Preparing for Taxes

By , January 19, 2013 1:59 pm
Image provided by Shutterstock http://www.shutterstock.com

Image provided by Shutterstock http://www.shutterstock.com

Preparing your expenses and sales receipts for filing your taxes can be a nightmare. Do you have your company related papers filed in a shoe box? Or, are you organized and enter your information in bookkeeping software like QuickBooks or Peachtree?

Whatever your preferred method of filing your information is, you have to assemble it for the tax preparer or accountant. What do you have to give him? Here is a list of the documentation:

1. Receipts for the purchase of equipment. These are your assets, and assets are depreciated over time. Various types of equipment have different rates of depreciation. Your accountant will know what those rates are, and he will be able to calculate your depreciation expense. Additionally, certain purchases of capital equipment will give you a tax credit. So it is worthwhile to have your accountant review this information.

2. Payroll information is important. Providing a summary of Social Security and Medicare taxes, health benefits, if any, Federal, state and city taxes for each employee and the Treasury payments made are necessary to ascertain your payroll expenses for the year. Any payments made to independent contractors should be reported on Form 1099.

3. Any draws that you have taken from the business and any estimated taxes you have paid will assist the accountant in preparing your tax liability.

Image provided by Shutterstock http://www.shutterstock.com

Image provided by Shutterstock http://www.shutterstock.com

4. You will need to give the accountant a list of accounts receivable that have remained outstanding at the end of 2012. He may ask you about the probability of collection of these accounts and may want to indicate whether these are probable or noncollectable leading to a bad debt expense. He may also want to know whether you have “earned” the revenue you have collected in the year. This refers to the Matching Principle in accounting – if you haven’t earned the revenues but have collected it, you will have an accrual on moneys collected but not earned.

5. In this vein, you will also need to give the accountant a list of those accounts payable that you have not paid at the end of the year. The numbers in 4 and 5 will have an impact on your Working Capital.

6. It will be necessary to also keep an eye on your inventory. How frequently do you replenish your inventory? Inventory Turnover is critical to learning whether you will need to reduce the selling price or if you will have a write-off of obsolete inventory.

7. If you have entered into any contracts with vendors or suppliers and independent contractors it would be wise to provide the accountant with a copy of those contracts so that he can see any anticipated revenues or costs associated with them.

Image provided by Shutterstock http://www.shutterstock.com

Image provided by Shutterstock http://www.shutterstock.com

8. Before providing you with the completed tax returns, the accountant will want to review them with you before finalization to make sure that he has included everything. Take this conference seriously. He should offer you advice on the conduct of your operation and indicate whether you need to do more to mitigate your tax liability or improve the way you are running your business.

By the way, if you are using a software package and your accountant uses the same program, you can provide him with a download of your files so that he can manipulate the information as he needs to. This will save him a lot of time in preparing your information.

 

Margo Moore teaches BE 261 Starting a Small Business, CEO 001 Setting a Course for Your Business, CEO 002 Knowing Your Market, and CEO 003 Formulating Your Financial Strategy.

Why Cash is King

By , December 15, 2012 2:19 pm

You have all heard the expression “Cash is King”. Did you ever think that it applies to the way you manage your business? Well read this!

As you manage your business from day-to-day you need liquidity, that is cash. Cash is required to pay your bills from suppliers to your utilities bills and even your employees. So, where is this steady flow of cash coming from? Your customers!

Your accounts receivable levels are important to watch. Bills are usually collected on a 45 day basis. Some customers may even pay sooner than that. Those customers are gold.

You should indicate clearly on your invoices what the terms of payment are. These are usually 10/20 net 30, meaning that if the bill is paid within 20 days, then the customer is entitled to take a 10% discount on the amount due. You benefit by collecting on that invoice sooner rather than later and having the money to run your business.

But consider the customer who pays in 60 days. This customer is costing you money! You are actually financing this customer to the tune of 36% a year. That is an incredible financing charge. Did you ever realize that you were becoming a bank by not collecting on these invoices? Therefore, it is critical to your cash flow to collect the amounts due you promptly. Hence, the time value of money. A dollar today is worth more than a dollar tomorrow.

A good tool to use that can be provided by your bookkeeper is the Aged Accounts Receivable Report. This report will indicate how long your invoices are outstanding and which ones to watch closely for delinquency. Your current ratio will be improved with monitoring.

Follow-up calls to customers are important to remind them that the invoice is due. These calls will also reveal to you whether the order is received in good order and if the customer is happy with the shipment. Sometimes a customer will not pay on an order that is unsatisfactory because he is a small business and he is just too busy to make that phone call to you; he just holds the goods instead of returning them to you.

If a customer is strapped for cash and cannot pay the total amount of the invoice, then you must ask him to pay something right away. Making an installment plan with him is beneficial to you and to him. You must collect something in order to make it easier for you to meet your cash demands, and he has just reduced the amount outstanding on that bill.

Now you understand why “Cash is King”.

 

Margo Moore teaches BE 261 Starting a Small Business, CEO 001 Setting a Course for Your Business, CEO 002 Knowing Your Market, and CEO 003 Formulating Your Financial Strategy.
She is the author of Love and War, the Human Side of Business.

Funding Your Business

By , August 11, 2012 11:21 am

What do Angels and Venture Capitalists have in common?

Have you often wondered what the difference is between an Angel inventor and a Venture Capitalist? There really isn’t much difference except for the size of the investment in your business.

Angels are private investors who are looking for a better investment and return than traditional investment schemes, like in the stock or bond markets. The age of the company and other specifics are on their checklist: early or formation stage and they look for a payback and a return on their investment where revenues are between $2 million and $10 million. They would usually expect preferred stock in return for their money which would pay semi-annual interest for the use of their money. After 5 to 7 years they would expect to be paid back and exit.

Venture Capitals are on a higher plane than Angels and can be private equity funds. They invest in early stage companies expecting a high return for the high risk involved where revenues are in excess of $10 million. Venture Capitalists look for companies with a defensible market position, strong management team, positive EBITD and discernible growth characteristics.

So what do these Angels and Venture Capitalists look for, you may ask? Think about the program Shark Tank seen on ABC-TV on Friday nights. You may have seen Angel investor Kevin O’Leary quizzing the presenting owners of small companies. He asks, “How am I going to increase my investment?” “What are your goals for the business?” “I don’t like your valuation!” “What are your margins?” “What are your sales and in what timeframe?”

What is making him salivate or not over the company’s products? These attractions are not unlike what the Venture Capitalist looks for. Take a look at the following:

1.   Unique or proprietary products or services. A patent owned by you is a plus.
2.   Existing sales are evidence of consumer demand where revenue growth is greater than 20% to 50% year to year; gross margins are over 40%; and with a lean management team.
3.   Increasing sales would be the result of their investment by marketing or hiring additional personnel, which they will  oversee.
4.   Realistic valuation based on your sales and profits
5.   Exit strategy must be included in your plans, like selling the company or merging with another company.

While some of you may say that seeking funding from these people is not worth it. Think of this. If you did not have their investment you would not be able to grow your business faster, gain market share and have the benefit of their expert opinion and management expertise. Their contacts and relationships would help you gain clients and suppliers for increased revenue and growth. So it is worth it, but make sure that you benefit from the relationship as much as the investor would. It is a two way street.

Margo Moore teaches BE 261 Starting a Small Business, CEO 001 Setting a Course for Your Business, CEO 002 Knowing Your Market, and CEO 003 Formulating Your Financial Strategy.

More on the JOBS Act

By , July 28, 2012 2:07 pm

We have been reading in this blog recently about the JOBS Act,  and how it will make fund raising easier for companies wishing to go public. But what about us smaller guys who have a business and would prefer not to go public and would only require $100,000 or less for a project or to get our small business off the ground? Basically, many small businesses have been raising money from friends and family by using the Internet.

The passage of this law in April has mandated additional controls on our ability to raise capital through social networking. The Senate is concerned with the possibility of fraud and the rise of unscrupulous individuals wishing to make a buck on unaccredited investors and companies who are naïve about this investing stuff and utilizing the unorthodox medium, the Internet. The Senate, which insisted on these additional controls, is looking for intermediaries to be registered with the Securities and Exchange Commission, that agency which watches for dirty dealing by intermediaries on unsuspecting investors. So controls have been sanctioned by the Senate to mitigate the possibility of fraud. One of those restraints is discussed below.

Those companies wishing to raise up to $100,000, must provide tax returns and financial statement s certified by a company’s directors. For those wishing to raise from $100,000 up to $500,000, they must provide financial statements that are reviewed by a CPA. Consider the cost of providing the financial statement review. It could cost the company from $20,000 to $30,000, a significant amount for a small business. So if a company wanted to raise $100,000, the actual net funding in this instance would be $70,000.

Why go for $100,000 or more? Why not raise $90,000 or less? A company would not be required to provide a financial review, just the financial statements signed by a principal of the business and your tax returns. The company would net $90,000 and not incur the costs of a CPA review.

So consider the cost when deciding to raise money. I am sure we will be hearing more about this process in the forthcoming months and any additional restraints on issuers and crowdfunding portals, like Kickstarter, IndieGoGo, RocketHub, Fondomat, etc.

Margo Moore teaches BE 261 Starting a Small Business, CEO 001 Setting a Course for Your Business, CEO 002 Knowing Your Market, and CEO 003 Formulating Your Financial Strategy.

Keep Your Eyes on the Books

By , April 28, 2012 2:35 pm

In teaching BE 261 and CEO 003 I often tell my students that they should at least understand the accounting and bookkeeping practices involved in their businesses. They should be able to speak the language of their accountant or bookkeeper and be able to ask for periodic reports to enable them to review their business’  financial position at any point in time. The several accounts to be mindful of are the following:

Cash. All of the transactions your business has pass through the cash account whether it is for the receipt of collections or the payment of bills. Some bookkeepers use two journals – cash receipts and cash disbursements – to track activity.

Accounts receivable. If you are a manufacturer or a service provider and you don’t collect payment immediately, you will generate “receivables”, and you must track them by having your bookkeeper generate an aged receivables report indicating which customers owe you money and how long the bill is outstanding. An effort to collect “old” bills is required to get your money. Busy businesses generate an accounts receivable report daily. But it is up to you how often you would want to see this report. But you should review this report weekly for any potential problem accounts.

Inventory. Products you have in stock to sell are your “investment” sitting on the shelf and must be carefully accounted for and tracked. Periodic audits of what you have on the shelves and what you have in your books must be compared and verified. It is important for you to determine what level of inventory is needed in order to satisfy your customers’ demand to avoid any write-downs of obsolete or damaged inventory.  An analysis of the levels of stock will help you do this.

Accounts payable. No one likes to pay bills and send money out of the business, but if you have good bookkeeping practices you will have a clear picture of everything if you use your accounts payable feature on your bookkeeping software. You will have timely payments, and you will not pay anyone twice. Paying bills early may qualify you for discounts with your vendors.

Purchases. The purchases account is where you track any raw materials or finished goods you buy for your business. These work- in- process accounts are part of your inventory account, and they can help you calculate your cost of goods sold, which is subtracted from your sales to find your company’s gross profit. Here you will be able to see if you are paying more for your raw materials and take measures to reduce the costs of them and improve your profit margin.

Payroll expenses. One of the largest expenses for all companies is the cost of paying employees. Keep this account up to date for meeting tax and other government reporting requirements.

It is important to note if you cannot hire a bookkeeper that you purchase a good bookkeeping software package, like QuickBooks, to help you organize and track your sales, collections and inventory.

 

Margo Moore teaches BE 261 Starting a Small Business, CEO 001 Setting a Course for Your Business, CEO 002 Knowing Your Market, and CEO 003 Formulating Your Financial Strategy.

A Lesson in Factoring

By , April 7, 2012 12:54 pm

Do you have a lot of money your clients owe you in the form of accounts receivable? Do these invoices take time, like 60 days or more, to get paid? Are you in need of cash to finance your next production line? You are not a good credit and are not able to get a bank loan. What can you do?

Factoring may be the answer. Factoring means that you sell your accounts receivable to a factor or third party source at a discount to provide funding. It is a short term solution to your working capital problem.  It may help you get on your way to traditional financing.

Here is how it works. You sell your invoices to a factor at a discount and these invoices act as collateral. You would typically receive 80% of the invoice value upfront. You will receive the balance remaining less a factor fee once your client pays the factor. The fee can be paid in any number of ways, but it usually nets out to be about three to five percent of the invoice value. Factoring is not a loan and does not show up on your balance sheet. It is the sale of an asset; therefore, you have no liability here.

To qualify for this factoring, your invoices have to be free and clear of any liens. This means that no other company has a claim on payments when they come in. Your customers must also be creditworthy. Why? – Because the factor will rely on their good credit and ability to pay the invoice quickly rather than on your credit history.

Learn how the factor deals with your clients during the collection process. Does he send out dunning notices with an indication that the factor is to be sent the payment? If the client does not pay your invoice, the factor may ask you to pay back the money he paid you on the invoice plus a fee. Something that is called recourse factoring.

If you decide that you want to seek out a factor, do your comparison shopping by looking at factor fees and the amount of the discount on your total invoices, a deposit or application fee, the advance rate and monthly minimums should also be considered. Factors will not work with start-ups; you need to have a large amount of accounts receivable for the factor to work with you. You can find factors in the telephone directory or in industry trade publications. Your banker may be able to refer you to a factor, but decide on a factor that knows your industry, can customize a service package for you, and has the financial resources you need.

Margo Moore teaches BE 261 Starting a Small Business, CEO 001 Setting a Course for Your Business, CEO 002 Knowing Your Market, and CEO 003 Formulating Your Financial Strategy.

Crowd-funding Gets More Controlled

By , March 31, 2012 9:00 am

You are an entrepreneur contemplating starting a business and you are wondering where you will get the funds to finance it with. On March 22, 2012 the U.S. Senate passed the JOBS Act, or Jump-Start our Business Start-ups. This, they presume, will make it easier for small businesses to raise money.

You have heard the word, Crowd-funding, previously written about in this column. Business owners can raise money from people they may not even know by posting their information and financial need on websites that facilitate this purpose. This is money that basically you wouldn’t need to pay back, and it would help you start your business, and would be considered a donation. This can be an issue of legality with the Securities and Exchange Commission because investors are not being given a security in exchange for their money. However, some businesses are giving back to the investors some form of payment in the way of product they created.

Sites such as ArtistShare, Kickstarter, Pledgemusic and Funding4Learning have a failsafe. They hold funds in an escrow account. If the nominated target isn’t reached, all funds are returned to contributors. While sites such as Fondomat, RocketHub, IndieGoGo and Sponsume allow projects to keep all the funds raised.

But now the U.S. Senate has tightened the process with its amendment saying that any company raising money using Crowd-funding must still file some basic information with the Securities and Exchange Commission, including the names of directors, officers and holders of more than 20 percent of the company’s shares, plus a description of the business and its financial condition.

For companies seeking to raise less than $100,000 they must also provide tax returns and a financial statement certified by a company principal; those raising up to $500,000 must provide financial statements that are reviewed by an independent public accountant.

Indicating that there is a great chance for fraud with crowd-funding, intermediaries offering to help companies raise money must register with the Securities and Exchange Commission, make sure investors are advised of the risks they are taking, and take measures to present fraud.

This bill will return to the House for a final vote, and then on to President Obama the week of March 26 for his ratification.

Margo Moore teaches BE 261 Starting a Small Business, CEO 001 Setting a Course for Your Business, CEO 002 Knowing Your Market, and CEO 003 Formulating Your Financial Strategy.

How to Get to the Next Level – Purchase Order Financing

By , March 3, 2012 5:44 pm

You have just received a large sales order for your designs, a great opportunity for you, and you cannot possibly fill it because your small business is low on cash or below water to purchase supplies in order to fill the order. So what are you going to do? Consider the hurdles:

• Purchase the goods you will need from your suppliers, with upfront money you don’t have
• Get the money you need from a bank, but without a long track record or history of impressive financial statements
• Accept not receiving payment from your customer until 30 or 60 days after they received shipment, creating a cash flow gap you can’t manage.

If you turn down the order, you may lose your customer to a competitor and you will lose out on your opportunity to grow the business. You will have to get creative.

There is a way to remedy this situation and that is through purchase order financing. Purchase order financing (or funding) looks to the credit worthiness (and good fashion sense) of your customer. Your creditworthiness or the fact that your business may be underwater is not an issue; your customer’s creditworthiness is. A purchase order financing company works with your supplier or manufacturer to get your garments produced on time. It also works with your customers to ensure payment of the invoice.

Here is how it works. A purchase order loan is a fee-based, short term loan and there is no interest charged. To see if the loan can be made, the purchase order lender investigates the credit history of your customer. If the customer has a good, solid track record of paying its bills and has the cash flow to pay for the goods it has ordered, a loan can be made. But there is some verification required on your part. You must know your costs for the product and the gross margin attributed to that product. If you have a gross margin of 25% or more, then it is possible to execute a purchase order transaction. This means that you will have enough room to make a meaningful profit.

If your customer has good credit, the purchase order lender delivers a letter of credit to the manufacturer that guarantees payment for the needed goods. The factory then makes the products, and a third party verifies that the order is complete. The factory gets paid and ships the goods off, usually to a third party warehouse. It is rare that you would take delivery of the goods; they are usually shipped directly to the customer.

When the bill is paid, the funds go to the purchase order lender, which subtracts its fee and sends the remaining profits to you. This fee may amount to 4%.

There may be a hitch to the receivables portion of the transaction. If you have given the customer payment terms of 60 or 90 days, another type of specialty lender, a factor lender, comes into play to provide immediate payment to the purchase order lender. The factor lender buys the outstanding invoice at a discount and then waits and collects the full amount owed later, pocketing a profit in the process. Meanwhile, the purchase order lender and you get paid immediately. Thus, with this good news comes the bad, there is another layer of costs involved with factoring but this may be required by the purchaser order lender.

Here is what you do. You provide a valid purchase order with a credit worthy customer and the expertise to manage the process. The purchase order lender provides payment to your supplier, allowing your goods to be produced and shipped. Payment is typically completed through issuing letters of credit and ultimately the payment of the invoice.

Benefits to using a purchase order lender. While you stand to get 94-97% of the profit (implies a 25% gross margin), you are getting money to help you grow your business. You can use a purchase order lender many times; there is no restriction. The transaction does not show up on your balance sheet (off balance sheet financing) as a liability, thus working capital is not impaired by this transaction and your total debt to equity ratio is not increased.

Who, other than the fashion industry, use purchase order lending? Importers, exporters, wholesalers, assemblers, distributors and manufacturers, who are experiencing rapid sales growth, capital constraints, sales volatility, seasonal sales spikes, high development costs, stretched credit, new product launches can take advantage of this type of financing. Industries that can benefit are electronics, housewares, sporting goods, toys/games, furniture, food products, hardware and industrial goods.

To find a purchase order company you can look at industry information and the yellow pages. Make sure you check references first.

Look for my forthcoming article on “Factoring” in the next few weeks.

Margo Moore teaches BE 261 Starting a Small Business, CEO 001 Setting a Course for Your Business, CEO 002 Knowing Your Market, and CEO 003 Formulating Your Financial Strategy.

It’s Spring and It’s Tax Time!

By , February 18, 2012 4:43 pm

As small business owners we have to be mindful of the fact that we have to prepare our taxes on the business as well our personal filings. As budding entrepreneurs we may not realize that there is a fair chance that we could create tax headaches for ourselves. Since we went into business we may have more forms to fill out that are growing more complex as time goes by because of new laws coming into play in the federal and state tax codes. And it can become difficult to keep abreast of the changes that affect us.

Just think about it. If we have employees we have to consider the new withholding taxes and the sheer volume of work that is involved. And it is not just the work; employees will need explanations as to why their pay stub is different. The employer must file tax Forms 941, Employer’s Quarterly Federal Tax Return, and 940, Employer’s Federal Unemployment Tax Return (FUTA), which address reporting of withholding for social security, Medicare and unemployment, as well as for federal and state income taxes. So it is difficult for the small business owner to keep up with all this information and the changes in the withholding tax laws and rates.

With regard to the business itself, Schedule C, Profit or Loss from Business (sole proprietorship), revealing the sales and expenses of the business, must be completed. Some issues may come up in preparing these; for example, any change in the value of inventories must be calculated and the treatment for the related profits and losses must be addressed. The treatment for such changes can be a tricky situation for the entrepreneur.

If you have an online business and sell to customers out of state, there is another issue which can become problematic. Some states which are short of cash may force companies to collect tax on sales made to their residents even when the company is based elsewhere. Court challenges on this topic leave the requirement in doubt, but if the trend catches on companies would find it harder to comply with the various sets of rules and tax rates.

What is the entrepreneur to do? In the first place it is recommended that a payroll preparation company that serves small businesses be hired to prepare your payroll and file the required withholding taxes and quarterly reports for your business. They are not expensive and the time and energy they can save you makes this task worry-free.

Hiring a small business accountant who has experience in your type of business is also worthwhile. Make sure you interview them for their abilities and your needs. While the fees they charge are an important consideration, you may want to retain them instead of getting billed for every question you may have. An accounting firm should have a retainer, like $150 a month, to cover payroll, tax returns and other filings. In this way you will be able to develop a relationship with the accountant and someone you can lean on. Nickel and dime billings for phone conversations would be nonexistent.

An experienced small business accountant who understands your business can help you grow your business. If he is asking the right questions he would address your goals and where you want to be in the next couple of years. He can help you shape your life.

 

Margo Moore teaches BE 261 Starting a Small Business, CEO 001 Setting a Course for Your Business, CEO 002 Knowing Your Market, and CEO 003 Formulating Your Financial Strategy.

Thoughts on Overseas Expansion

By , October 22, 2011 12:30 pm

The idea of expanding overseas is an attractive one and one that is especially easy with the advance of the Internet. Anyone with a computer and access to the Internet can see your website. With an Internet company all you need to have is the ability to fulfill orders and ship them to their overseas destination and the profits will come. But boosting bottom lines overseas is a dynamic challenge requiring thorough knowledge of international law and a cultural smorgasbord of tastes and aesthetic hurdles. Let’s examine some of the issues involved in this expansion.

The most important knowledge that you will need is a thorough understanding of the target culture. You will have to learn how each culture operates before you do business there. Every country has its own way of doing business and its own type of people. Understanding the cultural niceties and changeable legal statutes and having a shipper who has this kind of knowledge and understands global trade will greatly enhance your success.

Certainly there are other factors that may appear insignificant but will have substantial cultural ramifications on your success. Certain colors are inappropriate to use in certain Asian countries. Pink and purple are sometimes unwelcome, and red signifies different things in different places. So, if you are designing something internationally, you have to keep these things in mind.

Understanding the technological abilities and infrastructure of different countries are also helpful. What mobile devices, for example, does your target market use? While Blackberries are popular in the United States, Nokia is the device of choice in Brazil. When contemplating a new market you have to make sure that your mobile website is coded for these devices and built with a compatible interface.

While going international is a glamorous and exciting endeavor, there is one critical feature that we cannot overlook. In order to be successful overseas you have to have a successful business model with a product that sells very well here. You also need thorough market research to understand where your product will be in demand internationally.

We must also get back to the basics of international marketing and expansion by first establishing partners in target countries, many of which have organizations dedicated to multinational trade, who can open doors for you. Organizations like international chambers of commerce and industry-specific organizations can assist you in setting up businesses in those countries.

It is also beneficial to learn the language of the target country so that you will have a better understanding of the culture and the nuances of the language.

Margo Moore teaches BE 261 Starting a Small Business, CEO 001 Setting a Course for Your Business, CEO 002 Knowing Your Market, and CEO 003 Formulating Your Financial Strategy.

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