Category Archives: Profitability

10 THINGS TO DO AS A STARTUP ENTREPRENEUR

startup(1) Be realistic: It’s great to be a cheerleader for your company when dealing with customers and clients, but you must be realistic when it comes to understanding the limitations of your business, making financial projections, accepting apparent weaknesses, etc. We’ve all heard the expression, “Don’t drink your own Kool-Aid.” This principle applies to new ventures as it can get a startup entrepreneur in real trouble. Be honest and realistic as you move forward. If not, trouble can come before success!

(2) Slow down: It’s a never-ending problem all founders and small business owners have. There is never enough time in the day to get everything accomplished. It’s either too much to do by yourself or a lack of delegation. Whatever the problem, you must find time to step back from the business to relax, enjoy, and think. Yes, think. Without some “down” time, you cannot properly plan, innovate, or make improvements. Work smarter, not harder and longer!

(3) Full energy: You can only be successful in a small business when you devote your full energy to your new venture. This doesn’t mean working yourself to death (see #2 above). It does mean, however, that whatever hours you devote to your new endeavor whether full-time or part-time, it needs to be with your full energy and devotion during those hours. Who wants to do business with you or, possibly, invest in your business when you’re not giving it your “100%” when needed? Work on your new business with partial energy and see only partial results!

(4) Hatch your eggs: Make sure your eggs hatch before moving forward. Every entrepreneur wants to make a big splash right out of the starting blocks. It would be wonderful if it works that way but most of the time, it doesn’t. Throw a small pebble, make a ripple, and see what works. Then you’re ready to throw a boulder and make a big splash. Make sure the eggs hatch before moving on!

(5) Competence counts: Entrepreneurs “think” they know best and, maybe, they do when it comes to the technical aspects of their businesses. When it comes to other areas such as taxes, accounting, insurance, or legal, it pays to obtain professional and competent advice. Don’t try to do something yourself today only to hire a professional tomorrow to undo your mistakes. Pay to get the competent advice right from the start. Pay now or pay later!

(6) Narrow your focus: It would be nice to be all things to all customers, but it usually doesn’t work that way. Narrow your focus and concentrate on what you do best. Determine your strategy, define your target market, and don’t deviate. New opportunities and new markets can be profitable, but they must match the internal resources and strengths of a business. Be a great business in a narrow market rather than a mediocre business in a broad market. Focus first, then expand!

(7) Market research: Of course you know that your product or service is going to be successful, but have you checked with prospective customers for what they want? Market research is a powerful tool that can help lead a new business in the right direction. You can do it yourself. Ask, talk, send surveys, read industry publications, search the Internet, have a “think tank” dinner with respected business colleagues. When so much information is available before you start your business, why not take advantage of it? Market research just might be an eye-opener!

(8) Be prepared: It’s exciting to get a new business off the ground, but you must be prepared. This means having everything in place, so there is no faltering when the “doors open.” Financing, employees, marketing, procedures, etc. must be in place and ready to go. Why stumble at the opening when you can start running? It’s all about being prepared!

(9) Be passionate but prudent: You can’t be a small business owner if you’re not passionate about what you do. Unfortunately, being passionate does not always equate to being successful. Be practical, wise, and sensible when making business decisions. New startups do not have the luxury of poor decision making…and survive. Take the opposite approach. Be prudent and succeed!

(10) Know your numbers: You’re not an accountant. You don’t want to be an accountant, but you still need to know the numbers of your business…inside and out. What is your estimated revenue, cost of goods sold, gross profit percentage, cash burn rate, or current ratio? If the numbers don’t work, then your business might not work. Don’t leave all the numbers to someone else. Perhaps, they can do the preparation, but you still need to understand the numbers!

Source: http://www.aasbc.com, 10/23/14.

HOBBY OR BUSINESS? WHY IT MATTERS

hobbyMillions of Americans have hobbies such as sewing, woodworking, fishing, gardening, stamp and coin collecting, but when that hobby starts to turn a profit, it might just be considered a business by the IRS.

Definition of a Hobby vs. a Business

The IRS defines a hobby as an activity that is not pursued for profit. A business, on the other hand, is an activity that is carried out with the reasonable expectation of earning a profit.

The tax considerations are different for each activity so it’s important for taxpayers to determine whether an activity is engaged in for profit as a business or is just a hobby for personal enjoyment.

Of course, you must report and pay tax on income from almost all sources, including hobbies. But when it comes to deductions such as expenses and losses, the two activities differ in their tax implications.

Is Your Hobby Actually a Business?

If you’re not sure whether you’re running a business or simply enjoying a hobby, here are some of the factors you should consider:

  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Do you depend on income from the activity?
  • If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
  • Have you changed methods of operation to improve profitability?
  • Do you have the knowledge needed to carry on the activity as a successful business?
  • Have you made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Do you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is presumed to be for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).

The IRS says that it looks at all facts when determining whether a hobby is for pleasure or business, but the profit test is the primary one. If the activity earned income in three out of the last five years, it is for profit. If the activity does not meet the profit test, the IRS will take an individualized look at the facts of your activity using the list of questions above to determine whether it’s a business or a hobby. (It should be noted that this list is not all-inclusive.)

Business Activity: If the activity is determined to be a business, you can deduct ordinary and necessary expenses for the operation of the business on a Schedule C or C-EZ on your Form 1040 without considerations for percentage limitations. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.

Hobby: If an activity is a hobby, not for profit, losses from that activity may not be used to offset other income. You can only deduct expenses up to the amount of income earned from the hobby. These expenses, with other miscellaneous expenses, are itemized on Schedule A and must also meet the 2 percent limitation of your adjusted gross income in order to be deducted.

What Are Allowable Hobby Deductions?

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

Note: Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.”

Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:

  • Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
  • Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums, and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
  • Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

If your hobby is regularly generating income, it could make tax sense for you to consider it a business because you might be able to lower your taxes and take certain deductions.

Still wondering whether your hobby is actually a business? Call us and we’ll help you figure it out.

DO YOU KNOW WHAT IT TAKES TO BREAK EVEN?

breakevenpointYour business has certain fixed costs that it will incur regardless of your sales volume.  These include items such as rent, insurance, interest, and utilities. Your business also has variable costs that fluctuate with sales (for example, the cost of raw materials used to make a product). If your gross profit after deducting variable costs isn’t high enough to cover your fixed costs, your business will lose money.

A break-even point calculation lets you determine the level of sales at which your gross profit equals your fixed costs. Your goal is to exceed this level so that you’ll make money. However, knowing your break-even number provides a baseline for gauging your results as the year progresses.

If you need help calculating the break-even point for your product or service, please call our office today.

 

 

ACCOUNTING CONCEPTS THAT EVERY BUSINESS OWNER SHOULD KNOW

confusedYou may have just opened your business, but your business is D.O.A. without an understanding of accounting and recordkeeping requirements. Here’s a primer of twenty accounting concepts that every business owner must know: 

#1: Account Types

There are six Account types that are used in every business:

Asset – An item that your company owns.  Current Assets include those items that can be converted to cash within one year, such as Checking and Savings Accounts, Inventory, and Accounts Receivable.  Fixed Assets include those items that are not expected to be converted to cash during one year of normal business operations, such as Loans Receivable, Machinery, Equipment, and Furniture and Fixtures.

Liability – A debt that your company owes.  Current Liabilities include Accounts Payable, Credit Card Liabilities, Sales Tax Payable, and Payroll Taxes Payable.  Long Term Liabilities include Loans Payable, Notes Payable, and Mortgage Payable.

Equity (or Capital) – The net worth of your company.  Equity comes from two sources: money invested by owners or shareholders, and profits and losses earned by your business.

Revenue– Money that comes into the company and earned from sales or services.

Cost of Goods Sold – The cost of goods and materials held in inventory and then sold.

Expense – Money that is being spent by the company on business-related items.

#2: Financial Statements

There are two Financial Statements that are important to every business.

Balance Sheet – A report that summarizes the financial position of your company.  It shows the value of your company’s assets, liabilities, and equity as of a specific day.  It is called a Balance Sheet, because the value of the Assets is always exactly equal to the combined value of the Liabilities and Equity.

Profit and Loss Report – A report that summarizes your income and expenses for the month,  so that you can tell whether you’re operating at a profit or a loss.  The report shows subtotals for each Income or Expense account that has been set up.  The last (bottom) line shows your Net Income or Net Loss for the month.

#3: Petty Cash

A signed and approved petty cash voucher is always needed in order to reimburse the Petty Cash Fund. When a check is written to reimburse the Petty Cash Fund, the account number(s) to use for the expense account distribution should be all the expense account numbers and amounts based on the petty cash receipts.   Ex.-“Office Expense” $49.16; “Auto Expenses” $14.75; “Meals”  $36.09.  These three individual expense accounts should be listed as the expense accounts, and not Petty Cash.

#4: NSF, Credit Card, and Misc. Fees

These fees are often overlooked and are not subtracted from the company’s checkbook balance.  When they aren’t subtracted, the checkbook balance is incorrect and you may run the risk of overdrawing your account by writing checks and not having sufficient funds to cover them.  These fees should be recorded immediately as deductions in the bank account register.

#5: Purchase of Machinery, Equipment, and Furniture

Those specific items that will be used by the business for over one year should be coded to the specific asset account entitled “Machinery,”  “Office Equipment,”  or “Furniture and Fixtures.”  They should not be coded to the expense accounts entitled “Office Expense,”  “Repairs and Maintenance,” or  “Shop Supplies” etc.  The bottom-line invoice amount (which includes sales tax and possible delivery charges) should be entered.

#6: Year-End Bonuses

Payroll taxes such as Federal Withholding, Social Security, and Medicare must be withheld from the gross amount of the bonuses.  If you’re in doubt as to what should be the gross amount for, let’s say, a $100 net bonus check, please call us before you write the check.  When we discover that you didn’t withhold payroll taxes from a bonus check, we’ll have to calculate the taxes for you.  You’ll then end up paying the IRS both the employer’s and employee’s portion of Social Security and Medicare tax, which can be avoided.

#7: Loan Payments

When you write a check for a loan or note, the amount paid must be distributed to two accounts—for the loan principal (a liability account) and for the loan interest (an expense account).  The breakdown for these two amounts should be listed on a separate amortization schedule.  If you don’t have this schedule, please call the lender or your CPA. The loan interest is deductible as an expense on your Profit & Loss statement but the loan principal amount is not deductible on your Profit & Loss statement.

 #8: Payroll Tax Payments

When coding the check written for the monthly Form 941 payroll tax deposit, either the account “Payroll Tax Deposits” or else “Payroll Tax Liability” should be used.  Both of these accounts are liability accounts. Payments should never be coded to “Payroll Tax Expense,” an expense account.  (For QuickBooks users: Use the “Pay Payroll Liabilities” feature).

 #9: Credit Card Payments

When coding the check written for the credit card payments, individual expense accounts should be used for the specific items charged – ex. Office Expense, Meals & Entertainment, Repairs & Maintenance, etc.  Personal items charged should always be coded to the account “Distributions” (S Corporation)  or  “Shareholder Loan” (C Corporation).

 #10: Sales Tax Payments

When coding the check for the payment of sales tax liability to the state, the account number for the account “Sales Tax Payable,” a liability account, should be used.  Do not code these payments to “Sales Tax Expense,” an expense account.  (For QuickBooks users: Use the “Pay Sales Tax” feature).

 #11: Checks Written For Personal Expenses

Since these expenses are not business expenses, business expense accounts should never be used.  Instead, these personal expenses should always be coded to the account “Distributions” (if your company is an S Corporation)  or “Shareholder Loan” (C Corporation).

#12: Retained Earnings

Never code any Checks or Deposits to the “Retained Earnings” account.  This account should never be used in a transaction, unless your CPA gives you end-of-the-year journal entries to make that will increase or decrease the “Retained Earnings” account.

 #13: Miscellaneous Expenses

Don’t code any check amounts to “Miscellaneous Expense.”  This is a “hot” item for potential IRS audit.  You may need to create a new account for the specific item.  If you’re unsure of where to code this item, please call your CPA.  It’s always better to be “too specific” than to be “too general.”

 #14: Consistency in Recording Expenses

Always be consistent when coding a specific expense amount that could be considered to be ambiguous.  For example, when you code a check to pay for auto insurance, be consistent in either using the “Auto Expense” account or else the “Insurance” account.  The choice is up to you, but it’s important that you continue to use whatever account that you choose for all other subsequent checks to pay your auto insurance.  Another example where you should use consistency is in recording fees for printing checks.  Be consistent in coding the check to either “Bank Charges” or else “Office Expense.”

 #15: Recording Deposits

When deposits are recorded, be sure to only code receipts from customers as Sales Income.  Any other amounts received should be coded to their specific individual accounts.  For example, amounts put into the business from shareholders should be coded to “Shareholder Loan” and not to “Sales.”  Amounts received as refunds, rebates, loan repayments, etc. should be coded specifically to their specific account.

#16: Recording NSF Checks

If a customer’s check bounces in the current accounting month, then void the customer’s check payment.  However, if the customer’s check bounces in an accounting period following the accounting period that it was recorded as a payment, these steps should be followed: (1) Record the bank charge for the NSF check in the checking account register, (2) Record the NSF check in the checking account register.  Enter the customer’s name as the Payee, the amount of the NSF check in the payment column, and either Accounts Receivable (accrual basis) as the Account to be debited.

 #17: Recording Bad Debts

If a customer’s account becomes uncollectible in the current accounting month and the original sale was recorded in a prior accounting month, a credit memo should be prepared for the specific customer to reverse the customer’s invoice(s).

#18: Non-Deductible Expenses

There are a few business expenses that aren’t deductible when preparing your corporation’s income tax return at the end of the year.  These expenses should be tracked separately and include: (1) Penalties paid to the IRS (not Interest, which is deductible). (2) Business gifts over $25 per person per year.  These non-deductible expenses need to coded to an expense account called “Non-Deductible Expenses” and should be clearly defined as to what they are for.

#19: Vendor Payments

All payments to vendors for services for $600 or more must be tracked because a 1099 form must be given to them in January of the following year.  Be sure to separate amounts paid for services rendered as opposed to amounts paid for reimbursements, materials, or supplies.

#20: Voiding Checks

All checks should be entered in the account register—whether they’ve been used or unused.  Be sure that the monthly numerical sequence of checks is accounted for by including all voided checks and checks held but not yet released.  These checks should be recorded with zero amounts until they are released.

If you’re still confused, don’t panic — call our office today at (727) 391-7373.  We’re only a phone call away.