It’s Spring and Its Tax Time


adding machine

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 federal 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.

What makes a Good Business Plan?

At my former job in a major investment firm, I had the responsibility of developing new business for the firm.  In that position I received about 40 business plans a week from entrepreneurs and senior managers of companies seeking financing, and I reviewed about 25 per week.  Why didn’t I read all 40 plans?  Here’s why.

The opening section of a business plan is the business description probably written in two paragraphs.  Here the writer describes his business and product and indicates what his target market is.  If after reading the opening paragraphs I do not know what his business is or what he is talking about, I reject it and move on to the next business plan.  A writer has to write his business plan in a way that is easily understood and is simply written.  If you are an engineer and cannot relate your business in simple terms, then get someone else to write it.  There is no excuse.

I also look at the sentence construction, grammar and spelling.  If there are spelling mistakes or grammatical errors, it indicates to me that the writer has exhibited a level of care which is not conducive to managing and growing a company.  He is neglectful and pays no attention to detail.  If you have a shot at having a professional investor look at your plan, then by all means make sure that you have done your research accurately, use proper grammar and your financial information is added correctly.

When I have a business plan to evaluate I look at its presentation.  Is it neat and attractively done so that it would make you want to open it up and begin reading it?  Does it indicate what the business is and what the product is, how you are going to make money and what your profit will be?  Is what you say in the first section of the plan supported by the financial information in the second section of the plan? Are your profit margins, return on investment, and return on equity comparable with similar companies in your industry?

When you are constructing your business plan, heed the above and you will be sure to generate interest in an investor to read your plan.

Preparing For Taxes

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.
  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 uncollectable 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.
  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 and reduce your bill.

Keeping Your Eyes on the Books

In teaching Entrepreneurship 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 these accounts will help to determine this level.

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.

Are you Choosing the Right Suppliers?

Recently, my son told me that he was going to open a store in another state and was scouting the area that he wanted to establish it in to determine if there was enough of a population and traffic to warrant a successful store.  He started to relate a flow of consciousness about this thoughts, and enumerated a few of them including which suppliers to have, who would bring in the olive oil, cheeses and beer at a good price.  I voiced my thoughts and then thought that the following would be good information for other aspiring entrepreneurs to contemplate.

For any business, there is heavy reliance on their suppliers.  Any interruption in the supply chain could seriously impact their long-term viability.  Choosing the right suppliers and using performance measures to re-evaluate existing supplier relationships can help reduce risk and prevent problems down the line.

Customers are also affected by poor supplier relationships.  They can’t find what they were looking for because the supplies weren’t delivered.  They don’t care, as far as they are concerned, it is your fault that they can’t get what they want.

So, how do you determine whether a supplier is viable or not.  There are three factors which you must consider:

  1. The suppliers’ financial and organization stability
  2. How much of a priority you are to them given your size
  3. How willing and proactive they are in communicating with you.  Are you notified of issues before they arise so you can be proactive instead of reactive with your customers?

Investigate the supplier.  Ask for references to determine if they are reliable and treat you with respect. And follow up on them.  Consider four factors with measuring performance:

  • Cost.  Not just the cost to you, but does it cost you money to do business with your suppliers?
  • Quality of their products or customer services
  • Responsiveness to your needs
  • Their use of technology – are they more efficient because they adopted new technologies in their inventories and billings and communication with you?

If any problems arise with your suppliers collect data specifically on that one so that you can have a “fact-based” talk with it about any issues.

Investigate problems. If a problem should arise, find out why the performance is not up to par instead of terminating the relationship.  You should strive for long-term partnerships.  Think of it this way:  your supplier is a stakeholder in your business, if you fail, he loses a customer and his sales go down.  Therefore, it is important to maintain that relationship.

Taking on a supplier.  You may decide to take on a new supplier if he has a new product or brings something different to the table.  In general, it pays to not rely on a single supplier in case problems arise.



A New Way to Market

Have you ever gone into a store whether it is an electronics store, supermarket, or fashion department store and found on product labels this curious square with the words “scan me” for additional information?  That little square whether it is in black and white or in color is a QR Code (quick response).  You can upload this information into your mobile phone by scanning it for contact information or for product information.

QR Code

What do you do with this QR Code?  You can add it to your business card, put it on tag labels on garments and on packages all with the aim of driving traffic to a sales campaign or website to providing consumers with more information on a product or service.

But before you go ahead and have one designed for you, and you start adding it  to everything that represents you and your business, you should have a strategy in mind. Scanbuy, which processes 20% of all the QR Codes scanned globally, saw an increase in average scans per person from four scans in 2014 to 4.6 scans in 2015.  The industries which consumers are scanning QR Codes are food and beverage, consumer electronics, media, entertainment, wireless and home improvement.

But there is something for us to remember, not all consumers will be using these codes.  We have to determine that our target market will or has used QR Codes, and determine what motivates them.  How can these codes help me to grow my marketing strategy?  Will they pique curiosity enough to initiate the act of purchasing?  These codes can actually link to another page or document, so think what you want them to link to, a resume, a newspaper article or customer recommendations.

The target audience that uses these codes the most are the Millennium generation, those people who are 18 to 35 who use social networking.  But that doesn’t mean that this is the only target, older, savvy folks may use it as well, but they are slower to adopt them.

These codes are another way to have potential customers recognize your name.  So, give it a try and see what happens.