or at least acknowledge them in some way.

How do you find out which clients have generated the most revenue with you? If you store customer data in your accounting system, you can run a report to generate the data you need.  In QuickBooks, the report is called the Income by Customer Summary Report.  In Xero, it’s called Income by Contact. If you do not store customer data in your accounting system, you may be able to generate a report from your billing system, shopping cart, or point-of-sale system.

The reports look like this: each row holds the customer name and the Income column holds total revenue by the customer. If your system allows you to sort the revenue field, do this in descending order. If not, you can export the data to Excel and sort it in Excel. 

Once you’ve sorted the data, the answer is right in front of you.  Your top customers based on revenue will show in order. These are the customers you may want to consider spending more time with. Schedule periodic lunches with them, give them a call on a regular basis, and send them a gift or thank you note once in a while.  The report helps you organize your connection points with your top clients so you don’t miss an opportunity or forget to reach out to an important customer. 

Run this report on a regular basis so that you’re focused on nurturing the most important relationships in your business. You can also look at trends to see if you’re losing revenue over time or gaining revenue with new clients. You can reach out to clients that are spending less with you to try to save the relationship before it’s too late.  And you can get to know new clients that are growing with you so that you can grab even more business. 

Make this report a regular activity in your business to stay close to what your customers are doing with you.

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