Your favorite number on the balance sheet might just be Cash. It’s easy to understand and something every business has. But there is a more meaningful number, at least in the long-term sense, and that’s equity. Let’s dive deeper into that part of the balance sheet.
The Equity Section
As a reminder, the balance sheet has three major sections: assets, liabilities, and equity. When it comes to equity, the accounts that are displayed are dependent on the type of entity of your business. Your business could be a sole proprietorship, a partnership, a corporation, or something else. In this article, let’s focus on equity in a corporation.
Every corporation should have at least three equity accounts.
This account should reflect the amount of stock issued by the corporation. The amount and price of each share is usually spelled out in the Articles of Incorporation, the initial legal document of the corporation. For example, if the amount of shares the corporation can issue is 100,000, and they have a par value of $.01, then your stock account balance should be $1,000, which was paid in by cash by the corporation’s owner(s).
This account might also be named Capital Stock, Common Stock, or something similar. This account’s balance typically doesn’t change much over time for a small business. It’s only when new stock is purchased (issued), sold, retired or repurchased (by the corporation) that the account will see changes.
- Additional Paid in Capital (APIC)
Additional Paid in Capital occurs when investors and business owners pay in more than the par value price of stock. The balance represents the difference between what owners/investors paid into the company and the par value of the company stock.
- Retained Earnings
Retained Earnings is where the action is and is an important number to understand. It’s the accumulated earnings of the company less any dividends paid to shareholders.
For a small business, retained earnings will change once a year at the end of the fiscal year when net profit (or loss) from the current year is rolled into the retained earnings account. At this time, all of the income and expense accounts are zeroed out to start over for the new year, and the balance (which is profit or loss) is added (or subtracted, in the case of loss) to retained earnings. Your accounting system automatically does this for you, and you can check it out by running a balance sheet as of the last day of your fiscal year, then running a balance sheet on the following day – the first day on the next fiscal year and comparing what changed.
You can reconcile retained earnings by adding up all of your profits and losses for each year you are in business. Then subtract any dividends paid throughout the years, and you should come out with your retained earnings balance. You can have a negative retained earnings balance.
The retained earnings number is a measure of the long-term value of the business. It also plays a large role in determining your basis, or investment, so to speak, in the company, which is used for tax purposes.
An S Corporation will have an additional fourth account in its Equity section.
Distributions represent the money that the S Corporation owner has taken out of the business. This money is over and above the salary that is paid to the owner. It must be tracked for tax purposes, which is why it has a separate account on the balance sheet. In simple terms, distributions are generally not taxable as long as the owner has enough basis to cover them. In this way, distributions are different from dividends that are issued in C Corporations, since they are taxable.
Last, if you run a balance sheet report in your accounting system on any date during the year, you may see an additional account:
- Current Year Earnings
This is the sum of all of your income and expense accounts. It should be the same number as net profit or loss on your income statement from the beginning of the year to your balance sheet date. On a formal balance sheet for external purposes, this number is rolled into the retained earnings account.
The equity section can be the most difficult section to understand on the balance sheet. Hopefully, the explanation above will provide a bit more clarity as well as shine a light on the significance of the retained earnings balance.
ClickUp™ is a versatile new web application that serves multiple functions for a small business. It’s primarily a CRM – customer relationship management – with project management and workflow features built in, and is adaptable across several industries.
ClickUp’s goal for its users is to save time and reduce redundancy by tying everything together in one app. Its integrations, which are called ClickApps, are truly its strength. The 1,000+ integrations set ClickUp apart from other offerings, and for this reason, ClickUp excels at automating processes that use multiple apps, including hard-to-automate processes like customer onboarding.
Some of the items people use ClickUp for include reminders, goals, whiteboards, templates, calendars, document flow, task management, dashboards, marketing processes, and team collaboration and communication.
One of the features that is frequently mentioned is the ability to create custom views exactly the way you want them. Views provide a summary of your work and come in many flavors. You can create task views, list views, boards, calendars, Gantt views, workload views, and box views.
If ClickUp has a weakness, it would be its complexity. You really need to be somewhat tech-savvy to get everything set up. The learning curve can be intimidating, but once you get through it, there is so much power in having everything customized and in one platform.
ClickUp does have a following of power users, and a certification of sorts is offered. Becoming ClickUp Verified means that you’ve earned expertise in the product. If the learning curve is too much for you or your team members, you can hire one of these ClickUp consultants to do the setup for you.
As of this writing, ClickUp hosts 4,000,000 users, including the ones on the free version that is for personal use. Monthly pricing for business users ranges from $5 to $19 per user, depending on the features you need. Enterprise options are also available.
ClickUp was founded in 2017, is headquartered in San Diego, CA, and has raised three rounds of funding as of this writing. You can find out more at clickup.com.
Remote working has exploded in the last few years, especially in professional services. Now that companies are seeing the benefits of remote working, they are also seeing the benefits of an expanded pool of potential employees. Some firms are hiring employees that live several states away from where the office is located, which comes with quite a few ramifications for the business.
Let’s say your business is based in Texas. You already file quarterly payroll reports and pay federal payroll taxes for your Texas-based employees. You also already file all the required state payroll reports and have Texas workers compensation. In May, you hired an employee that lives in Cleveland, OH. And in June, you hired an employee that lives in San Francisco, CA. You’ll need to get set up to pay employees in each of these states:
- You may need to get set up as a Foreign Corporation in these states (the exact paperwork depends on your type of entity as well as the state’s requirements and where your business originates). This means filing legal paperwork as well as complying with annual tax filings and statements of information. You may also need to hire a firm who can be your registered agent and legal contact in that state.
- You must get workers compensation in those two states.
- You must sign up with the unemployment agency in those states. For California, it’s the EDD (Employee Development Department), and for Ohio, it’s the Ohio Department of Job and Family Services.
- You’ll need to work with your payroll provider to give them your account numbers so they can accurately create the paychecks with the appropriate state withholdings.
We’re not quite done yet. You’ll need to make sure you file the correct quarterly payroll reports in addition to your federal ones. Continuing our example: in California, this consists of Forms DE-9 and DE-9C, Quarterly Contribution Return and Report of Wages. In Ohio, there are multiple forms: one for SUTA, IT 3, IT 941, and IT 501, all with exacting filing requirements.
Some states that are small and close together may have exceptions that you can follow to save time.
Having an employee in another state creates nexus for your organization, which means that you may have additional tax and legal requirements beyond payroll taxes.
- If you have sales in these states, you may also need to collect and remit sales tax on those sales and file sales tax returns. The first step is to register with the sales tax agency in the state.
- As the business owner, you may even need to file a state income tax return and pay state income taxes as an individual, even if you’ve never set foot in that state!
Hiring a remote worker is so easy, but the paperwork that comes after it is anything but easy. Make sure you stay in compliance with all the tax and legal requirements of hiring an out-of-state worker. There can be some lead time in getting all this set up, so be sure to plan for this prior to your new employee’s start date.
As always, if you need help with any of these overwhelming tasks, please feel free to reach out to us any time.
When starting a business, most entrepreneurs excel at the specific technical skill set they need in order to deliver their services and products to clients. For example, if you own a bike shop, you are pretty great at all things related to bikes. If you own a law firm, you are probably good at practicing law. This skill is your core skill.
As your business grows, you need different skills beyond your core skill in order to thrive. That skill depends on the type of business model you want to succeed at. Here are some examples of business models and the key skill you need to be outrageously successful.
People-Based Business Model = Leadership
If your business is one of the 25 percent of small businesses that have employees and you have a team that serves customers, then you most likely have a people-based business model. The revenue you earn is dependent on how your people perform and serve clients.
Some examples would be a mid-sized law firm, a nail salon, a marketing agency, and a mid-sized plumbing company. Each one has a team of people that generate revenue.
These people need to be hired, trained, and motivated, and that is where the skill comes in. If you have a business model like this, you need to excel at leadership, which includes managing people as well as hiring and firing. You need to be great at developing a productive, happy team in order to reach your highest pinnacle of success. Your core skill is still needed, but without leadership skills, you won’t grow as much as you could.
Acquisition-Based Business Model = Negotiation
Some companies grow through acquisition of other companies. In this case, your top skill should be negotiation; you will need to make excellent deals to keep your business growing.
Project-Based Business Model = Project Management
If your job revolves around delivering large projects, such as construction, possibly IT companies, and some real estate, then your business model might be project-based. While knowing how to be a general contractor might be your core skill, your top skill should become project management.
How well you manage the project timeline, delivery of materials, and management of the right number of people with the right skill at the right time all factors into completing the project as quickly and profitably as you can, with the quality needed so you can move to the next one.
Volume-Based Business Model = Merchandising
If moving high quantities of products or services is your business model, then your revenue depends on volume and how much you can sell. Some examples of these types of firms include grocery stores, software companies, some retail stores, and wholesalers.
How you display and market your products will affect how many customers you can get in the door and how fast you can sell. Your top skill should become merchandising and all things marketing.
Your Top Skill Is No Longer Your Core Skill
These four types of business models serve as a sampling to show that once you achieve some level of success, your core skill will no longer be the keystone to further success. Developing skills beyond your core skill will take you farther than you ever imagined you could go with your business.
Whether we’re headed for a recession or not, it’s always a good time to squeak out more profits from your business books. We’re not talking about drastically slashing expenses or spending a lot to raise revenue; the tips in this article are long-term ideas to gently lift up your profits.
Timing on Capital Purchases
The timing of asset purchases, such as equipment, a truck, or even a PC, can be tricky. Understanding the best timing for asset purchases and replacements can make a difference in your profits.
When purchasing a new asset, gain a good understanding of the return on investment so that you’re prepared from a cash flow standpoint. With more complex businesses, it’s a good idea to hire an accountant who knows your industry and has capital expenditure experience.
When replacing an asset, it should be timed so that the asset is replaced before you have to spend a lot on repairs, but not so soon that you don’t get good use out of it.
Rent and Utility Contracts
When rent and utility contracts come up for renewal, this is the time to bargain. If your landlord hasn’t fixed something, you can at least use pressure to get the repairs accelerated.
For utility contracts, especially internet and phone, the price often goes up when the contract runs out. This is the time to get it lowered back down by asking for a new customer deal (it never hurts to ask!). Communications companies are constantly creating new deals and packages, so you should be able to jump into one of those to keep your costs from going up.
Profit in Leftovers
What assets have you got lying around that aren’t working for you? Put them to work!
Here are some examples:
- Cash – make sure your excess cash is safely invested or at least in an interest-bearing account.
- Extra space – rent out space that you are not using or only using some days. This solution can have many different looks to it beyond the monthly renter. As an example, virtual workers looking for a conference room for a day could be a money-maker for you.
- Manufacturing firms can sell the scrap from their assembly lines as well as their obsolete inventory.
- Excess construction materials can be sold, donated, stored for the next job, used on a new small project, or used as firewood.
If employees are wasting time, they are wasting money in the form of salary you pay them. There are three good solutions:
- Offer training – perhaps they haven’t been shown what to do correctly or how to do it efficiently. Or they may need to break bad habits.
- Re-energize employees with incentives, new benefits, or motivational training and events.
- Redesign your processes and automation, then retrain – it could be your workflow needs revamping to make it more efficient.
If these options don’t work, it could be your employee is a bad fit. You know what you have to do in that case.
Stop the Subscriptions
Those recurring monthly charges just keep adding up. The average small business uses dozens of apps, meaning they also likely have dozens of $20 to $50 automatic monthly charges going on a credit card somewhere in your business. This includes magazines, memberships, dues, conferences, newsletters, gadgets, and software.
If you’re making a lot of money, you may have trouble finding the time to research what subscriptions you really need versus what you don’t. But in the long run, you will make more the sooner you sit down and examine this area of spending. Stop the $20 to $50 madness by reassessing what subscriptions you really need and cancelling the ones you don’t.
Try these five ideas to give your profits a permanent, long-term boost.