Resources

Tax Resources

modeforjoe@gmail.com (Joe C) — Thu, 24 Aug 2023 18:34:39 GMT

Tax Information Resources for Small Busines

Here's a list of a few resources and articles to help small businesses like yours with taxes. This can get complicated, but often times the complications are opportunities to minimize you tax liability. Don't miss those deductions and credits, and don't walk into that first meeting unprepared, for your tax preparer.

IRS, Small Business Section

www.irs.gov/businesses

Believe it or not, the IRS has a (fairly) well organized website, and they compiled a lot of resources for business in one place.

IRS, Taxpayer Advocate

www.taxpayeradvocate.irs.gov/

Even more surprsingly, the IRS has an entire department dedicated to taxpayer advocacy and assistance. They cover taxpayer resources, tax news, and even reports to Congress. Thrilling.

New York State Tax & Finance, Business

www.tax.ny.gov/bus/

Similar to the IRS links, but including additional resources for sales tax, real estate taxes, alcohol taxes, and information on additional incentives in NY.

Small Business Administration

www.sba.gov/business-guide/manage-your-business/pay-taxes

The SBA has a basic but broad guide on the many considerations for running a business, with the link above diving into tax-related guidance.

Small Business Tax Guide, Walters Kluwer

www.wolterskluwer.com/en/expert-insights/understanding-small-business-taxes

A basic survey of tax considerations, including a few you might not be familiar with.

Common Tax Deductions, Ramsey

www.ramseysolutions.com/taxes/small-business-tax-deductions

A list of some of the most common tax deductions for businesses. Great for making sure you don't miss any, but also planning out business decisions that maximize these opportunities.

The Cashflow Statement — Don't Sleep On It!

modeforjoe@gmail.com (Joe C) — Thu, 24 Aug 2023 17:55:26 GMT

It's the middle-child of the 'big three' financial reports... let's talk about it

When thinking about financial statements, most will come up with the profit & loss statement and the balance sheet. People rarely think of the cashflow statement, and look at it even more rarely. Why does it compliment the other two, and how can it help your business?

Secrets of the Profit & Loss Statement

When you spend money that's an expense, and when you deposit money that's income, right? Well, businesses know that's not true, and accrual accounting takes into account what is an actual expense and when it becomes an expense. Did you pay an insurance premium? If it was for a 6 month period of coverage, you'll need to divide it and book it as an expense in each of those 6 months, even if you wrote one big fat check. Did you complete a big job this month but won't pay one of the vendors for it until next month? You may not have paid them, but if they completed work for you, then you owe them and it still gets treated as an expense. Did you pay a security deposit? You may want a deduction out of it, but we know that amount actually belongs on the balance sheet.

Wait a minute! Expense and revenue are both important, but cash is king and it almost seems like we need a special bank-account-to-business-activity report, perhaps something better than constantly checking my banking website. This is where the cashflow statement comes in.

Show Me the Cashflow

Your revenue, expenses, and profit for a given period are important, but you want the way those same transactions affected your cash to be reported too. It's one thing to rack up revenue faster than expenses, but it's another thing to bounce checks because your bank account zeroed out. The Cashflow Statement analyzes cash by starting with your profit over a period, and makes adjustments in three categories:

Operating Activities : Expenses you haven't paid for add to your cash, revenue you haven't received subtracts
Financing Activities : Payments that include principal on loans subtract from cash, borrowed money adds to cash
Investing Activities : Investments from investors add to cash, disbursements and dividends to owners subtract

How will these adjustments in the three categories help us understand some of the transactions mentioned above? Take the insurance premium payment example, and assume it is a $6,000 payment covering a 6 month period. This shows up on the books as a $1k insurance expense and $5k prepaid exp on the balance sheet. If that month's business profit was $25k, the cashflows statement will adjust it to $20k. On the other hand, if you receive a vendor's invoice for $3k in the current month for a job completed that month, but you won't pay them until next month, the cashflows statement will make the opposite adjustment. You'll see that adjusted $20k in operating cashflow adjusted up by $3k, simply because that vendor bill counts as an expense, but if you still owe it and haven't paid it, you still have that cash on hand.

Financing activities adjustments can be even more revealing. If your business has vehicles with loans on them, you may be making payments of $500 to $1,500 per month on each of them, but seeing expenses of only $100 to $1,200 per month reflected in your profit. In other words, your profit and loss statement is showing smaller costs associated with those vehicles (only the interest expense) and implying there should be more money in your bank account at the end of the month, but in reality you're writing much larger checks to the car loan servicer and your bank account has less money in it than you'd expect. The reason? Loan payments include a principal amount, and while this isn't an expense it still reduces your bank account. The cashflow statement will identify this difference and make the adjustment, but it will do so in the financing activities section. Similarly, borrowed money isn't income, and isn't an operating activity, but this section will add to the reporting of cash. Also noteworthy, if you take on a new car loan for a new company vehicle, you'll generally book it as an increase in a liability account and an increase in a non-cash asset account for vehicles: this will not be picked up by the cashflow statement because it didn't involve a cash asset account.

Sometimes the biggest swings in cash come from the investing activities section, which captures items that aren't reflected in the profit & loss statement, and are hard to determine looking at the balance sheet. When you pay out distributions to yourself or other owners, this isn't an expense. It adjusts your equity accounts downward on your books, but the balance sheet will simply state the accumulated balance of those equity accounts. Instead of pulling up an older balance sheet and subtracting the accounts in your head, the cashflow statement can give you the amount of change as an adjustment to cash. This is particularly helpful if monthly statements routinely show a comfortable profit, but the bank account always seems to come up short... an especially important metric for silent partners and passive investors to look at.

Dive Into Your Cashflow

Usually, the profit and loss statement is a good indicator of how much money you're bringing in at the end of the month, and the balance sheet is a good indicator if money owed by customers or to vendors is getting out of hand, but the cashflow statement will give you a straight assessment of how all of those things translate directly into cashflow changes. Quickbooks Online has one neat trick that lets you really dive into cashflow: you can run a cashflow report over a period of time, and have Quickbooks total columns by month. This will let you follow the progression of your cashflow changes by simply reading it left to right for each account and section. If you're consistently entering certain expenses against a client, you can run cashflow statements across all clients too!

Hopefully you're now more comfortable looking at the cashflow statement and understanding how it fills in the blanks the other two reports miss. Along with the two advanced techniques, you should now have an additional reporting tool in your management toolbox.

Metrics for Your Business

modeforjoe@gmail.com (Joe C) — Thu, 24 Aug 2023 15:52:07 GMT

Try these two business metrics for improving your business

Keeping track of your business is critical if you want to know which customers owe money or have outstanding estimates, or how much you owe vendors and which items you commonly buy from them. However, you should also be looking at the big picture, and business metrics and ratios can help. Most people will look at their Profit & Loss statement and not go much further, but there can be a few metrics that might just change your decision making for the better.

Inventory Turnover Ratio

What is inventory? In some sense it’s money you have tied up in products (or supplies directly related to a service) you haven’t sold yet. All businesses need some inventory, but if your P&L looks healthy yet you often feel a cash crunch, this could be why.

Example

Analyze this by taking your cost of goods sold over a 12 month period, and dividing it by the average of your inventory level over that same period. If your COGS is $250k and your average inventory is $40k, your ratio is 6.25, and if your average inventory is $70k then your ratio is 3.57. Comparing the two examples ($40k and $70k), you’ve “trapped” yourself into tying up $30k in otherwise liquid working capital that could be used for other purposes. Emergency repairs? Key equipment replacement? Outside contractor for a special job? That tied up $30k might mean the difference between cutting a check and pulling out the credit card. Another way to think of this: if your gross margin is 40% you have to wait to sell $75k over a period of 45 days before you’ve “made up” for that tied up $30k. Finally, your ratio can be translated into Days Sales of Inventory (telling you the average number of days [cost weighted] before selling something) by dividing 365 by your ratio. A 3.57 ratio improved to 6.25 will lower your DSI from 102 days before a sale to 58 days.

Of course, a higher inventory turnover ratio is ostensibly better because it avoids tying up cash, but inventory is necessary because you want products available for sale immediately, and for jobs that require supplies you don’t want to give quotes with longer timeframes. Competitors might quote the same price but they can also start much sooner.

What to Do About it

If, after analyzing your own numbers, your ratio seems high, you can then look at individual products line by line using quickbooks reporting to see which items move slowly. After updating your purchasing strategy, you can set a budget… a ratio budget. Measure your inventory turnover ratio each month for the previous three months and check to see that you’re hitting your target.

Are only a few items selling too slowly based on your turnover target? If they’re a niche product customers can’t avoid or substitute buying, maybe your price is too low. If it’s a competitive market for that product and can be purchased online at retail easily/conveniently, maybe it’s just not worth carrying.

Unit Economics

Even more core to a business than inventory, Unit Economics is the revenue minus costs directly related to some key unit of a business. This can be the revenue & costs associated with an hour of labor or billable hour, a delivery mile, individual products/orders, or an individual customer. The formula is simple: the unit’s revenue minus its costs divided by the quantity of units. What’s tricky is classifying which costs and revenues to include, and this is where a strong accounting system is needed. Does your payroll isolate admin staff pay from direct labor and billable labor? Are vendors/expenses separated so that flat fee costs and per item/use costs are in different expense accounts? Something as simple as not properly entering a sales return in QB by using the item when entering transactions can throw this off. Once ready, you can run reports that include the revenue & expenses to be included, filter by products/services, and run product/service reports all to get good revenue/expense/item count numbers.

Once you’ve calculated your unit economics, you can improve your business in a number of ways. First is the question of revenue. Do you have particular jobs or scenarios where your unit economics is too low because the related costs are unavoidably high? Perhaps your competitors are facing the same cost pressures so maybe you’re not charging enough in revenue. You may sell a little less, but you’ll also pay less in those costs and also better cover them with the revenue. Does your expense for that revenue vary widely? Maybe you should break down your revenue item into two different products at different prices.

Second is costs. Are you capturing all of your costs in your revenue/pricing? Are some items categorized as “supplies” actually kind of expensive and maybe should be billed as materials to your customers? If you’re writing an estimate for $1,200 for an exterior building repair, it might be better to express it as $500 materials, $400 equip rental, $400 service/labor. The total in the second example is $1,300, but it better shows potential customers what your rough cost breakdown is and may make the estimate seem more reasonable. Additionally, the materials cost might vary a lot from job to job so you can capture that on the revenue side, staying true to that line item’s unit economics.

Know Your Numbers

These are just a few metrics that can help your business. Once you pair them with business strategies and incorporate them into a monthly/quarterly analysis, you’ll be able to address problems that you might miss simply looking at the Profit & Loss report alone.