Alisa A. Mitchell CPA PAFor small businesses formed as an S Corporation and with plenty of profits, reasonable compensation is a term you may want to be familiar with.
Many small businesses have organized as an S Corporation form of entity. In many cases, the S Corp election allows a business owner to save money on self-employment taxes, especially if they are operating as a sole proprietor. S Corp profits, or distributions, are not subject to payroll taxes.
If you are a business owner taking a salary and contributing substantially to the operations of the business, you may think that you should just take the distributions and forget the salary. After all, think how much you would save in payroll taxes. But this has already been tried and shot down by the IRS in the courts. And this is where the term reasonable compensation comes in.
The IRS requires that business owners that perform a substantial contribution to the business be paid a salary according to a number of factors. This is called reasonable compensation. You can’t pay yourself below market and take a large amount in distributions.
The IRS has issued a fact sheet that describes the guidelines that can be used to determine reasonable compensation. They include employee training, experience, duties, time spent, history of distributions, bonuses, and many other factors.
There are also reasonable compensation ramifications for C Corporations as well.
If reasonable compensation is an issue or concern for your business, please feel free to reach out and let us know how we can help.
For business owners with employers, payroll is a necessary task that can slow your day and tie you down if you let it. If you’re looking for a way to make payroll less time-consuming, here are five ideas you can put to good use:
- Employee Onboarding
If you hire a lot, empower your new hires by letting them do their paperwork for you. A good payroll system allows employees to “onboard” themselves, completing the I-9, W-4, and direct deposit authorizations electronically, even before they show up for their first day. You’ll still need to ask for ID on their first working day, but at least you won’t have to do their paperwork for them.
- Integrate Employee Benefits
Rather than hire several separate companies to handle benefits, some payroll systems allow you to integrate benefits solutions right in their dashboard. That way, you won’t have to re-enter employee data in multiple systems, which often gets out of sync. Deductions and payments can also be integrated to save accounting time.
- Delegate Timesheet Entry
Require non-exempt employees to enter their own time; all you should have to do is approve it. The right timesheet application can take care of that, and a great timesheet application will allow employees to enter time from multiple options, including timecard, cell phone, and others.
- Eliminate the Annual Worker’s Compensation Audit
Tie your worker’s compensation vendor to your accounting system, and you’ll be able to avoid that time-consuming annual reconciliation report required by your worker’s compensation insurance company. You can also avoid the large annual payment because the insurance will be taken out each payroll cycle.
- Reduce the Frequency of Payroll
It’s not always possible, but if you can pay employees less frequently, you might be able to cut your payroll time in half. Pay weekly employees every two weeks or pay bi-weekly employees monthly. Reducing payroll frequency boosts cash flow as well.
Try one of these five ideas to streamline your payroll time and costs in your business. And as always, let us know if we can help.
In the last year, chatbots have exploded. A chatbot, short for chat robot, uses artificial intelligence to imitate a conversation with people. One place they have exploded is the Facebook Messenger app, which is a free instant messaging platform.
To get Facebook Messenger, you can download the app on your smartphone or go to https://www.messenger.com on your PC or Mac in any browser.
In Messenger, a chatbot looks just like a person. All you need to do to connect to a chatbot is to go to the People section and enter the name of the bot you want to connect with. Typically, there will be a Get Started button. The bot may ask you some setup questions such as your time zone, city, or topic preferences.
Bots can do many things. There are bots to deliver the news daily (Chat Newswire), bots that entertain and play games, bots that help you find recipes and restaurants, bots that improve your productivity, bots that help kids with their homework (Christopher Bot), and even a bot that connects with QuickBooks (Freelanzr).
Each bot works a little differently. In general, you will receive a welcome message, then the conversation will begin. The bot will prompt you to ask a question, enter a phrase or a word, or select from a group of horizontal button choices.
Bots are useful for your daily routine. You can get daily news, weather, reminders, and tips. If you are stuck standing in line somewhere, riding public transportation, in an Uber or taxi, or experiencing other downtime, you can have several conversations with your bots to pass the time.
If you don’t know of any bots or wonder about a bot that does a specific thing, there are lots of bot directories available. To get you started, here is one bot list: https://botlist.co/.
The cool part is you can design your own bot for your business which can be fun for customers. The Facebook Messenger platform is open, and you can find out more about how to create a bot here: https://messengerplatform.fb.com/.
There are more platforms for chatbots besides Facebook Messenger, including Twitter, Android, Slack, and Amazon Echo, to name a few that you can explore if you don’t care for Messenger or Facebook.
It’s still early for bots. The effectiveness of the bots depends on how well they are designed as well as how much time the user spends learning how to work with the bot. Try connecting with a couple of bots to see if they will be productive for you. If nothing else, your kids will love the game bots while they are standing in line with you.
If you perform a service or ship a product before you get paid, then you likely have a balance in your Accounts Receivable account. If customers pay when their invoice is due, all is right with the world. If they don’t, then your cash flow slows down and your bank balance is not as high as it should be. Here are some tips, preventive and supportive, to help you keep your accounts receivable current.
Granting Credit
When you deliver your service or product before your client pays you, you are in effect their “bank,” granting them credit. Not everyone deserves to be granted credit. Consider running credit checks, especially if you are billing large amounts of money for your sized business.
You may also want to ask for a retainer or deposit prior to starting work or shipping your products. This will smooth your cash flow and reduce your credit risk.
Offer Multiple Payment Options
When a customer is ready to pay their bill, make it easy on them by offering multiple payment options. Perhaps they will pay faster if you take payment by credit cards. Many people have extra money sitting in their PayPal accounts, so that is another payment option. Apple Pay and Android Pay are relatively recent options to consider adding.
You may also want to revisit the credit cards you offer: MasterCard, Visa, and American Express are universal, but many places also take Discover and Diners Club. If you are doing international business, consider JCB (Japan), China UnionPay, and RuPay (India).
Collection Process
Once an unpaid invoice has reached its 90-day mark, the chances of collecting it are about 50 percent. This means that you will need to put some aggressive collection processes in place prior to the 90-day mark.
If the invoice is due in 30 days, start at the 35- to 40-day mark with a friendly reminder. At 60 days, your customer needs a strong reminder and perhaps a phone call. At 75 days, they need to know what consequences there will be for not paying. Will you report the customer debt to credit agencies? Will you turn the account over to a collection agency?
At 90 days, it’s probably a good idea to make one final collection effort and then turn it over to a collection agency. It might sound too soon, but the odds of collecting something much older go down significantly as time passes.
At any rate, create your own process, and automate it as much as possible. The main thing is to stay on top of it.
Past Due Accounts
From how you first engage with your clients to the last steps in the collection process, there are many cost-effective techniques to avoid past due accounts and the unpleasantness that goes with them for both parties. If this is an issue in your business, try these ideas above and reach out if you’d like our help.
Increasing your profits might sound like it’s an unattainable dream just out of your reach. But there are a finite number of ways that profits can be increased. Once you understand what they are, you’ll have clarity on how to best reach your goals.
There are two primary ways to increase profits:
- Raise revenue
- Lower expenses
That’s not particularly enlightening or instructional, is it? Let’s look at the four ways you can increase revenues and the four ways you can reduce expenses to get clearer on what actions we can take.
Four Ways to Increase Revenue
1. Raise prices
The easiest way to raise revenue is to simply raise prices. However, this is not foolproof and assumes you’ll be able to maintain the volume of sales you’ve achieved in the past.
This method is also limited by market demand, what your customers are willing to pay.
2. Add new customers
Adding new customers is what most entrepreneurs think about when raising revenue. Increasing your marketing or adding new marketing methods is typically the way to add new customers.
Another related option is to work hard to keep the customers you already have. You can also potentially contact the customers you lost and ask them to come back.
3. Introduce new products or services
For some companies, your products and services are changing every year. For others, not so much. To increase revenue, consider adding new products or services that will bring in an additional revenue stream that you didn’t have before.
Even if your products are changing every year, you can consider adding something completely different that your customer base would love. For example, a hair salon could add a nail desk, a clothing store could add handbags or shoes, a grocery store could add a coffee bar, a restaurant could add catering, a landscaper could add hardscaping, and so on.
4. Acquisition
The final way a business can increase revenue is to acquire another business in a merger or acquisition.
Four Ways to Reduce Expenses
1. Negotiate for a better deal with vendors
If you’ve been working with a vendor for a while, you may be able to re-negotiate your contract with them. This is especially common with telecom companies. Call you phone provider and ask them for the latest deal. They always favor new customers over long term customers, but they don’t want to lose customers either. Just calling them usually yields a better price than what you are paying now.
2. Change vendors
If a vendor has gotten too expensive, it might be time to look for a new vendor. Health care insurance seems to be in this category. Often, changing providers will lower your costs.
3. Cut headcount
If there is not enough work to support your employees or not enough cash flow to pay them, then it might be time for a layoff or restructuring. You might also consider outsourcing a function that you previously did in-house.
4. Cut the expense or reduce services
It might be your business no longer needs to spend money on an expense. Perhaps this expense has been automated. In this case, it’s an easy decision to cut the expense out entirely.
Those are the eight ways to increase profits. Which one makes the most sense in your business? Create a plan around these eight ideas to boost your profit in 2017, and let us know if we can help.