Business Finance Articles

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.

Many companies hold petty cash as a convenient means for making small purchases. The money is also used to reimburse employees for office items they buy. Unfortunately, petty cash is prone to accounting errors.
One of the problems is failure to accurately record expenses paid with petty cash. The money is an asset just like a bank account. Businesses should therefore subject petty cash to the same controls as funds in a bank. A policy is needed that establishes who approves petty cash disbursements as well as who reconciles the cash drawer.
Money removed from petty cash is replaced with receipts for a business expense attached to a supervisory approval for the purchase. The custodian of petty cash periodically totals the receipts and determines the amount of petty cash spent for each business expense category. The sum of the receipts and the remaining cash always equals the same original petty cash amount. After the petty cash fund is nearly depleted, the custodian turns in the receipts and obtains replacement cash. This returns the petty cash amount to its original balance.
Businesses must conduct reimbursements to employees under the rules of an accountable plan. Doing so means that reimbursements are not considered income for employees and are therefore exempt from payroll taxes. Businesses with accountable plans treat reimbursements as if they had paid the expenses directly. Accountable plans require reasonable accounting of expenses with a business purpose. Disbursements in advance require the employee to return with a receipt for the business purchase and the change.

There’s more to the financial operations of a business than tracking revenue and expenses. The balance sheet shows what happened to the profit or loss and reveals the overall condition of a business.

By examining the balance sheet you see the assets acquired with your profits as well as debt you incurred to buy those assets or to cover an operating loss. You already know to monitor your available cash. The balance sheet permits you to also supervise the levels of what’s owed to you and how much you owe.

The most useful function of the balance sheet is that it permits you to locate any accounting mistakes. As the name implies, this financial report must balance, so any incorrectly reported expenses or unreported revenue must create an equally erroneous amount in an offsetting account on the balance sheet.

Some incorrect amounts are obviously too large or too small in relation to known facts. For example, you generally know about how much you paid for your inventory on hand. So a glance at the amount indicated for inventory on the balance sheet confirms some general accuracy.

In addition, the balance sheet provides an opportunity for specific accuracy of your accounting. That is, most of the figures on the balance sheet are verifiable against independent sources.

For example, cash asset balances should reconcile to bank statements, the inventory asset balance should reconcile to a physical inventory count, loan balances should reconcile to reporting by lenders and credit card balances should reconcile to monthly statements.

An S corporation is taxed differently than an unincorporated proprietorship because the S corporation doesn’t incur self-employment tax. This is the tax on a proprietor’s profit that substitutes for payroll taxes covering Social Security and Medicare.

Shareholders of an S corporation pay only regular income tax on their respective shares of business profit – regardless of whether the corporation distributes any profit. This regular income tax assessment is identical to a proprietorship. However, there are no payroll taxes on S corporation profits. S corporation employees – including shareholders who operate the business – incur payroll taxes on their wage compensation.

Wage Requirements

These circumstances result in an incentive for S corporation shareholders to minimize their own wages. This increases the corporate profit that’s not subject to payroll taxes. The Internal Revenue Service (IRS) is increasingly interested in these situations. After all, someone must operate the corporation. This person is therefore an employee who should receive wages. The IRS expects payroll taxes on some amount of wages for the operating shareholder.

The general IRS rule is that an operating shareholder of a profitable S corporation must receive “reasonable” wages for services. S corporations that pay less than “reasonable” wages to shareholders have drawn IRS attention.

Determining What’s Reasonable

The IRS has authority to adjust S corporation tax reporting to reflect reasonable wages. Doing so causes an assessment of back payroll taxes – along with penalties and interest – on shareholder wages disguised as non-payroll distributions.

This doesn’t mean that S corporations are not a viable opportunity to reduce taxes on a business. However, it does indicate that those forming S corporations should obtain competent advice about compensation to operating shareholders. Distributions of profit to shareholders should not substitute for reasonable wages.

The tax code doesn’t contain a definition of “reasonable” wages, but the IRS suggests it is determined by such things as hours worked, duties performed, and the complexity and size of the business.

S corporations making distributions to shareholders that exceed their wages commonly draw IRS scrutiny.
In addition, wages to operating shareholders that are far below the market wage garner attention.

The trade-off for escaping self-employment tax on S corporation profit is incurring payroll taxes on wages that are fairly related to the value of services rendered.

In some circumstances, lower-than-market wages are justifiable. For example, a high level of debt service might impact wages. When debt includes loans from shareholders, it must involve documentation and include interest.

Another factor related to operating shareholder wages is the effect on retirement plans.

Because the profit of S corporations is not self-employment income, the IRS has ruled that such profit is not considered for determining contributions to qualified retirement plans.

The only basis for retirement plan funding is wage compensation.

Businesses can avoid trouble with mileage expenses by following a few simple rules.

For starters, businesses can deduct mileage expenses only when certain standards are followed. The same requirements apply to self-employed individuals deducting business mileage, and companies that reimburse employees for business miles.

Adequate records are required for business mileage deduction. They must document the date, place and business nature of the vehicle use. Employees who obtain reimbursement for business miles must provide this record to you. A single record is permitted for several business stops on an uninterrupted trip. Minimal personal use is considered an uninterrupted trip.

The Internal Revenue Service (IRS) establishes a standard mileage rate at least annually. The tax deduction for mileage cannot exceed this rate. Because the rate is announced in advance, you can obtain it from the IRS website or your accountant.

Your employees must return any reimbursements that exceed the standard mileage rate or that aren’t substantiated by records provided to you. In addition, employees must provide their business mileage records within a reasonable amount of time. The IRS considers 60 days after incurring the business miles as reasonable.

Mileage reimbursements are not taxable income to employees who provide the required records and receive no more than the standard IRS rate. When these conditions are not met, the excess reimbursement is added to employee compensation and reported on the annual Form W-2.