Simple Steps to a Simplified Financial Forecast

Operating a small business is like a hike in the woods where the trail is mostly familiar, but sometimes referring to a compass is key.

The entrepreneur’s compass is the financial forecast. These projections guide you in the course you want to take. And when the path twists you in a different direction, the forecast shows where you’re offtrack and how to get your bearings back.

Your forecasts allow you to set goals and milestones. More importantly, they permit you to measure progress toward your objectives. Many entrepreneurs avoid making financial forecasts because the process entails a lot of numbers, which seem cumbersome to calculate. However, forecasting can be a simple process. Use a spreadsheet to identify a few basic factors, with which you’re probably already familiar. These factors create your financial forecast.

1. Resources

The top line in your financial forecast is sales revenue. But determination of this figure requires an initial step of identifying your available resources. These elements are cash and time.

Cash: Assess available funds for inventory and other costs that must be paid before you collect from customers. The money on hand for these things represents a curb on how much you can sell.

Time: Your revenue is limited by the time you have to contribute to the business. Selling more than you can deliver individually means adding staff, and that brings you again to a cash need.

2. Direct Costs

Once you’ve determined your resources, start identifying direct costs. Begin with all direct costs, such as inventory or materials. Labor cost is also commonly a major direct factor in generating sales. For solo-operated service providers, the only direct cost is typically the entrepreneur’s time. The key dynamics are how much output the individual can accomplish every month and the amount of personal income desired for the effort. This owner compensation target is the major direct cost in many basic business models.

3. Sales Revenue

When your direct costs are identified, sales revenue is projected as a multiple of those expenditures. All you need is your ratio of direct costs to sales revenue. This may be calculated using historical data. Or you might simply identify a markup you aim to achieve. For example, you might have prices that are twice your direct costs – yielding a ratio of 0.5, or 50%.

Divide your forecasted costs by the ratio. The product is your sales revenue forecast. Subtracting direct costs from sales revenue results in an amount for gross profit.

4. Overhead Expenses

Every business has general overhead expenses. Even the solo entrepreneur working from home must at least cover the cost of internet and cell phone use. Larger organizations of course incur expenses for rent and office administration. Don’t forget costs for advertising and marketing, even if that’s only website development and maintenance. Subtract these expenses from your gross profit to obtain net profit.

Over time, update your financial forecast. Poor results will necessitate cutting overhead and capital expenditures. On the flip side, beating expectations gives you extra funds for expansion.

Make Bookkeeping Changes to Comply with New US Tax Law

Few things in life are more complicated than US congressional attempts at making things simple. This principle holds true for the latest tax simplification. To adhere to newly established standards, business owners must make some straightforward adjustments and some less-than-clear changes.

  • Businesses may no longer deduct expenditures primarily connected to entertainment or recreation (ballgames, theater tickets, fishing outings).
  • Manufacturing businesses no longer receive a domestic production activities deduction.
  • Enterprises with $25 million or more of gross receipts now have a limit on deduction of interest expense to 30% of taxable income.

The good news is that businesses will also benefit from new allowances in 2018. Specifically, bonus depreciation of 100% is allowed on purchases of both new and used assets placed in service from 2018 through 2022. Additionally, the Section 179 deduction for property purchases is now allowed for items costing up to $1 million. When applying these deductions, entrepreneurs would be wise to rely on the judgment of their tax professionals for accurate reporting.

Tax experts will certainly aid in handling the new 20% deduction of pass-through income from business entities. Company owners must navigate income threshold limitations, disregard shareholders’ salaries, and weigh business assets and wages paid-all to determine deduction limitations. Accurate accounting is now more crucial than ever for tax planning. To keep up with congressional efforts, business owners should stay in close communication with their accounting professional.

What You Need to Know about Capital Gains

No one likes to pay taxes, especially on an appreciated investment.

With careful planning, you could avoid or minimize capital-gains taxes. Here are three tips.

Hold investments for at least 366 days

How long you keep investments in your portfolio before selling them determines the taxes you pay on your gains. Short-term capital gains are taxed as ordinary income. Long-term capital gains are taxed at rates of 0%, 15%, or 20%, depending on your tax bracket.

Invest in a low-turnover fund

Mutual funds realize capital gains just as individual investors do. Any time your fund sells a security at a gain, that gain is taxable. Since the law requires mutual funds to pass most of their net gains on to investors, you realize a capital gain. This is either long-term or short-term, depending on how long the mutual fund held the securities. You can avoid these types of gains by investing in a low-turnover mutual fund.

Use capital losses to offset capital gains

Do you have a losing investment in your portfolio? You might want to sell it and use the loss to offset gains. For example, if you have $4,000 in capital gains, and you take a $4,000 capital loss, the two will negate each other, and your tax liability on the gains will be eliminated.

Plus, if your investment losses for the year exceed your gains, you can use the balance to offset your ordinary income, up to a $3,000 limit.

Business Expenses: Get Reimbursement Right

If a business owner is the main or only employee of the company, it’s important to implement a judicious policy of expense reimbursement that’s similar to that of major organizations. Solo enterprises are, in fact, the most likely operations to incur business expenses paid with personal funds. This often occurs when the owner uses a personal credit card for company purchases.

The business should treat reimbursed expenses as if it had paid for them directly. The reimbursement is recorded in an expense category of the company’s accounting system that describes the type of expenditure. Creating nebulous categories with such names as “Reimbursements” or “Credit Card Payments” obscures the actual business purpose. Instead, use an expense account that classifies the cost exactly as you would for nonreimbursed, directly paid expenditures.

A sound reimbursement policy ensures that you don’t miss claiming valuable tax deductions, improperly classify business expenses, or suffer cash drains of uncertain origin.

Limit the Episodes

It’s best to limit the occurrences of expense reimbursement. The easiest solution is to have a single credit card devoted entirely to business purchases. Bookkeeping accounts for each credit card charge as it occurs. Since all the charges are company costs, the credit card bill is simply paid by the company. The bill payment is allocated to the credit card liability account on the balance sheet to which the charges were applied.

A credit card provider that supports a business account will issue secondary cards if you have employees. This allows tracking of charges by each worker.

In an era where almost anything may be purchased with a credit card, cash advances are generally unnecessary. Company policy should prohibit cash advances – even to the owner. If you must spend cash for a small item, place the receipt in the business records and collect a reimbursement. This is the same procedure you would utilize with an employee. In these cases, bookkeeping should record the expense in the same category it would have if the expense had been directly paid by the business.

Avoid Complications

Personal expenditures inadvertently charged on a company credit card are not business expenses. An owner may easily make the mistake of charging something like a personal dry-cleaning bill on the company credit card. Account for these charges as owner distributions. With all credit card charges recorded on the books – even these owner distributions – the liability balance in the bookkeeping system will match the eventual credit card bill.

Setting a standard of recording every charge exactly as it will appear on the credit card bill ensures easy reconciliation of the books to the credit card statement. Avoid the temptation to make a bookkeeping entry for a group of charges. This technique is suitable only when reimbursing multiple expenses paid with cash or a credit card not dedicated exclusively to business. A single charge may be divided into multiple expense categories. For instance, meals while traveling for business must be distinguished in the company’s accounting from lodging and transportation. Additionally, personal entertainment during a business trip is not tax-deductible, despite the allowable deduction of travel costs.

What You Need to Know about Capital Gains

No one likes to pay taxes, especially on an appreciated investment.

With careful planning, you could avoid or minimize capital-gains taxes. Here are three tips.

Hold investments for at least 366 days

How long you keep investments in your portfolio before selling them determines the taxes you pay on your gains. Short-term capital gains are taxed as ordinary income. Long-term capital gains are taxed at rates of 0%, 15%, or 20%, depending on your tax bracket.

Invest in a low-turnover fund

Mutual funds realize capital gains just as individual investors do. Any time your fund sells a security at a gain, that gain is taxable. Since the law requires mutual funds to pass most of their net gains on to investors, you realize a capital gain. This is either long-term or short-term, depending on how long the mutual fund held the securities. You can avoid these types of gains by investing in a low-turnover mutual fund.

Use capital losses to offset capital gains

Do you have a losing investment in your portfolio? You might want to sell it and use the loss to offset gains. For example, if you have $4,000 in capital gains, and you take a $4,000 capital loss, the two will negate each other, and your tax liability on the gains will be eliminated.

Plus, if your investment losses for the year exceed your gains, you can use the balance to offset your ordinary income, up to a $3,000 limit.

Business Expenses: Get Reimbursement Right

If a business owner is the main or only employee of the company, it’s important to implement a judicious policy of expense reimbursement that’s similar to that of major organizations. Solo enterprises are, in fact, the most likely operations to incur business expenses paid with personal funds. This often occurs when the owner uses a personal credit card for company purchases.

The business should treat reimbursed expenses as if it had paid for them directly. The reimbursement is recorded in an expense category of the company’s accounting system that describes the type of expenditure. Creating nebulous categories with such names as “Reimbursements” or “Credit Card Payments” obscures the actual business purpose. Instead, use an expense account that classifies the cost exactly as you would for nonreimbursed, directly paid expenditures.

A sound reimbursement policy ensures that you don’t miss claiming valuable tax deductions, improperly classify business expenses, or suffer cash drains of uncertain origin.

Limit the Episodes

It’s best to limit the occurrences of expense reimbursement. The easiest solution is to have a single credit card devoted entirely to business purchases. Bookkeeping accounts for each credit card charge as it occurs. Since all the charges are company costs, the credit card bill is simply paid by the company. The bill payment is allocated to the credit card liability account on the balance sheet to which the charges were applied.

A credit card provider that supports a business account will issue secondary cards if you have employees. This allows tracking of charges by each worker.

In an era where almost anything may be purchased with a credit card, cash advances are generally unnecessary. Company policy should prohibit cash advances – even to the owner. If you must spend cash for a small item, place the receipt in the business records and collect a reimbursement. This is the same procedure you would utilize with an employee. In these cases, bookkeeping should record the expense in the same category it would have if the expense had been directly paid by the business.

Avoid Complications

Personal expenditures inadvertently charged on a company credit card are not business expenses. An owner may easily make the mistake of charging something like a personal dry-cleaning bill on the company credit card. Account for these charges as owner distributions. With all credit card charges recorded on the books – even these owner distributions – the liability balance in the bookkeeping system will match the eventual credit card bill.

Setting a standard of recording every charge exactly as it will appear on the credit card bill ensures easy reconciliation of the books to the credit card statement. Avoid the temptation to make a bookkeeping entry for a group of charges. This technique is suitable only when reimbursing multiple expenses paid with cash or a credit card not dedicated exclusively to business. A single charge may be divided into multiple expense categories. For instance, meals while traveling for business must be distinguished in the company’s accounting from lodging and transportation. Additionally, personal entertainment during a business trip is not tax-deductible, despite the allowable deduction of travel costs.

Automation Requires More – Not Less – Outside Support

Business owners know that to stay on top of conditions impacting their companies, they need to become one with their financial reports. However, this isn’t easy; wringing useful information from financial reports needs to be the result of tireless bookkeeping work.

In the start-up phase, pieced-together data in a spreadsheet may deliver adequate information. But a business owner expecting to thrive over the long haul needs better numbers. Fortunately, there is accounting software to automate the process. Unfortunately, automation is also the bane of small-business owners with limited bookkeeping knowledge.

Why? Because not everything in an automated system is automatic. Individuals lacking experience with double-entry bookkeeping commonly make data entry mistakes. Some events, such as purchases and sales of capital assets, depreciation expense, and borrowing arrangements, pose real problems.

If you enter data yourself, you may make mistakes – which can slow you down or throw you off track. If you expect a family member or college intern to handle the function, well, more of same.

Truth is, there’s no substitute for an expert. Whether you’re a do-it-yourselfer or you opt to hire someone for data entry, you still need professional assistance to check for errors and record complex transactions. Skilled accountants and experienced bookkeeping services deliver crucial value. In return for the cost, you have the security of reliable financial statements to aid in managing your business.

The takeaway: Automating your accounting doesn’t relieve you of the need for outside assistance tailored to your needs and budget. In fact, it may make it even more crucial.

How to Limit Those Nasty Financial Surprises

We all know people who are quick to respond. But thought leaders, entrepreneurs, and mega-successful business owners don’t wait to respond. They’re proactive. And it pays off for them – big time.

Some people are born with a “proactive personality.” But research shows that no matter where you are in your life cycle, you can develop a proactive mind-set. Even if you weren’t born with this trait, you too can improve your chances of success by choosing to look – and act – ahead.

The list below comes from an Inc.com article written by David Van Rooy, Walmart Canada’s vice president of talent and organizational capability. In it, Van Rooy outlines seven tips to help you become more proactive. They are:

  • Focus more on the future. Learn from the past, but look toward the future.
  • Take personal responsibility for your success. Don’t wait for others to lead you.
  • Think big picture. Consider your ultimate goals and determine how to achieve them.
  • Focus on what you can control; let go of the stressors you can’t.
  • Prioritize. Not everything is important. Choose what is and focus on it.
  • Think through scenarios. Anticipate what could happen in your industry and stay ahead of your competitors.
  • Make things happen.

Reactive people respond to events after the fact, and, as we all know, sometimes that just needs to happen. But those who look ahead, anticipate what may happen, and take steps to capitalize on opportunities create their own reality.

What kind of business owner do you want to be? It’s your choice.

Find the Narrative in Your Financial Statements

Reliable financial statements are essential for every business. Small companies included. To fulfill your vision for your company, you need to use, and understand, your financial statements, with the help of your team: your accountant and your bookkeeper.

The narrative: By design, financial statements summarize past events. They’re only relevant to future action when accompanied by explanations. Simply recording transactions and not studying the resulting financial reports accomplishes little. Similarly, don’t let complacency take over when you receive financial information from a professional bookkeeper. Instead, examine and learn from it.

Understanding all the elements in financial statements is often challenging. For instance, a business may have a profit but insufficient cash. The income statement doesn’t indicate cash paid for unsold inventory, loan payments, new equipment, owner distributions, or income tax payments. Therefore, along with the balance sheet and income statement, a cash flow statement is an important component of financial reports.

Cash in the bank is like insurance against uncontrollable events. For any business, shifts in the market can arise suddenly. Be prepared with enough cash to survive events like reduced customer orders or the need to replace equipment.

If you check the financial statements of a large organization, whose securities are listed on a public stock exchange, you’ll find an analysis and discussion by management. Your bookkeeper can give you access to similar types of information on your company; he or she can highlight major trends, identify recent issues, and point out any red flags in your financial statements.

The significance of financial statements comes in knowing what they convey. Wise business owners, with support from their bookkeepers, are always aware of year-to-date sales, profit margins, changes to primary expenses, debt ratios, payroll hours, and the collection of receivables. They recognize when inventory on the balance sheet isn’t worth the stated cost and when receivables should be written off, as well as the tax implications of selling particular capital assets.

Own the numbers: If an accountant issues a compilation of your financial statements, a cover page will accompany this report. Read the language describing the accountant’s responsibilities. The accountant assumes no responsibility for any of the numbers. Rather, the compilation report clearly states that the figures are the responsibility of the company’s management. Even with fully audited financial statements – which are uncommon for almost any small enterprise, because they’re costly and usually unnecessary – an accountant only provides reasonable assurance that the statements are free of material misstatements.

The takeaway is that company management is responsible for the financials. Hence, you must take ownership of the financial data and understand every line on the statements.

Your business tax return: Be aware that the internally prepared financial statements of a small business are commonly adjusted for tax reporting purposes. Tax returns treat assets differently, don’t allow deduction of some expenses, and distinguish certain incoming cash from ordinary sales income. Ask your accountant to explain how your tax return reconciles to your financial statements. Your financial team members are available to explain the complexities. So use them!

The Easy Way to Monitor Your Financial Health

Money problems can be avoided by monitoring a few key financial areas. The good news: you don’t have to be a wizard at financial statement analysis; you just have to be vigilant.

Cash on hand: Monitoring cash balances is a simple process. It just requires a regular glance at your company’s balance sheet. Bank accounts appear at the top of this report, and you should frequently compare account balances over time.

Determining whether you have enough cash on hand involves some quick math. Cash, plus the receivables you expect will become cash within a month, should exceed the near-term debts you owe – called “current liabilities” on the balance sheet. Current liabilities include credit card balances, payroll taxes, sales tax, and other upcoming amounts you expect to pay.

Spending: A significant number of business errors are the result of not knowing where the money is going. Money should be spent for things that simplify your business and make you more productive. The income statement (also called the profit and loss statement) will help you evaluate your spending habits.

Here you’ll find the percentages of each expense category relative to revenue. By comparing this report over multiple periods, you’ll discover how your expenditures may have changed as percentages of revenue.

When business is going well, you’ll want to keep spending the same percentages of revenue for the expense categories that are variable. With fixed expenses, such as rent and telephone, what will hopefully be an increase in sales will cause the percentages of revenue for these categories to favorably decline.