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Two Key Numbers You Need to Know to Manage Your Small Business

January 13th, 2010 · Uncategorized

When it comes to quickly evaluating how my business is doing, there are two numbers I pay attention to above all else.  These two numbers tell me very quickly how exactly my business is doing and whether or not there are any major looming problems.  Both numbers are really easy to calculate, too.

The first number is the average bank balance for the past thirty days.  Thanks to online banking, I can easily look at how much cash I have on hand every day.  I track this information and look at the average of the past thirty days to give me a good picture of the true balance of the account without worrying too much about the fluctuations throughout the month with regular bills and regular income.

Cash on hand is the key factor in the success of a small business.  If you are consistently strapped for cash and you’re living off of credit instead of using credit as a tool for business success, your business is at risk.

How much is enough cash on hand, though?  There are countless different formulas and schools of thought on this question, but for me, the answer is pretty simple.  I just compare the average bank balance of the past thirty days to periods in the past – six months ago and a year ago.  If I see a notable difference that isn’t explained by a comparable increase (or decrease) in revenue, I know that something’s afoot.  In other words, I use my own past as a guide.

This tactic is by no means perfect, of course, as it doesn’t take into account any other changes in your business, but it serves greatly for a quick look to see if there are any obvious problems.  Which is exactly what we want from that number.

The second number I look at is the average number of days to customer payment.  This usually fluctuates with the economy – if the economy is bad, this number is usually a bit higher.  However, any increase in this number is noteworthy and worth evaluating more deeply.

As with the average bank balance, I usually compare the average number of days to customer payment from the last thirty days to the same number from a year earlier.  Ideally, the number holds steady or – if I’ve improved my billing standards – has decreased a bit.  A small increase in a down economy is acceptable.  An increase in a good economy, though, or a big increase at any time means that I need to step back and take a serious look at my billing practices.

These two numbers provide tremendous insight into how my business is doing at any given time.  If these numbers are stable or are improving, my business is usually in solid shape.  Of course, these numbers are not a substitute for deeper analysis – they’re just a simple way to keep tabs on the cash flow of your business.

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Homebuyer Credit

December 27th, 2009 · Uncategorized

Homebuyer Credit. The first-time homebuyer’s tax credit of up to $8,000 has been extended, so eligible taxpayers can now claim the credit as long as they purchase a home or are in contract by April 30 (they have until June 30 to close). For those looking to move up or downsize, existing homeowners may qualify for a new tax credit of up to $6,500 — but they must purchase a new home, or sign a sales contract, between Nov. 7 and April 30.

The credit can be claimed for the year before the purchase. So if you buy a home in 2010, you can still claim the credit on your 2009 return. But if you do not close on the purchase by tax day, you may need to get an extension or file an amended return later.

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Buy That Car before year end!

December 27th, 2009 · Tax Retuns

Buy That Car. If you are planning on buying a new car, truck or motorcycle, you may qualify for a federal tax break if you purchase it before Dec. 31. The break allows eligible taxpayers to deduct state and local sales and excise taxes paid on up to $49,500 of the purchase price. But the amount of the tax break, which can be used whether you itemize deductions on your tax return or not, begins to phase out for individual taxpayers whose modified adjusted gross income is $125,000 to $135,000 and $250,000 to $260,000 for joint filers.

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Spending the next several weeks worrying about your shortfalls in 2009 isn’t going to put more in the bank for 2010.

December 24th, 2009 · Good Stuff

Partner Up. Everyone had the same rough 2009 as you had. This means that everyone is open for partnerships that might not have made sense the year before. Can you forge some new relationships now, while times are still tough, that will benefit you going forward? Maybe there are others out there struggling to grow their businesses, too. Find them and grow together.

Buy Up. People need cash right now, so they’re willing to take less for what they’re selling. This means there are some great opportunities out there if you have money you can put up-front. Need a bigger retail space? This is the time where landlords may be willing to lease you more space at a cheaper rate in return for payments in advance. Want to get some favorable pricing from some of your suppliers who may need the cash? Maybe pay for a chunk of inventory up-front at a discount. Make some arrangements. Can you offer exclusivity somewhere? If so, see if that can get you something back.

Catch Up. If times are slow, sink some of your extra time into relationship-building. It will pay off when people get the money to spend. You could send notecards to past customers just saying that you’re thinking of them. Don’t make any offers—just connect. Ask them how they’re doing. Invite them to connect with you on Facebook or Twitter. The point is that by reaching out to them when times are a bit quiet, they’ll remember you when they’ve got some money.

Spending the next several weeks worrying about your shortfalls in 2009 isn’t going to put more in the bank for 2010. What will get you further ahead is looking for ways to do more with less, to leverage the current opportunities that are out there, and to build relationships that will weather any storm.

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The IRS hates employers that pay their employees as independent contractors.

December 24th, 2009 · Payroll information

Here is an interesting article that I found in American Express Small Business report. If you have any questions about payroll, give me a call.  Or I can recommend a good payroll company Mosaic Employer Solutions who does not charge an arm and a leg like ADP or Paychex.

Depending on what end of the pay stub you are on, payroll is a pleasure to receive and a bore manage. According to Holly DeVito, president of Sum of All Numbers, a bookkeeping company, “Payroll is boring to work in and nothing exciting happens, but there are a few stupid things small businesses do with their payroll worth noting.” Those stupid things happen to be quite common and can be costly once the IRS gets involved.

So when considering payroll and your company, here are a few things to think about:

Know your state’s laws.
California, where DeVito works, it is state law that non-exempt employees must be paid every two weeks. Companies that don’t pay on time are subject to fines and lawsuits. “Here in California, if you don’t pay within 24 hours of the agreed pay date, you can get fined and the employee can report you to the state,” says DeVito.  “It’s a breach of contract.”

Employees paid once a month vs. every two weeks pay higher taxes.
If you’re a paid employee receiving checks less frequently, on only a monthly basis, you may be paying a higher tax for that larger chunk of dough. “Say you’re making $10K a month instead of two payments of $5K, the IRS has it set up where they assume you’re still getting two paychecks and actually making $20K a month, and tax you that way.” Of course you correct it come tax time, but “the IRS gets to keep the money free of charge all year,” says DeVito. In essence, paying twice a month as opposed to once a month is better for companies struggling with cash flow.

Bimonthly payments tend to be more reliable than every two weeks.
The standard payroll system pays every two weeks. The processing fees are a bit more for a company paying every two weeks because there can be three checks in a month. (It’s more or less negligible.) The real reason the companies prefer to pay bimonthly and not every two weeks is because of the convenience for the payroll department. “I pay on the 5th and the 25th of each month, so I know I have payroll on those days,” says DeVito. “If it were every other Friday, it would be harder to keep track.”

The IRS hates employers that pay their employees as independent contractors.
Besides having employees who slow down the processing of forms and employees who don’t pay their taxes on time, the biggest payroll issue DeVito encounters is companies that pay their employees as independent contractors when they’re treated as employees. “The IRS is coming down hard on businesses pushing this employee tax issue and they have no problem auditing for that,” says DeVito. There are four qualifications to be an independent contractor:

1. You must use your own equipment.

2. The contractor tells the employer when they will do the work instead of being told to come in.

3. The contractor determines how much the pay is.

4. The contractor doesn’t need training for the work. Some of DeVito’s clients have gotten audited for ignoring her warning that they had been simply calling employees independent contractors because they didn’t want to pay taxes on the workers. “I had one client I told over and over who owned a spa/salon that massage therapists aren’t independent contractors, they are employees, but he didn’t believe me. The IRS issued $50K in penalties to him. When you mess with other people’s taxes as an employer, the IRS gets even angrier. This guy ruined his business and threw it all away by not paying his employee’s taxes.”

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Tax return preparers must e-file for 2010 tax returns

December 23rd, 2009 · Tax Retuns

Tax return preparers will have to pay attention to an amendment added in the Senate version of the Worker, Homeownership, and Business Assistance Act of 2009, which extended the First Time Homeowner Credit and unemployment benefits, because beginning in 2010, this amendment will require tax return preparers to file any individual tax return electronically unless the preparer expects to file fewer than 10 returns in a calendar year. This means that individual tax return preparers will be required to apply for an EFIN, the Electronic Filing Identification Number, which will help the Internal Revenue Service (IRS) to track their returns. The requirement applies to individual tax returns, estate, and trust returns. Note: This new law does not affect 2009 tax returns filed in 2010.

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IRS Audits few people earning less than $200,000

December 23rd, 2009 · Tax Retuns

Per the The Wall Street Journal / The Associated Press article published 12/22,  Tax returns showing earnings of under $200,000 have just a 1% chance of being audited, according to IRS enforcement numbers released Tuesday. The chance of an audit increases to about 3% for earnings of $200,000 and over, and 6% for returns showing earnings of $1 million or more. Audits of returns showing earnings of $1 million or more rose 30% between 2008 and 2009.

Remember a CPA can represent you before the IRS – take caution if you are doing taxes yourself without professional advice.

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New 990 Filing Rules for Non-Profits

December 21st, 2009 · Tax Retuns

The changes to IRS Form 990, Return of Organization Exempt from Income Tax, beginning with tax year 2008, are the most significant in the last 30 years. Driven by Congressional concerns over nonprofits being used as illegal tax shelters and as fund-raising vehicles for terrorist groups — as well as the Pension Protection Act of 2006 — these changes will require more transparency and disclosure.

“These changes are important to all of us — nonprofit employees, board members and donors alike,” says Bo Donegan, CPA, CFF, Cr. FA “In addition, if you’re involved with a small, community-based nonprofit, such as your child’s soccer league, you’ll want to know about the changes required of these organizations, as well.”

What are some of the major changes?

The new governance section, Part VI, requires information about the organization’s governing body, its governance and management policies, and its disclosure practices. Governance policies and practices are not required by law, but the IRS recognizes that a nonprofit is more likely to report its activities correctly if it has policies and practices in place.

How detailed does the information in the governance section have to be?

The organization will now have to make declarations regarding officers and board members who receive salary or payments. In the past, only salary had to be disclosed. Now, information on consulting and other relationships must be disclosed, as well. Before, the organization was only required to disclose the officers. Now, it has to disclose the number of board members and how many of those members are independent (the standard of independence is that you can’t receive more than $10,000 per year, nor can you or any member of your family be involved in a transaction worth more than $10,000 per year). This is significant in that it will reveal how many, if any, board members are personally benefiting from being involved with the organization. Form 990 is a public document. Most charities post it on their Web site or list it on www.guidestar.org, which maintains information on charities. This is where the transparency comes in. If you have a board of 20, but only three are independent, how does that look? As you can see, the new requirements aren’t just for the government but also for people choosing where to donate.

What do nonprofits need to watch out for?

Be aware of the new compensation reporting requirements. The new form requires you to report on a calendar year basis for officers, employees, trustees. You will have to list base compensation and bonuses, deferred compensation, nontaxable benefits and other compensation, and report on compensation practices.

Be aware of any nondirect relationships with officers and board members. For example, board members who receive endowments or who have additional business relationships with the charity will cause additional scrutiny by the IRS and donors.

Do you have any advice for preparing for the transition?

Meet with your internal staff and accountant now to identify what new information will be needed and to determine who will collect it and how. You’ll need to gather information from officers and governing body board members — maybe obtain declarations. Have a workshop or webinar with your employees and governing body so they’re clear on the changes. The changes may result in you realizing you need to make adjustments in your record-keeping system. If you’re not documenting all board meetings, make sure this is one of the first things you begin to do.

The IRS realizes the changes will take time to adapt to. There is a three-year transition period in place, and you may be able to file Form 990-EZ in lieu of Form 990. A phase-in chart is available in the charities and nonprofits section of www.irs.gov.

Will anything new be required of small nonprofits that never had to file in the past?

Small organizations whose gross receipts are normally $25,000 or less are now required to electronically submit Form 990-N, also known as the e-Postcard. The IRS sends reminder notices but often has outdated contact information on file. An organization that fails to file the required e-Postcard for three consecutive years will automatically lose its tax-exempt status. If you’re involved with any small, nonprofit community groups, make sure the main contact person is aware of this new requirement. Form 990-N can easily be filed at www.epostcard.form990.org.

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Housing crash leads to decline in divorces

December 20th, 2009 · Good Stuff

The divorce rate in the U.S. fell 4% last year, according to a report released last week by the National Marriage Project. The news might cheer family advocates, but the lousy housing market is probably the cause, as couples with depreciated home values wait to split until the market rebounds.

Right now, home values are down substantially. According to Moody’s Economy.com, 31.8% of owners with a first mortgage currently owe more than their house is worth. Couples who decide to get divorced are splitting liabilities instead of assets.

“It used to be that couples fought over the house because of continuity and stability for the children,” says Fadi Baradihi, president of the Institute for Divorce Financial Analysts. “That’s not happening anymore. Now everybody wants to run from it.”

But when a property has lost significant value, running isn’t so easy.

When it comes to the dilemma of selling or keeping the family home, the issue is if either spouse can actually qualify to refinance the home as a single, one-income household. With negative equity so prevalent, it’s virtually impossible to refinance, says Leslie Thompson, a certified financial planner and partner at Spectrum Management Group in Indianapolis. That doesn’t leave a divorcing couple with many good options. Here are a few to consider.

Wait it out: Continue joint ownership with an agreement to defer the sale of the house, in the hope that home values will rise down the line. Under this arrangement, one spouse usually moves out.

If both spouses are on the mortgage, the one who moves won’t be able to get another mortgage, since banks are unlikely to lend to someone whose assets are tied up. When the house sells, each spouse gets half the proceeds at the time of sale (not at the time they got divorced). If one spouse has been making mortgage payments, he or she should get credit for the amount of the principal paid since the split.

Rent it out: In this increasingly popular arrangement, both spouses move out and rent to someone else. This setup also makes it difficult to buy another house, because both spouses are stuck with the house and the payments for a long time.

Just get out: Sometimes it’s best to sell at a loss and move on, says Ms. Thompson. The couple negotiates with the lender to pay the difference between the sale price and the amount they owe or a lesser amount — in which case they will have to determine how the debt will be paid. The lender also might agree to take the entire loss.

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2010 Mileage Rates

December 13th, 2009 · Good Stuff

WASHINGTON — The Internal Revenue Service today issued the 2010 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 50 cents per mile for business miles driven
  • 16.5 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than last year’s. The mileage rates for 2010 reflect generally lower transportation costs compared to a year ago.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Revenue Procedure 2009-54 contains additional details regarding the standard mileage rates.

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