Business Finance Articles

Like elite athletes, successful entrepreneurs are always up for challenges. It doesn’t matter what economic situations they face, elite entrepreneurs are constantly finding ways to improve. Great managers achieve steady success regardless of occasional setbacks.

It’s a relentless commitment to excellence that enables them to meet and exceed their goals. That and realizing that numbers are critical management tools.

While attention to customer service and marketing are important in tough economic conditions, it’s financial actions that help entrepreneurs remain competitive.

Here are four actions to give you that edge.

Customer payments: Maintain a system that reveals aging of your accounts receivable. Ask your accountant to measure the average balance relative to sales. When you see this figure creeping up, your customers are waiting longer to pay.

Allowing customers to pay several days after a purchase is a privilege you offer, not a buyer’s right. You have the right to expect prompt payment, and the regular customers with whom you’ve established valued relationships will understand.

Of course you can afford to be lenient with customers who keep their word and are honest about temporary cash shortages. But you may want to change transaction terms – even requiring payment at the time of sale – for those customers who consistently let you down when it comes to payment.

Vendor priority: Just as you expect prompt payment from customers, your vendors expect the same. But not all vendors are equal. Remitting payroll taxes, for example, is critical and should be a top priority. Paying your rent should also be a priority, more so even than paying your banker, who is often willing to resolve issues and avoid collateral repossessions.

Keep an accounting of amounts owed to each vendor. If the numbers creep upward relative to sales, it is essential to prioritize vendors. Be proactive. Contact vendors and ask for extra time to remit payments. Always pay the highest-priority bills first and describe your circumstances honestly to every vendor.

Inventory balance: Holding too much inventory relative to sales is a recipe for disaster, and a successful business sells its inventory promptly. The basic procedure of measuring your inventory turnover must be conducted often. Your accountant can show you the equation, which uses numbers readily available from your bookkeeping system.

Don’t be afraid of discounting stale inventory. Too many businesses don’t hold enough cash during a downturn in sales and unloading old items from inventory helps you to weather a slump. In fact, the cash you raise through liquidating your stale inventory allows you to accumulate new inventory at low prices.

Experiment: Top-quality business owners always have an eye to the future. They improve upon what they do well and discard mistakes. They experiment and measure the results.

For example, you can enhance sales with free installations or by offering extended warranties. Create customer loyalty clubs or invest in training your sales team. Most important, you could schedule regular meetings with your accountants to review company bookkeeping and evaluate overall your financial condition.

Few business problems are more costly, and more unnerving, than losing information. Recovering just a few hours of data entry can take several days and hundreds of dollars. The solution is proper storage of digital information.

There can be intentional and unintentional reasons for losing data. Take, for example, deleting a file by accident. Or not saving it to start with. Fortunately, automatic save features are now built into most applications and self-service local backups represent an easy solution to recovering deleted files without requiring an IT wizard. Cloud-based backups are an inexpensive option to prevent against data loss from natural disasters. In addition, this offsite backup offers protection against data theft and infection of files by outside viruses. A basic offline backup is another solution, which retains at least one copy of data that intruders are unable to access or modify.

Hardware failures are inevitable. Downtime crashes are reduced or even eliminated by servers equipped with RAID (redundant array of inexpensive disks). Using a UPS (uninterruptible power supply) reduces data corruption from power failures and overloads. Large businesses have backup data centers and smaller companies can rely upon external hard drives. But, ultimately, there is only one sensible strategy for storing and protecting data and eliminating concerns over data loss. That is redundancy. Simply synchronizing data is not the same as creating redundant copies. The best solution is having multiple backups in different locations.

Small-business owners run short of cash for many reasons. Understanding how the loan process works is half the battle to getting money from a bank.

Bank Limitations

When applying for a business loan you must remember that banks require assurance of repayment. Most importantly, a banker seldom possesses sole authority to approve a loan. The banker must sell the idea to the bank’s loan committee and he or she has no desire to look like a fool presenting a poorly conceived loan.

In addition, banks are heavily regulated institutions. Government authorities closely review loans to assure compliance with bank lending policies.

To avoid complications, many loan officers deploy strict suitability standards. They refuse to evaluate any circumstances beyond the basic measurements. You cannot obtain loan consideration from them if you don’t fit their narrow criteria.

The Right Banker

Consequently, your strategy for getting a business loan is to first interview loan officers before they start assessing your qualifications. This doesn’t entail asking specific questions about lending philosophy. It actually means taking stock of general demeanor. A banker with plenty of self-confidence is most apt to evaluate your loan proposal with a broad view using a personal sense about business matters.

Confident bankers listen to narratives about how a small business operates. They develop an appreciation for the system an entrepreneur uses to prevail in the market. These loan officers rely upon their experience in knowing if a loan applicant is sound. You can explain to such people how you expect to generate earnings for loan repayment.

Organized Information

A good first impression is imperative. You must substantiate your business plan. Demonstrate how your past strategies succeeded. Provide financial reports and understand their meaning. You need a balance sheet as well as a profit and loss statement. Use them to support your oral history of the business and description about current conditions. Determine some key financial ratios that define trends. Present a projection of cash flow from following your plan that reveals funds for repaying the loan. Describe why the loan proceeds will make more money for your company.

Explain the reason you are short of cash.

A banker will know if the cause is poor management. However, healthy businesses can have sound explanations for needing loans. Equipment breaks down at the wrong time. A sales slump sometimes occurs. Expansion opportunities arise when insufficient capital exists.

Remedies are available, but they require more than cash infusions. Reversals of misfortunes demand guidance by organized managers. Show that you have the skills and discipline required to effectively operate the business.

Every banker deals with countless people seeking loans who don’t even know where to find a financial statement.

Other applicants have financial statements but not a clue about what they mean.

A customer in possession of well-understood financial statements and a plan for loan repayment is so rare that it commands a banker’s full attention.

Monitoring business equity is as important as knowing the amount of money in a company’s bank account. Adverse consequences arise if equity becomes negative.

Equity is all of the owner’s investment in the enterprise. Retained earnings are the component of equity comprising all profits that remain in the business. A new business has no retained earnings. Profit at the end of year one is retained earnings to start the second year. Subsequent accumulation of profits further adds to retained earnings.

Withdrawals of profit reduce equity. Business structure determines how an owner withdraws company profits for personal use. Proprietors withdraw money at will. Partners have the same privilege in proportion to their ownership percentages. S corporation shareholders receive distributions, and C corporation shareholders obtain dividends.

Contrary to popular perception, business owners can possibly withdraw more than accumulated profits. This creates negative retained earnings. When that happens, the business has more debt than assets. Selling or liquidating the operation will likely require owners to input capital for repaying liabilities.

The worst consequences of negative retained earnings occur with S corporations. Distributions to S corporation shareholders that create negative equity are taxed as capital gains – unless the shareholder is the source of loans to the business. In addition, a shareholder is not allowed a tax deduction for the loss of an S corporation when he or she has no equity or loan investment in the company.

Understanding one simple matter will allow faster completion of your tax return at a lower cost and with improved accuracy. This step is identifying asset costs separately from expenses. A common burden for accountants is adjusting expenses that belong in a fixed-asset category.

Accounting for Assets

Assets appear on the Balance Sheet of a business. The Income Statement, which lists only revenue and expenses, does not convey complete financial information. The Balance Sheet shows what happened to profit that remained after earning revenue and paying expenses. Changes on the Balance Sheet over time indicate if the profit was used to repay loan amounts or acquire new fixed assets such as equipment or office furniture.

You should identify expenses on your Income Statement that require classification as assets on the Balance Sheet. Get accounting help when you borrow money to acquire a fixed asset. Loan payments also are not expenses on the Income Statement. Classify them as reduction in loan balances on the Balance Sheet.

Asset Tax Details

An asset improperly classified as an expense overstates total expenses. This

The Internal Revenue Service guideline is that property with a useful life of more than one year is an asset.

lowers your taxable profit. The reduction is not justified, because the correct process is depreciation of the asset cost over several years. If the unallowable positive impact on your income tax is discovered, you incur assessment of back taxes plus penalty and interest. To avoid this, accurate classification of assets is critical.

When your accountant sees a change in fixed assets, further details are required about the purchases. Depreciation calculations are based upon when an asset is first placed in service. Put that date as a memo in the accounting entry that records payment of the asset cost.

Cost Threshold

Identification of assets purchases is not always easy. The Internal Revenue Service guideline is that property with a useful life of more than one year is an asset requiring depreciation. You cannot list such property as an expense in the year of purchase. However, small purchases normally don’t count. For example, a bookbinding machine is a fixed asset but a paper clip is not – even though the paper clip lasts more than one year.

Discuss with your accountant a policy for identifying items with minimal cost. The limit is generally based upon the size of your business. A purchase of property that lasts more than one year is still an expense when the cost is below the established amount.

Addition to Value

Improvements to property are assets rather than expenses. However, routine repairs are expenses. To distinguish the difference, consider the impact of the expenditure. A cost that makes something operate better for the present is an expense. For instance, fixing a hole in the wall is an expense. So is replacing a few shingles on the roof.

Conversely, adding a new wall or replacing the entire roof adds to the long-lasting value of the property. Therefore, these costs are assets. They add to the value of property, which is a key ingredient to identifying a fixed asset.

Outlays over an established threshold to add value or acquire property with a life of more than one year are properly classified as assets, not expenses.

The federal government requires you to pay income tax throughout the year. A penalty is usually avoided by paycheck withholding or paying four estimated tax payments.

No penalty is assessed when four equal tax installments fall within $1,000 or 90% of your tax liability.

You also avert penalty with four equal tax payments totaling 100% of your tax liability in the preceding year. When your adjusted gross income for the year is greater than $150,000 – or $75,000 if married filing separately – pay 110% instead of 100%.

Estimated tax payments based upon your last tax return prevent the penalty but can create other problems. If your income for 2012 is higher than 2011, you owe more tax in April 2013. If your income is lower in 2012, you pay more than necessary as an interest-free loan to the government.

To resolve this, ask your certified public accountant (CPA) to calculate your 2012 estimated tax payments based upon the “regular installment method.” This computation requires you to provide your CPA with expected income and deductions for the entire year.

If necessary, you can make an estimated tax payment for one period in which you incur unexpected additional income.

Ask your CPA to determine an estimated tax payment based upon the “annualized installment method.” However, if you earn income throughout the year from which tax is not withheld, simply paying four equal payments is much easier. Determination of your tax each quarter is not possible without full-year estimates of income and deductions.

You cannot win a band competition without instruments, and you cannot succeed in business without a bookkeeping system.

Hiring a bookkeeping service is normally the best choice for every business that isn’t large enough to have a bookkeeper on staff.
Attempting a shortcut by assigning bookkeeping to an untrained employee as a side duty is a recipe for disaster. A sound bookkeeper is identifiable as conducting the work using the right processes.

Reliable bookkeeping services create a system of verification and reconciliation. This ensures data integrity. Bookkeepers accomplish this by comparing your accounting to statements and reports from financial institutions. Good bookkeepers know the effects of debits and credits, because bookkeeping challenges arise frequently. You want a bookkeeper who’s capable of sound thinking and determining solutions. Excellent bookkeepers also understand the big picture in order to coordinate with your certified professional accountant at tax time. Superior bookkeeping demands attention to details by professionals who aren’t afraid to ask questions so that transactions are accurately recorded.

A high-quality bookkeeper doesn’t need an extensive academic record in accounting. More important than formal degrees are experience and familiarity with your industry.

The best bookkeepers are also proficient with technological tools.
Therefore, be sure to ask about the bookkeeping software used and confirm that it renders the reports you expect. Discuss when and how you’ll obtain needed reporting.

The allure of software for completely in-house bookkeeping and tax return preparation is a constant temptation to small-business owners.

Unfortunately, the odds are against a mere software purchase achieving financial paradise.

Bookkeeping software is only as reliable as the input. A substantial number of business owners don’t understand double-entry bookkeeping.

Likewise, tax preparation software helps prepare accurate tax returns only when the input correctly follows tax rules.

Tax software doesn’t know what expenses a business incurred. It cannot judge whether eligible expenses are entered in the correct categories. Tax specialists are valued because of their knowledge, especially regarding complex matters for businesses.

Working with accounting professionals is almost always the right strategy for business owners. But tax accountants and bookkeeping services may not automatically convey all details about the nature of your relationship with them. So, you have to inquire about these issues.

Following are four things to ask your accountant:

1. Ask your accountant what substantiation you need for certain tax deductions. Some items require distinctive supporting documents. For example, reimbursements for business use of a personal vehicle necessitate a mileage log with specific details. Also, large payments to contract labor demand that the business issue a Form 1099 to each worker. You also need to know how much of your documentation you need to provide for preparation of tax returns or financial statements.

2. Ask if your accountant will notify you of any questionable matters on a tax return. For example, an expense category for utilities without any office rent is a likely error. Utilities for a home office are a separate matter from ordinary business expenses. Make sure that your accountant identifies situations where the basis for a deduction seems unsound.

3. Find out what privileged disclosure is available with your accountant. A limited privilege is available with certified professional accountants and other tax practitioners authorized by the Internal Revenue Service (IRS). This is not the same as privileged disclosures with attorneys, which are a fully protected right of common law. Privileged disclosure is important because it affects the facts you are willing to present in order to obtain advice. Accountants can assert privilege only in civil matters brought before the IRS or federal courts. It does not apply to criminal proceedings, state taxes, preparation of tax returns or civil proceedings that involve tax shelters. Be sure to identify the professional credentials possessed by the individuals with whom you communicate about your taxes.

4. Ask your accountant about who is actually preparing your tax return. At firms with large staffs, your tax return is likely delegated to young associates or even a temporary employee. This is not necessarily bad, but you should find out. As long as your accountant is signing the tax return, you can rest assured that the signer is at least reviewing any preparation work by someone else. Make sure that your accountant is responsible for any mistakes in reporting figures you accurately present.

Accurate payroll accounting is important to businesses of all sizes.

Avoiding sloppy payroll accounting ensures accurate tax returns, reduced cost from accountant untangling and no omissions of valuable tax deductions.

Few businesses realize that the Internal Revenue Service makes an accuracy assessment by comparing payroll figure consistency on a variety of filed reports. No business escapes notice by the IRS.

The person with authority over business payroll matters is personally liable for accounting of wages and payroll deductions. This means that the boss who signs payroll tax returns is required to certify that payroll taxes are correctly calculated and remitted. Total gross wages are reported on payroll forms that are normally submitted quarterly.
Amounts on the payroll forms must match wages and payroll tax expense on the income tax return.

Businesses with workers must separately account for taxes withheld from wages and the payroll taxes paid as employer expenses.

The withheld amounts are not an expense for payroll taxes. These are merely part of the compensation paid to employees. You therefore have to account for withheld taxes as “wages” expense.

Your accounting system must record gross compensation paid to employees before any deductions. Most fringe benefits you provide employees are also recorded as gross wages expense. Tax laws permit excluding some benefits – notably health insurance paid according to certain rules. Accurate payroll accounting requires tracking types of withheld amounts and subsequent remittances.

Some deductions from wages reduce an employee’s compensation subject to income tax but do not reduce wages subject to Social Security and Medicare taxes. A prominent example is retirement plan contributions made by an employee. These are part of the business expense for “wages.” The only “retirement plan” expense of a business is contributions to retirement accounts by the company that are not withheld from wages.

Every year, accounting firms spend an extraordinary amount of time preparing income tax returns that show expenses for “wages” that match payroll tax reports. This process transpires because businesses fail to correctly account for tax withholding from employee pay in the “wages” expense category.

When amounts are withheld from wages, they are described as accrued by the business until they are later paid.

This same accrual for future remittance also occurs with the payroll tax expenses of the business.

Each employer pays contributions to Social Security and Medicare based upon wages. These are the tax amounts not withheld from worker compensation. They are payroll tax expenses of the business.
Unemployment tax is another employer expense not withheld from wages.
Even a business that uses cash-basis accounting is entitled to deduct un-remitted payroll taxes that accrued for prior pay dates. The payroll tax expense of the business is recorded when employees are paid.

Both withholdings from gross wages and the employer payroll taxes are simply payable in the future. But the wages and employer tax liability are accounted for as expenses on payday.

Tip income is an important area of concern for several types of businesses. Employers are responsible for including tips received by workers on their W-2 forms.

Workers must report to their employers the total tips received in a calendar month whenever the amount exceeds $20. Employers include reported tips in calculations for withholding of income tax as well as Social Security and Medicare taxes.

Box 1 on a W-2 for wages should include reported tips. In addition, Boxes 3 and 5 for Social Security wages and Medicare wages are applicable for reported tips.

Paychecks can possibly have insufficient wages to cover withholding requirements on tip income. Any required withholding that isn’t collected is reported in a special box on Form W-2. This figure should match the adjustment on an employer’s quarterly federal payroll reporting. Alternatively, workers may give their employers money from collected tips to cover calculated withholding amounts.

Food and beverage businesses have a special rule about tips. When reported tips are less than 8% of gross receipts, most food and beverage establishments must calculate the deficiency. This figure is then allocated among employees according to a formula based upon proportions of gross income or hours worked. Allocated tips are indicated in a special box on Form W-2. No withholding is required on allocated tips.

The IRS has escalated enforcement of tip-reporting rules. Businesses in industries where tipping of employees is common should ensure that compliance measures are executed for all income from tips.