Alisa A. Mitchell CPA PARunning a small business is often about taking and managing risks. Market risks are normal but business and tax risks are another thing altogether. Most business and tax-related risks can be managed as long you know about them. Here are seven small business risks you will want to make sure are covered.
1. Best Choice of Entity
Are you operating as a corporation, limited liability company, partnership, or sole proprietor? More importantly, is the entity you are operating under providing you with the greatest tax benefits and separation from personal liability? If not, you might want to explore the alternatives to make sure you’re taking the amount of risk that’s right for you.
2. Employees or Contractors
Are your team members properly categorized when it comes to the IRS’s rules about employees versus contractors? Unfortunately, it’s not about what you and your team member decide you want. If you decide to hire contractors and the IRS determines they are employees, you could owe back payroll taxes that can cripple a small business. So you’ll want to do the right thing up front and make sure you and the IRS are in agreement, or be willing to take a future risk.
3. Insurance
If you’d like to protect yourself from possible losses through a disaster, theft, or other incident, insurance can help. There are a lot of kinds to choose from, and you’ll likely need more than one. At the minimum, make sure you’re covered by:
- Business property insurance, renters insurance, or a homeowners rider to protect your physical assets.
- Professional liability or malpractice insurance, if applicable, to protect you from professional mistakes including ones made by employees.
- Workers compensation insurance, to cover employee accidents on the job.
- Auto insurance or a non-owned policy if employees drive their car for work errands.
You may also want personal umbrella insurance, life insurance, and health insurance. Check with an insurance agent to get a comprehensive list of options.
4. Sales Tax Liability
Are you sure you’re collecting sales tax where you should be? As the states get greedier, they invent new rules for liability. For example, if one of your contractors lives in another state, you may owe sales tax on sales to customers who live there even if you don’t live there or have an office there.
Nexus is a term that describes whether you have a presence in a state for tax purposes. Having an office, an employee or contractor, or a warehouse can extend nexus so that you’d need to collect and file sales tax for those states. If you’re in doubt, check with a professional, and let us know how we can help.
5. Underpricing
Most small businesses make the mistake of underpricing their services, especially when they start out. If you started out that way, it’s awfully hard to catch up your pricing to a reasonable level. Knowing the right price to charge can make the difference between whether the company last six months or six years. You can mitigate this risk by getting cost accounting help from your accountants who can help you calculate your margins and determine if you’re covering your overhead and making a profit.
6. Legal Services
Legal services can be expensive for a small business, so sometimes owners cut corners and take risks. Attorneys are needed most when it comes to setting up your entity, reviewing contractual agreements such as leases and loan agreements, settling conflicts, advising on trademark protection, and creating documents such as terms of service, employment agreements, and privacy policies. Just one mistake on any of these documents can cost a lot, so be sure it’s worth the risk.
7. Accounting Services
Doing your own accounting and taxes can be risky if they’re done wrong or incomplete. You could end up paying more than you should if you leave out deductions you’re entitled to. Worse, if you do your books wrong, you could end up overpaying taxes without realizing it. A common bookkeeping error results in doubling sales, and while it might look good, you certainly don’t want to pay more than what’s been truly received.
How did you do with these seven risks? If you need to reduce your risks in any of the areas, feel free to reach out for our help.
Most small businesses need help with cash during certain stages of their growth. If you find that you have more plans than cash to do them with, then it might be time for a loan. Here are five steps you can take to make the loan process go smoother.
1. Make a plan.
Questions like how much you need and how much you will benefit from the cash infusion are ones you should consider. If you don’t already have some version of a budget and business plan, experts recommend you spend a bit of time drafting those items. There’s nothing worse than getting a loan and finding out you needed twice the cash to do what you wanted to accomplish.
2. Know your credit-related numbers.
Do you know your credit score? Is there anything in your credit history that needs cleaning up before it slows down the loan approval process?
Take a look also at your standard financial ratios. These are ratios like your current ratio (current assets / current liabilities) and debt-to-equity ratio. If these are in line with what your lender is expecting, then you are in good shape to proceed.
3. Research your options.
Luckily, there are many more options for financing your business today than there have been in the past. Traditional options, such as banks, still exist, but it can be difficult to get a bank loan for a small business.
Here are some online loan sources where investors are matched with borrowers via an online transaction:
- Kabbage
- OnDeck
- LendingClub
- FundBox
- BlueVine
Or you can go to Fundera and compare which loan is the most economical.
There is also crowdfunding, which is very different from a loan. Crowdfunding is a way to raise cash from many people who invest a small amount. Top sites include GoFundMe and KickStarter, where you can find out more about how it works.
Other ways to get cash include tapping into your personal assets: using credits cards, refinancing a house, and borrowing money from family and friends.
4. Create your loan package.
Most lenders will want to know your story, and a loan package can provide the information they need to decide whether they want to loan you money or not. A good loan package includes the following:
- A narrative that includes why you need the loan, how much you want, and how you will pay it back. A good narrative will also list sources of collateral and a willingness to make a personal guarantee.
- Current financial statements and supporting credit documentation, such as bank statements and credit history.
- A business plan and budget, or portions of it, that cover your business overview, vision, products and services, and market.
- A resume or biography of the business owners and a description of the organization structure and management.
While it takes time to put together a great loan package, it’s also a great learning experience to go through the exercise of pulling all of the information together.
5. Execute!
You’re now ready to get your loan. Or not. Going through these five steps helps you discover more about your business and helps you make an informed decision about whether a loan is still what you want and need.
Throughout the process, you may have learned new information that tells you you’re not quite ready for a loan, or that in fact, you are. At any rate, preparing for a loan is a great learning process, and the good news is there are lots of avenues for small businesses to get the cash they need to grow.
Two very important skills for entrepreneurs to master are marketing and finances. Combine them by understanding the numbers behind marketing, and you have an even more powerful understanding of exactly what makes your business tick.
Key Numbers – Cost Per Client Acquisition
Do you know how much it costs your business to bring in one client? The technical term is “Cost per customer acquisition,” and it’s computed by adding the total marketing and sales costs excluding retention costs and dividing them by the total number of clients acquired during a period of time.
Cost per customer acquisition is important to know because then you can compute how long it takes before your business begins to make a profit on any one customer. In software application services with a monthly fee, the breakeven for a client can be around ten months.
It’s essential to understand this dynamic for pricing and volume planning purposes. If your services or products are priced too low so that your acquisition costs are not recouped in a reasonable period of time, it can play havoc with your cash flow as well as your profits. If you don’t have enough volume to cover overhead and acquisition costs, then your company will be in trouble in the long term.
Customer Lifetime Value
There is a simple and an academic formula for customer lifetime value. You can estimate it by multiplying the average sale of a customer by the average number of visits per year by the number of years they remain a customer. That’s the easy version.
The more difficult version of this formula takes into account retention rates and gross profit margins. The formula is: Average customer sales for life times the gross profit margin divided by the annual churn rate.
Once you know and track these numbers in your business, you’ll be better able to make smart decisions about your marketing investments and your pricing. And if we can help you, please reach out as always.
Spring denotes new growth, fresh starts, and spring cleaning. Why not apply these ideas to your sales so they can blossom along with spring flowers? Here are six ideas to put the spring into your sales.
1. Spring Cleaning Sales
Get rid of old inventory by having a spring sale that will clean out your closets and put some money in your account. Look through your items for sale and find the ones that haven’t moved like you expected. Mark them down and move them out.
2. New Items and Services from Customer Ideas
Now that you’ve gotten rid of the old stuff, you have room for new. If you’re not sure what your clients want or need, ask. Use Survey Monkey to find out what your clients can use. If you don’t have what they want, make it, buy it, or partner with someone who does. Then let everyone know, “based on popular demand” of course, that you have new items for sale just in time for spring.
What questions should you ask in your survey? Try questions like these to draw out your customers’ needs and wishes and to discover any shortcomings you might have not known about:
- What items/services are on your wish list that you’d like us to stock/provide?
- How do you currently use our services/products?
- What do you wish our items accomplished that they don’t now?
- How would you recommend we expand our selections?
- What do you wish we did better?
3. The Old “Fries with Your Burger” Upsell
Waitpersons offer desserts and appetizers, office supply staff offer cables and accessories with hardware purchases, and software vendors offer the next level package. Almost every business practices a form of upsell these days, so if you don’t, you’ve got a new opportunity right here.
Dust off your old upsell procedures and try these ideas to rejuvenate your upsells:
- Re-visit your inventory to pair complementary items for upsell potential.
- Retrain your staff for upsell language at the time of sale.
- Re-package like items to offer more bundles and groups.
4. New Prices
When is the last time you’ve raised your prices? If it’s been a while, then it’s a great opportunity to increase revenue with little additional effort.
5. Spread the Word with Spring Samples
Samples can help get your product or service into the hands of many potential buyers. Buyers can better experience your product and reduce their perceived risk.
Not all businesses can provide samples, but there is always the next best thing. Where your product is not consumable, you can sometimes provide a portion of the product, such as a carpet sample, wallpaper swatch, or floor tile. With retail clothing, pictures will have to do. With books or courses, you can provide a sample chapter or a demo video. And with services, case studies or proof of concept will suffice.
6. Offer a Customer Reward Program
Put together a program to reward your most loyal clients and to make them even more loyal to you. Some of the perks could include monthly gifts, priority service, an exclusive event, and/or discounts. The price can be structured as a membership fee, retainer, or package price. Increasing contact, benefits, and communication with these clients is always a good investment.
Try one of these six ideas to put the spring in your sales this season.
Outsmart your accountant and other financial friends with these accounting-related definitions:
Fiscal Year
Most companies report their results on a calendar year, from January 1 through December 31. Some companies use a different year for reporting, and that’s called a fiscal year. For example, Intuit’s fiscal year runs from August 1 to July 31. A nonprofit commonly runs from July 1 to June 30.
The word fiscal alone refers to government or public revenues and expenditures. A fiscal year can also be considered the period where companies report their financial results to the public.
Budget
Most companies sit down once a year and plan what they intend to spend. This set of numbers is a budget. It is prepared in income statement format which includes planned revenue and expenses. It can be done for a year, monthly or both.
A common report that compares budget to actual figures is the Income Statement Comparison to Budget which includes columns for month and year-to-date actual, budget, and variance (the difference).
Forecast
While a budget is a longer term plan, a forecast is an attempt to predict the short-term future. Forecasts can be made for cash flow, predicting your bank account balance, or can be focused on potential profit for a period. A forecast is created by enumerating current and expected short-term cash commitments.
General Ledger
A general ledger is a fancy word for your accounting books. It’s also a very specific report that lists each account within the chart of accounts, beginning balances, the activity of each account for a particular period of time, and ending balances. It includes both balance sheet accounts, such as cash, accounts receivable, and accounts payable, and income statement accounts, such as revenue and expenses.
Fixed Asset
A fixed asset is a special type of asset that includes items such as land, vehicles, furniture, buildings, office equipment, plants, and machinery. Fixed assets cannot easily be converted into cash (cash equivalents are termed current assets) and they must last longer than one year. They are physical or tangible (as opposed to intangibles such as patents and trademarks).
Depreciation
Most fixed assets except land depreciate in value over time. For example, when you drive a new car out of the lot, no one will give you what you just paid for it. This reduction in value over time is recognized on accounting books by recording depreciation. Since assets need to be recognized at market value, depreciation is an estimate of this adjustment. Depreciation becomes an expense and reduces the value of the fixed asset. Unlike most other transactions, cash is not affected when recording depreciation.
Accrual
There are two ways to keep books when it comes to the timing of how items are recorded: the cash method and the accrual method. Let’s invoke Popeye the Sailor Man’s friend Wimpy who always says, “I’ll gladly pay you Tuesday for a hamburger today.” Let’s say today is the Friday before this famous Tuesday.
If you are using the cash basis method, you would record the entire transaction on Tuesday, when you get the cold hard cash. If you are using the accrual basis, you would have two entries: one on Friday to record the sale to accounts receivable and one on Tuesday to zero out the receivable and increase cash. It’s the same net, effect; the only difference is in the timing.
Most small businesses that extend credit keep their books on an accrual basis so they can keep track of everything. Most taxes are paid on cash-basis books, requiring adjusting entries at year end that reverse at the beginning of the year.
Balance Sheet
A balance sheet is a very common report of all of the business’s account balances as of a specific date, such as December 31. These accounts include cash, receivables, fixed assets, liabilities, equity and others.
Journal Entry
A journal entry is usually an adjustment that is made to the accounting books. The result is that some accounts increase and others decrease. In theory, every transaction made to a company’s books is a journal entry. When you write a check and it’s cashed, cash goes down and an expense is increased. When you receive a payment, cash goes up and revenue goes up. Each of these transactions is a journal entry.
Do you feel a bit smarter? I’m not sure how exciting this is for cocktail table talk, but hopefully you feel smarter when it comes you’re your business’s accounting function.