Category Archives: accounting

7 Tips for Maintaining a Healthy Cash Flow in 2019

No matter how big a company is or how much revenue it generates, it can fail if it has a cash flow problem. Cash flow is the amount of money flowing in and out of your business during any given time period—and you need to keep an eye on it. It’s critical to have enough money entering your business in time for you to pay your bills and cover other expenses when they’re due.

Cash Flow Statement – A Tool for Monitoring Your Small Business’s Cash Flow

The cash flow statement is a financial report that enables you to see the sources of cash flowing into your business—and how you are using your money—over a specified period of time. Businesses that have enough working capital available at all times to cover their operating costs are said to be “cash flow positive.”

Cash flow statements provide critical insight into the financial health of your business that you cannot alone get from looking at balance sheets and profit and loss statements. For example, if you’re a sole proprietor or single-member LLC owner who takes owner’s draws rather than paychecks from your business, your owner’s draw amounts probably aren’t included in your P&L. However, they do show up as money flowing from your business on cash flow statements.

If you’re using accounting software like QuickBooks, FreshBooks, XERO or another tool, you can easily generate cash flow statements. If not, SCORE has a template you can use to create a 12-month cash flow statement.

Because most businesses receive income and pay bills monthly, it’s beneficial to review cash flow regularly throughout the year.

How to Improve Your Small Business’s Cash Flow

What if you find your monthly cash flow is negative or barely covering costs in time? Below are some ways to improve cash flow.

1. Ask for down payments on projects.

If your business invoices customers on a project basis, ask for a portion of the billable amount upfront. Doing so will help ensure you’re not waiting until project completion for all income. Also, consider billing for any completed work to-date when clients delay an assignment mid-project. The key is to try to have your customers pay you for your goods and services as close as possible to when you provided those goods and services.

2. Send invoices immediately.

Rather than sending all client invoices at the end of the month, consider sending them as soon as you’ve finished your work or provided a product to a customer.

3. Adjust your terms of payment.

Another way to convert sales into cash more quickly is to shorten your net due date on your customer invoices. If your contracts allow it, for example, consider changing from a net 30 to a net 15 due date.

4. Accept payment by credit card or PayPal.

Although these options come with a small transaction fee, they can help you get paid more quickly than waiting for a customer to process a check payment.

5. Offer a discount for paying early.

To incentivize customers to pay quickly, consider offering a small discount. For example, some companies provide a 2 percent discount if an invoice is paid in 10 days.

6. Follow up with customers who have overdue accounts.

Sometimes invoices slip through the cracks and well-meaning customers forget to pay them. A polite reminder may be enough to get that money flowing into your business.

7. Negotiate with vendors and suppliers.

Adjustments on the accounts payable end of things can make a difference in cash flow, too. Consider asking your vendors and suppliers if they’re willing to extend due dates to accommodate your receivables better. They may also be willing to offer your business more favorable pricing if you commit to a longer-term agreement.

“Cash is King,” So Treat Your Cash Flow With Respect

If you need help understanding the financial health of your business, seek the expertise of an accounting professional. Also, contact SCORE; our experienced mentors are here to offer insight and guidance to help your business succeed.

 

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3 Essential Financial Reports You Need to Thrive

Hard work and motivation will take you far as a new entrepreneur, but they’re not enough! To grow and sustain your small business, you need to know how to manage your money. Even if you enlist the expertise of an accounting professional, you as a business owner should have a fundamental understanding of how well your company is doing financially.

 

These three basic accounting reports can help:

1. Profit And Loss Statement (a.k.a. Income Statement)

This report shows your revenue and expenses during a given period. It answers the question, “Is my business profitable and how profitable is it?”

The math within a P&L statement is rather straightforward; your company’s revenue is added in one section, all of your expenses are added in another, and then a profit or loss is calculated by subtracting total expenses from total revenue.

Entrepreneurs often refer to their P&L report on a monthly, quarterly, and annual basis. Comparing recent Income Statements with those for a past period (such as the month, quarter, or the year prior) will allow you to see how your company’s profitability has changed over time.

According to Russ Smith, SCORE Maine mentor and financial workshop presenter, “The income statement is one the most important tools you have at your disposal for managing your business. If you spend time with your income statement, it will not only help you identify problems, but it will also provide insight into how profitability can be improved. It will help you evaluate the success of new products, services, and locations.”

Smith shared the following “case study” of how a P&L statement helped a SCORE client:

“We had worked with a client who owned a pub restaurant that was famous for its steak tips dinner. The client had recently hired a new cook and noticed that his food costs on the income statement had increased dramatically as a percent of sales. We observed the new cook, a large man with equally large hands, grabbing a handful of steak tips and putting them on the grill. When we weighed the handfuls, we discovered they averaged 14 ounces—which was 5 ounces more than the 9-ounce portion that was supposed to go into the tips dinner. A scale and some plastic bags quickly solved the problem and put costs back in line. Without his income statement, our client may have never known his costs were escalating.”

 

2. Cash Flow Statement

This report provides a list of your company’s incoming and outgoing transactions and identifies how your business is spending money and earning money over a period of time. It allows you to see when and from where cash is flowing into your business and when and to where cash is flowing out of your company.

Even if your business appears profitable on your P&L statement, you could run into financial issues if your revenue doesn’t arrive in time to cover expenses when they’re due. Your cash flow statement can help you detect problems with cash flow, so you can take measures to fix them before you become delinquent in paying your vendors.

The ability to forecast what will happen and how shortfalls will be covered is critical to the survival of a business.

“Maintaining sufficient cash reserves in the business to meet anticipated demands is a recurring issue for business owners,” shared Smith. “How do I balance my need to take home a paycheck against the needs of the business? The cash flow statement can be very helpful in helping you figure out how to answer that question.”

Smith offered another case study of what can happen when you don’t mind your cash flow:

“Failure to manage cash flow can have both dramatic and painful consequences. Several years ago, a client had borrowed $200,000 through a home equity loan to finance the start of their family business. The business accelerated quickly, but within six months they had exhausted their working capital and had gone back to the bank for an additional loan. The bank turned them down. After extending payment due dates to two customers that owed them $40,000 at the time, the clients were unable to pay their suppliers. Suffice it to say it all ended very badly.”

 

3. Balance Sheet

This snapshot report shows the financial health of your company at a given moment. It details your assets, liabilities, and equity—as of a specific date. Typically, accountants and business owners will run a Balance Sheet report at the end of a month, quarter, or year, but it can be useful at any given point in time. A balance sheet most often is laid out with company assets listed on the left and liabilities and equity on the right. It represents the basic accounting equation:

Assets = Liabilities + Owners’ Equity

The totals on both sides of the equation should match, hence the name “balance” sheet.

Balance sheets summarize what your company owns and what it owes—something investors will want to know if they’re considering providing funding to your business.

“It is important to remember that strong personal and business balance sheets are critical when approaching lenders about borrowing money to grow your business or to finance gaps in your cash flow,” Smith said. “During the last recession, we saw many otherwise survivable businesses with decent balance sheets fail because their owners made bad decisions in their personal lives. The businesses may have been ‘bankable,’ but the owners were not.”

Knowledge is Power!

With a working knowledge of these three reports, you will have a better handle on whether your company’s performance is on target to achieving your financial goals. The accounting software you choose to use for bookkeeping will allow you to run these reports or you can ask your bookkeeper or accountant to run them for you. Now that you know about the three key financial statements, take these steps to take charge of your businesses financial destiny:

 

 

 

Business Structure Basics: Which Legal Structure is Right for You?

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Choosing the right legal structure for your business is one of the most important decisions you’ll make. It affects how your company is taxed  as well as the level of liability protection.

Let’s take a look at the common legal structures you might consider for your small business:

Sole Proprietorship

When you are the sole owner of your business and don’t elect a specific formal business structure, you will by default be a sole proprietor. Many home businesses operate this way. As a sole proprietor, you as an individual are your business. From an income tax standpoint, your business profits and losses flow through to your personal income tax return. One potential downside of a sole proprietorship is the lack of liability protection it provides. If someone sues your business and your company doesn’t have funds to pay the legal fees or creditors, your personal assets are at risk. The upside to operating as a sole proprietor? Simplicity and cost effectiveness. Aside from needing to file a DBA (Doing Business As) if you’re using a fictitious name for your business and securing a business license (if required for your type of business), you avoid the formation paperwork, costs, and ongoing compliance that come with other legal structures.

General Partnership

When your business has multiple owners and the owners don’t elect a specific formal business structure, the business will by default be classified as a general partnership. As with a sole proprietorship, a general partnership’s profits and losses flow through to the owners’ personal income tax returns. And as with sole proprietorship, owners’ personal assets are not protected from legal action brought against the business.

Corporation (C Corp)

C Corporations operate as separate legal entities from their owners and offer limited liability protection to their shareholders, directors, officers, and employees. C Corps are subject to two levels of taxation: one at the corporate level and another at the shareholder level. The C Corp structure offers the advantage of raising funds through sale of stock (either privately or through the public markets) to an unlimited number of shareholders. Delaware C Corps are the preferred entity of venture capitalists and other sophisticated investors. The startup costs are higher with a corporation and you can expect more compliance formality and less tax flexibility than with LLCs and S Corporations.

S Corporation (S Corp)

S Corp is not a type of corporation but a type of tax status available for eligible C Corps. S Corps are identical to all other corporations except for their tax status. S Corp taxation is popular for many small business owners because it offers one level of tax at the shareholder level and some relief from the self-employment tax burden of owners of LLCs that have not elected to be taxed as S Corps, sole proprietorships and partnerships. Only an owner’s reasonable wages/salaries are subject to self-employment (FICA) tax while profits distributions to the shareholders are not. Shareholders’ distributions are assessed tax at the shareholders’ individual income tax rates. Like C Corps, S Corps may raise capital though sale of stock to shareholders, although limitations apply.

Single-Member Limited Liability Company

This structure, which is available to businesses with one owner, provides the limited liability advantages of a corporation and the flexibility of a sole proprietorship. It reduces owner liability without the formation complexities and compliance requirements that come with corporate structures. Typically, taxes are handled as for sole proprietorships (pass-through taxation to personal income tax returns) or you can opt for C Corporation or S Corporation tax treatment. With “LLC” at the end of a business name, customers might perceive a company as more credible than a sole proprietorship.

Multi-Member Limited Liability Company

When a limited liability company has multiple owners, it’s classified as a multi-member LLC. By default, a multi-member LLC is taxed as a partnership, but owners can instead elect for their business to receive S or C Corporation tax treatment.

Which Legal Structure Is Right For Your Small Business?

According to attorney and SCORE mentor Chris Dargie, entrepreneurs should begin the process of determining the best legal structure by considering three core questions:

  • What is the company’s purpose and business plan?
  • Who are the owners and what is their level of involvement in the business?
  • Will the company require outside capital, and if so, what type? (For example, to obtain venture capital, you would likely need to form, or convert to, a Delaware C Corporation before venture capitalists would consider investing in your business.)

Pitfalls To Avoid

While it is possible to change a business’s entity type at any time, doing so midstream can involve expensive tax consequences. Therefore, tax is a crucial consideration when selecting an entity.

The most common mistake Dargie sees with small businesses is the failure of sole proprietorships to convert to at least LLCs for liability protection. “There is rarely a reason for a single-owner business to operate as a sole proprietorship,” said Dargie. “Single-member LLCs are simple and cheap to form and maintain, and they offer liability protection for the owner at a cost that is much cheaper than commercial insurance. They’re really a no-brainer.”

Another common mistake Dargie sees is multi-member LLCs that lack basic operating agreements. “Most entrepreneurs understand that an entity offering limited liability protection to the owners is desirable, and the default entity type these days is the LLC,” explained Dargie. “However, LLCs with multiple owners present serious traps for the unwary. Anyone starting a business with others and intending to form an LLC should get some basic legal advice about the risks.”

Something else that Dargie has seen adversely affect business owners is when they’ve unknowingly created a general partnership. As an example, let’s say you’ve started a cleaning company and asked a friend to help you clean a few homes. Rather than putting your friend on payroll and compensating via an hourly wage, you instead agree to share a portion of the profits you make on the jobs he helps you with. By doing so, you’ve potentially made him a partner, and you’re potentially legally obligated to follow the legal and accounting requirements of a partnership.

Other common mistakes Dargie sees include commingling personal funds with business funds and the failure of companies to maintain adequate company records. “Owners should always treat their business entities as separate from themselves. Failure to do that can result in loss of liability protection and serious tax headaches,” shared Dargie.

Final Notes

With so much affected by the legal structure you choose, you need to do your homework and be as informed as possible. Be sure to consult with both legal and accounting professionals so you’re fully aware of how each structure will impact your taxes, liability risks, and ongoing compliance obligations. As you’re working through the process, remember that our SCORE mentors are here as a resource to direct you to trusted and reputable professionals in your area who can guide you in making this important decision.

 

Chris Dargie is a full-time attorney / director / shareholder at Perkins Thompson in Portland, Maine. He started volunteering with SCORE in January of 2014.

Please note that this article is for informational purposes only and should not be considered a substitute for professional legal or accounting advice.

Two Ways to Reduce Your Small Business’s Income Tax Liability

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Whew! The headache of filing our 2015 income tax returns is over. But for small business owners whose bank accounts were hit extra hard, the pain isn’t over.

 

If you experienced an unwelcome surprise and had to write out a big end-of-year check to the IRS, you may be wondering, “What can I do to lower my tax liability for year 2016?”

 

While there’s no magical way to make your tax burden shrink, you could potentially benefit from making one or both of the following changes:

 

  1. Reinvest more of your profits into your company by buying things that will help you grow your business and run it more efficiently.

 

The more business expenses you have, the lower the taxable portion of your business income will be. But make smart decisions so you’re spending your hard-earned revenue on products and services that will truly make a positive difference in your business. For example:

 

  • Bring on a sub-contractor to help with bookkeeping, social media marketing, or another task that may be taking your time away from the things you do best.
  • Replace old, unreliable equipment (printers, phone, etc.) with new, fully functional devices.
  • Update your business cards and other print marketing collateral.
  • Give your website a facelift.
  • Invest in office renovations or remodeling to make your space more inspiring and functional.
  • Schedule a consultation with a tax professional or accountant to discuss how you can better manage your tax liability and maximize profits.

 

  1. Change your business’s legal structure.

 

If you’re a sole proprietor, you’re paying the 15.3 percent self-employment (Social Security and Medicare) taxes on all of your taxable business income. That can add up to a big chunk of change. By changing your business structure from a sole prop to an S Corporation, you might potentially decrease your tax bill.

 

With an S Corp, you have the option to take a portion of your profits as your salary and the remaining amount as a distribution. An S Corp only pays self-employment taxes on the salary portion of its profits. So, if your company made $90,000 in profit and you paid yourself a salary of $50,000, the other $40,000 would not be subject to self-employment taxes. Realize that you do need to issue yourself a reasonable salary that reflects the market rate for the services you provide to your business. You could land in trouble with the IRS if you try to game the system by paying yourself a ridiculously low salary in an attempt to avoid paying self-employment taxes.

 

Don’t Go It Alone

Before making any significant changes to how you operate your business, consider talking with tax, accounting, and/or legal professionals for expertise and guidance. SCORE mentors can help connect you with reputable experts in those fields—and they can help you with the many other aspects of starting and running a small business. What are you waiting for? Contact SCORE today.

Is Your Business Ready To Accept Payments From EMV-Enabled Cards?

Starting October 1, 2015, all businesses, regardless of size, will be required to have systems in place to accept credit cards equipped with EMV (Europay, Mastercard, and Visa) smart chip technology. EMV cards offer increased safety and convenience for users. Cards with EMV smart chip technology contain a cryptogram, making it extremely difficult for others to copy or use cards fraudulently.

The new requirements put pressure on business owners to get up to speed with the technology. A recent Intuit survey found that over half of business owners with fewer than five employees have heard of EMV cards.

Why are businesses adopting this technology? 

EMV smart chip technology provides greater protection to consumers rightfully concerned about the security of their data. Credit and debit cards with the chips are far less likely to be compromised than cards with the traditional magnetic strip.

How do I make the switch to EMV smart chip cards?

If you accept debit and credit card payments, contact your point of sale system provider for more information. If you want to know more about the EMV chip technology from the standpoint of a payment card user, contact your bank or credit card company. You can also get additional details on the topic in this SCORE.org blog post.

WATCH: How to use an EMV smart chip card

What happens if my business isn’t ready to accept EMV cards?

You (rather than the cardholder or credit card company) might be held responsible for the cost of any unauthorized purchases made via your point of sale system.

According to the Payment Security Taskforce, more than 575 million U.S. cards will feature EMV chips by the end of 2015, so you can expect that many of your customers will be using them. If you don’t want to be on the hook for fraudulent transactions made at your point of sale, you’ll want to explore what you need to do to upgrade your equipment and software so you can process purchases as EMV chip transactions.