Business Finance Articles

Although a business owner spends a lot of time determining how to earn money, the bottom line is equally affected by limiting how much money is spent.

Fortunately, saving money is easier than earning it. The best way to start is by examining money-saving strategies in three areas where wise spending improves business.

Make the Right Employee Assignments

For many businesses, the largest expense is payroll. You can’t make much of an impact on your bottom line by pinching pennies on office supplies and telephone expenses. The first step in confronting payroll costs is to simply get a person with the right skills for each job. For example, place individuals with “people skills” in capacities where they maintain contact with customers or suppliers. Workers who can’t write a properly structured email must have assignments away from the public.

You have a problem if your business has grown to the point of requiring more employees in customer-contact capacities but lacks enough staff with people skills. An unfortunate fact of business is that sometimes the individuals who got you here today are not the same folks who can carry you to the next level. Don’t be afraid to make changes. Chances are that employees are well aware of their unsuitability for new tasks you’ve assigned to them.

Paying for productivity you’re not receiving runs counter to the long-term interests of both employer and worker. It causes poor business results that lead to everyone becoming part of a failure. In fact, most employees who are in over their heads will depart for more satisfying positions. If you continue hiring the wrong person for a job, the cycle repeats itself.

Employee turnover is costly. Interviews, orientation and training consume precious time. Find the right person for every job with a well-crafted ad that describes the position in clear bullet points. Address every point with the individual you hire for or assign to the job. If there’s any mismatch between skills and duties, find a different person.

Involve Employees in Their Benefits

Next on the expense hit list is employee benefits. The purpose of benefits is to attract and retain better employees. To achieve this purpose, inform employees how much is spent for their benefits.

This is particularly relevant for health insurance. By informing employees about the cost, they can provide input about coverage that’s important to them. You can then tailor a policy to meet their objectives and reduce cost by eliminating benefits that aren’t important to them.

You also want to capture a tax credit currently available for providing health insurance. Remember to discuss with your accountant the details needed to calculate this tax credit.

Don’t Waste Marketing Dollars

There’s seemingly no end to the number of ways a business can waste money on marketing. Small businesses need to have value from their marketing expenditures.
Target your expenditures to those areas that get noticed by the most people.

Wasteful marketing costs limit your ability to budget for effective measures. Most marketing firms advise small businesses to steer away from spending on sponsorships, onetime mailings and holiday cards.

The Internal Revenue Service (IRS) audited 1.11% of all tax returns filed in the last government fiscal year. However, business returns with gross receipts of $25,000 or more were audited twice as frequently as the overall rate.

An IRS audit requires a time-consuming and frustrating process of collecting detailed business records. There’s no perfect method for avoiding an audit, but you can execute measures to limit the possibility.

One important way is to exercise care in choosing your tax-return preparer. The IRS has new tax-return preparer regulations. This permits easy identification of preparers who frequently compile returns that fail IRS audits. That increases the audit potential for every return of such preparers.

Carefully gather complete tax information. The IRS compares figures on your tax return to W-2s, 1099s and other reporting by payers of income to you. Make sure your tax return matches these information reports.

Don’t estimate any figures. Don’t use rounded-off amounts. Take the deductions you are entitled to report, but be prepared to justify them with accurate records. The IRS uses a discriminant function system score to select returns for audit. This compares amounts you claim for specific deductions to the statistical averages for your income level. Any large deduction relative to your income might require response to an IRS audit with proof of the amount.

Last, make sure your state income tax return is accurate. If you’re audited by a state and owe additional tax, an IRS audit is likely to follow. The IRS maintains information-sharing agreements with every state.

Online invoicing applications offer many features that make accounts receivable quick and hassle-free. Today’s invoicing tools are sophisticated, offering both transactional capability and intelligence, with dashboards and analytical tools that let you see where your money is coming from and where it’s going.

There are hundreds of products on the market, many targeted to the needs and budgets of small businesses and some specifically designed for certain industries or niche businesses. Most providers offer mobile device apps to complement their web-based products.

Many vendors offer free or very low-cost solutions to lure you into buying a subscription or introduce you to other products. When choosing an app, consider its capabilities, ease of use, ability to interface with other programs you use, training and support, along with cost. Following are a few of the top online invoicing apps:

Freshbooks: This is easy to use and integrates with other accounting and project management systems such as QuickBooks and Basecamp. In addition to standard features, it offers time-tracking and some other bells and whistles.

Invoices Made Easy: This is designed for small service trades, such as tax consultants, plumbers and landscapers. Standard features include an EasyMail service that sends invoices out by snail mail.

PaySimple: This targets merchants and focuses on recurring online payments, both invoices and payments, using creditcard payments, e-checks, and online payment forms.

Simply Invoices: This is just what it says: simple.

Every year, businesses receive property tax notices that are ignored at great cost. Tax is assessed on real estate and any property used for business purposes, including equipment. Despite time constraints, you can take simple steps to reduce your property tax assessment.

Obtain information about the market value of your property by checking on any recent sales. Contact equipment dealers to inquire about resale values for used equipment. Ask your banker about prices paid by anyone who has financed the purchase of similar equipment. Use the Internet to find listed prices for your assets. Maintain contact with a commercial real estate broker. This person can provide you with reasonable valuation per square foot for a building you own.

Compare your tax assessments with others. Check with your neighbors about their real estate assessed values. Talk with competitors about whether their equipment assessments approximate yours with some variation for age and condition. Contact your industry trade association about current used equipment prices. You may want to start a local association among similar businesses. All the members could benefit by maintaining reasonable property tax assessments.

You can file a property tax appeal. Sometimes this only requires a call to your local tax office or using a reply form that comes with your assessment notice. A successful appeal that reduces business property taxes requires collecting details about replacement costs and income produced by the assets. There are services that conduct appeals or appraise business assets for a fee. Sometimes they’re worth considering.

National statistics may indicate that we’re in an economic recovery, but that’s no reason to get complacent about business costs. There’s still plenty of uncertainty regarding sustainable consumer spending strength.

The customers you have today are an opportunity to set aside profit for potential slowdowns in the future. This requires a focus on spending. By reducing costs, you keep more of your revenue as profit.

Looking at the Big Picture

Keeping a sharp eye on business expenses isn’t just an emergency measure, it should be your natural process.

Start by examining your largest categories of expenditure. These items are likely employee costs and rent. Next, determine the impact of immediately cutting these expenses. For example, if you have one less employee, consider how remaining staff will handle extra duties. Maybe a simple realignment of job responsibilities permits a staff reduction.

Eliminating employees is the right path if you failed to control past expansion of staff. Most of the ways you cut business costs are not as dramatic. Instead, there are tangential expenses related to staff functions.

Adjusting Your Processes

According to some sources, the average office employee uses 12,000 sheets of paper annually. All those printouts of email and attachments add up. You can reduce this cost by having employees operate a little differently and giving them some tools.

Store reports electronically. If personnel need instant access to reports while on the go, consider a cloud computing service. Invest in software for every computer that permits employees to print documents in an electronic format for immediate storage and future retrieval.

You can also reduce costs for mailing paper. Bulk rates are available for large mailings. That can lead to considerable savings for newsletters or a sales letter. Use email whenever possible, and be sure to ask customers for email addresses.

Reaching out to both new and repeat customers probably requires only a postcard instead of a letter. The cards are a lot cheaper. In addition, use online banking services to avoid mailing payments.

Going a Little Deeper

Employee benefits are another cost concern. Shop around every year for different health insurance coverage. You might lower the cost by increasing deductibles and giving employees another benefit with health reimbursement arrangements (HRAs). HRAs permit employees to receive reimbursement for their out-of-pocket medical expenses up to a specified annual limit.

Don’t forget about other types of insurance. Online quote requests instantly provide multiple options for business insurance coverage and price.

Or use an independent agent to conduct the search for an optimal policy.
Consider negotiating frequently with your mobile and Internet service providers for better rates and packages. Get bids from competitors.

If your business requires recurring travel, investigate the cost of videoconferencing to satisfy matters that demand face time.

Learning how to build a workable budget is so frustrating that most business owners skip the process completely.

But hoping the numbers will work out is certain to cause greater frustration and possibly failure.

There’s an effort required to set goals in a budget. However, the process is much easier when following some basic guidelines and deploying the right mind-set.

A budget is the most effective way to control and sustain growth. Budgeting permits you to meet sales and profit targets by investing company resources along a corresponding timeline. After all, sales can be achieved only with preceding outlays for marketing, equipment, staff and material inputs.

Budgeting is the first step to controlling business profit instead of merely responding to urgent surprises.

To become a successful budgeter, start by carefully studying the costs you must incur to produce your projected sales. Add to your forecast the length of time between incurring the costs and generating the sales revenue.

This is the essence of a budget. A business has to possess sufficient resources up front in order to meet a sales goal. After you set a budget for profit, another budget is easily devised for cash flow.

Don’t neglect to create the cash flow target. It is based upon when payment is due for the costs you incur and when you will collect revenue generated.

Forecasting the future is difficult, but your accuracy improves with practice.

Implement budgets for specific projects or just the next couple of calendar quarters. Then compare actual results to the budget. Revise the forecast based upon what you learned.

Practice will soon make your budgets accurate and reliable. You’ll discover what deliverable dates are realistic based upon your resources.
Your next budget will then help you plan for completing projects on time while maintaining your other business functions.

Make sure to include others in your budget preparation. This means receiving input from your management team, if you have one. When you are the only manager, find an outside source of advice. Your accountant or banker can review budget details. Or if you create only a rough estimate, an accountant or banker can recommend someone to help you complete the budgeting process.

Don’t budget too precisely. Exact budgeting to a specific amount is not the objective. Instead, a budget is about providing you with direction. It’s a compass that helps you chart the right course of action. A budget is supposed to simplify business decisions, not drive you crazy with small details.

Frequently compare how you’re doing to your budget. Find out why any variance is occurring and what improvements you can make to have better results. You’ll find that trade-offs are necessary. After all, business resources are finite. When an unexpected expenditure arises, find something in the budget to cut. This discipline prevents you from overspending. There are always plenty of tempting purchases. Focus on the ones that maximize profit.

In the end, your business budget provides you with sustainable profit and comforting control over management of your business.

The credit card reform law that went into effect this year shields consumers from such card-issuer practices as large jumps in fees and interest rates. But the new law applies only to credit cards issued to individuals, not to small businesses.

Consequently, small-business owners are more likely than ever to be pursued by credit card issuers.

Be wary of the offers, because a small business is vulnerable to interest rate fluctuation, especially if you miss a payment. Higher penalty rates are imposed for small-business cards than are legally permitted for regular consumers.

If you carry a credit card balance for business purchases, opt for using a card issued to you personally. Interest rates are generally 2% lower than for a card issued to the business.

You’ll need a business card if you must delegate one to an employee. To protect yourself, make sure these cards are paid in full each billing cycle. More important, never make a late payment.

Having a business credit card makes sense only when you always pay on time and don’t carry a balance. This allows you to capture the rewards of a cash-back card without incurring any costly downside.

Paying for products and materials with a reward card can put significant sums of cash into the company of a savvy business owner. Just be careful to avoid the catch of high fees and interest rates.

Card issuers are trying to capture these from small businesses now that ordinary consumers are insulated from such practices.

Successfully converting your business accounting to computer software such as QuickBooks requires careful completion of some essential steps. You will identify errors and have reliable data by developing familiarity with basic financial statements such as the balance sheet and profit and loss report. An accountant can explain these and provide valuable assistance in the accounting setup.
The first step is to establish a chart of accounts with accurate beginning balances. Entering the correct beginning balances is tricky and extremely important. The benefit of automated reporting from the software is lost if you start with the wrong balances for your bank account, fixed assets, accumulated depreciation, loan balances, accrued payroll liabilities, credit cards or other accounts.
Most programs like QuickBooks provide a chart of accounts for typical companies in various industries. However, no business is typical. You should customize the accounts for your business. Simplify this process by limiting the number of accounts. Only add accounts in the future when existing categories are completely inappropriate.
When accounts are set up, you must select correct types. Most programs identify accounts very specifically. For example, asset-type accounts are classified as bank accounts, other current assets, fixed assets or other assets.
You have to recognize the distinction among account types. For example, a bank account type must be an actual account at a financial institution. Don’t call something a bank account in your software when it’s really something else.

Business owners create multiple problems when they combine business and personal finances. First, the unfortunate mingling needlessly complicates financial reporting, inhibiting accurate tracking of expenditures and assessment of business operations. Second, failure to separate business and personal records causes a mess at tax time, resulting in extra work to avoid lost deductions and misreported income.
For sole proprietors, this is merely inconvenient. However, the situation is more severe for partnerships and corporations. For partnerships, mixing personal finances with business is likely to cause an inequitable financial arrangement among the partners. In the case of corporations, the Internal Revenue Service (IRS) prohibits individuals from using the entities as personal cash machines.
Ask your accountant to demonstrate the problem of using a corporation to disguise income from classification as self-employment. Such action is destined for IRS detection and assessment of extra taxes.
Mixing business and personal finances usually starts when a business is new. The owner shifts personal money in and out of the company. This process then becomes a perpetual bad habit.
Always treat your business as a separate entity – whether it’s large or small. If you’re just starting a business, capitalize it with enough personal funds to reach your projected level of sustainability.
The first step in proper organization of finances is to have a separate bank account for your business. All of your business income and expenses are in one place. This improves your record-keeping system. You will not have to remember different ways that business expenses were paid.
In fact, this is absolutely critical for partnerships and corporations. The tax returns for these business entities include reporting of not only deductible expenses, but also the sources of money for those amounts. Movement of money in and out of a partnership or corporation is reported on the entity’s tax return. Don’t get stuck with a system that fails to account for every movement of funds.
Next, use a business credit card. At the very least, use one card issued in your personal name only for business purposes. One of the advantages is that interest paid on a credit card used only for business is tax-deductible.
In addition, you will experience less trouble reconciling the credit card statement to your business records when all the charges are for company expenditures. This reconciliation ensures that your records capture all business costs.
Most important, if you use accounting software, make sure that you have separate files for personal and business records. You don’t want personal bank accounts and credit cards mixed with the ledger of accounts for your business.
There’s one other detail to remember: If you create a corporation that is the successor to operating a proprietorship business, you have to create an entirely new accounting system. The corporation is a separate entity.
If you follow the system of separating business and personal finances – even as a sole proprietor – you are better prepared to recognize a corporation as a distinctive organization.
Any type of business should never receive treatment as your personal wallet.

Employers cannot evade responsibility for deducting employment taxes from wages by simply declaring workers as contract labor. Only independent contractors qualify for exemption from tax withholding by employers.
The federal tax code defines the necessary conditions for independent contractor status. States also provide guidance on defining an independent contractor arrangement. Independent contractors basically present themselves as available for services to a variety of businesses at any time. They are assigned specific tasks to accomplish and work without direct supervision.
A business may produce an annual Form 1099, indicating the amount paid for contract labor. The form is sent to an independent contractor and the federal government. An employee receives Form W-2 annually, indicating gross compensation and taxes withheld.
Federal law requires employers to deduct certain taxes from employee compensation. These deductions include the employee’s federal income tax liability, determined from Internal Revenue Service (IRS) tables on the wages paid. The other deducted federal payroll taxes are the employee portions of Social Security and Medicare contributions under the Federal Insurance Contributions Act (FICA). No withholding of taxes is required from amounts paid to independent contractors. Instead, the independent contractors are entirely responsible for remitting taxes associated with their income.
Employers face penalties for failing to remit all withheld taxes, along with a matching amount of the FICA taxes, when they are due. Most important is the fact that payment of employment taxes to the U.S. Treasury is the responsibility of an employer. Therefore, liability for payment of taxes always rests with employers – even when taxes are not withheld. An employer who incorrectly classifies an employee as contract labor is responsible for payroll taxes. The IRS will assess back taxes on payments that are deemed disguised wages.
The IRS is permitted to collect unpaid payroll tax liabilities of corporations from individuals responsible for collecting and remitting the taxes. The customary protection of individuals from personal responsibility to pay corporate obligations does not apply to payroll taxes.
The IRS may seek to collect payroll tax deficiencies from several individuals for the same tax assessment. However, the IRS cannot collect more taxes than are owed by a business. In this policy of joint and several liability, the IRS conducts a tax assertion on multiple parties. If overpayment results, the last person to pay the taxes owed that caused the overpayment is entitled to a refund.
The IRS may assess a penalty for recovery of unpaid payroll taxes on any person who has status, duty and authority over financial decisions of the business and who willfully failed to collect, truthfully account for and pay payroll taxes.
Essentially, the control person of a business is not permitted to knowingly pay other creditors with payroll tax money payable to the IRS. A responsible person has been defined by court cases and administrative rulings as someone who possesses authority to decide which creditors to pay and when to pay them. Consequently, the test for personal liability is an assessment of who controls payment decisions, regardless of the person’s business title.