Using Regulation A to Raise Capital

Article written by EricBank

Like thoroughbreds chomping at their bits on the starting line, small business owners are keenly awaiting the SEC's final release of equity crowdfunding regulations. It's been a long wait -- the JOBS Act mandated the new financing mechanism over two years ago.

No Time to Wait

Some entrepreneurs have not been content to cool their heels while the SEC labors over its task. To raise capital, many continue to place unregistered securities privately via Regulation D. What some don't realize is that there are a few other alternatives for issuing stock without an IPO. Dan and Ben Miller, real-estate developer brothers based in Washington, D. C, have been successful using Regulation A to raise money for projects. Their first foray into Reg A financing created a pot of $325,000 from 175 investors. They used the money to convert a 5,000 square foot warehouse, but the process wasn't easy.

Regulation A

Reg A gives entrepreneurs a safe haven for issuing non-registered securities, but it differs from Reg D in several ways. Reg A is like a mini-IPO, albeit with a fundraising cap of $5 million per year. Here are some key facts about Reg A:

·       You must file SEC Form 1-A, which contains an offering circular (much like a prospectus), a notification and several required exhibits

·       There are three Form 1-A formats to choose form, including a simplified Q&A version

·       You must also file for approval from the states in which you plan to accept investors

·       You can market the securities publicly, much like Rule 506 securities under Reg D

·       Unlike Reg D securities, Reg A securities are not restricted -- in most cases, investors can resell up to $1.5 million of these securities

·       Reg A financial statements requirements are simpler than those for IPOs

·       You can make small investments and you don't have to be an accredited investor

·       The issuer does not fall under the reporting requirements of The 1934 Exchange Act nor the Sarbanes-Oxley Act

·       Reg A offers unique provisions for "testing the waters"

Making a Test Run

Under Reg A, a company can distribute marketing information before filing an offering statement with the SEC. This allows a company to gauge interest in the offering before they have to shell out for accountants, lawyers and other worthies necessary to prepare an offering statement. While you can collect commitments before filing the offering, money can't change hands until the filing is made, approved and distributed.

The Rise of Fundrise

The Millers realized that the software they developed to manage the Reg A application process was of great general interest to other real estate developers. In response to that interest, they built Fundrise as the first "curated and vetted platform" for real estate fundraising. It is, in effect, a crowdfunding portal that uses Reg A and Reg D instead of the JOBS Act rules -- that is, until the JOBS Act rules become effective. Investors participate by purchasing preferred equity or mezzanine debt. The real estate developer pays Fundrise 2 percent of funds raised and an origination fee. Investors pay a 0.3 percent service charge.

Employer Contributions: New Limits for 2015

Article written by EricBank

 

If your small business contributes to an employee retirement plan, you should be aware of the new limits in place for 2015. These can affect you in a few ways:

• You may be able to make a larger employer contribution to your employees' account
• You can accept larger employee contributions in 2015
• If you're self-employed, you may benefit from higher employer and employee limits

 

401(k) Plans

 

For 2015, the maximum total contributions cannot exceed $53,000, or $59,000 for employees 50 and older. This is up $1,000 from 2014. Employees can defer up to $18,000 of their annual compensation, up $500 from 2014. Employees age 50 and older can make $6,000 in catch-up contributions, also up $500 from 2014. Note that these limits also apply to 403(b)s, most 457s, and Thrift Savings Plans.

 

By the way, 401(k)s must pass anti-discriminatory tests that in part depend on the definition of a highly compensated employee. For 2015, the threshold for this designation is up $5,000, to $120,000.

 

Individual 401(k)

 

Many sole proprietors fund their retirements via one-participant 401(k)s. As an employer and employee, you get to make contributions in both roles. As an employee, you can contribute $18,000 of your earned income in 2015, up $500 from 2014. If you're 50 or older, the limit is $24,000, up $1,000. Total contributions cannot exceed $53,000 (up $1,000), not counting the catch-up contribution. You figure your earned income after first deducting both 1/2 of your self-employment tax and your contributions for yourself. Rate tables in IRS Publication 560 help you figure your maximum individual 401(k) contributions as a self-employed person.

 

SIMPLE IRA and SIMPLE 401(k) Plans

The employee deferral limits on SIMPLE 401(k) plans have increased $500 in 2015, to $12,500. The catchup contribution limit is also up $500, to $3,000.

 

SEP IRA

 

For 2015, you can contribute up to $53,000 to each employee's SEP IRA account, up $1,000 from 2014. The contribution can't exceed 25 percent of an  employee's compensation.

 

Workplace Plan/IRA Income Limits

Some employees who participate in a workplace retirement plan also maintain a traditional or Roth IRA. Here are the 2015 income limits for those who participate in both workplace plans and IRAs:

 

• Traditional IRA: Singles can fully deduct IRA contributions up to $61,000 income, and partially up to $71,000. Both are up $1,000 from 2014. The limits for married couples filing jointly begin at $98.000 and top out at $116,000, a $2,000 increase for both. If your spouse belongs to a workplace plan but you don't, the limit range is $116,000 to $131,000 for a single filer and $183,000 to $193,000 for joint filers. That's $2,000 higher than the 2014 spousal limits.
• Roth IRA: Contributions are limited for singles when income is in the range of $116,000 to $131,000. The range for married filing jointly is $183,000 to $193,000. All these figures have increased $2,000 for 2015. Remember, you can circumvent the income limits by making a non-deductible contribution to a traditional IRA and then doing a trustee-to-trustee transfer to a Roth IRA.

Three Retirement Plan Options for Small Businesses and Self-Employed Owners

Article written by EricBank

If you are self-employed or a small business owner, now is a good time to consider setting up a retirement plan. The three retirement plans discussed here each has unique pros and cons, but each one will cut your tax bill and provide other valuable benefits. All three work well for small businesses and for the self-employed.

 

SIMPLE IRA

 

The Savings Incentive Match Plan for Employees (SIMPLE) IRA is a good choice for small businesses with no more than 100 employees, each of whom received at least $5,000 in annual compensation. You can make matching contributions up to 3 percent of a participant's compensation or non-elective contributions of 2 percent of every employee's compensation up to $260,000. Employees can contribute up to $12,000 ($14,500 for aged 50 and older). These plans are easy and cheap to set up -- you file IRS Form 5304 -- and the plan requires no administrator. This plan has higher limits than does an individual IRA (although lower than other employer plan limits), and the employer contributions are deductible. On the downside, SIMPLE IRA contributions reduce allowable 401(k) contributions, and early withdrawals may trigger a 10 percent penalty. You can only set up a SIMPLE IRA from January 1 through October 1.

 

SEP IRA

 

For a one- or two-person company, consider the Simplified Employee Pension, or SEP IRA. This plan is easy to set up using IRS Form 5305-SEP. The SEP accepts only employer contributions. The contribution limits are the lesser of 25 percent of compensation or $52,000. This makes the SEP IRA attractive for the self-employed, although the deduction for self-employed individuals requires a special calculation. You must make contributions proportional to each participant's compensation, but you can skip years. These plans must be established by the end of the year to take a tax deduction in that year. They are very simple and inexpensive to set up and run. Contributions don't affect other accounts and you can terminate the plan any time. Possible disadvantages include the fact that the contribution percentage must be the same for all employees, employers contribute everything, and all employees must be included.

 

Individual 401(k)

 

The individual 401(k) applies to a self-employed person (and spouse). These plans have the same rules as other 401(k) plans. As a self-employed owner, you can make elective deferrals of 100 percent of your compensation up to $17,500 in 2014. In addition, you can make employer nonelective contributions up to 25 percent of your compensation. Total contributions for 2014 can't exceed $52,000 ($57,500 for owners age 50 or older). Once again, you must make a special calculation to figure your maximum contribution. You must open an individual 401(k) with a custodian by December 31 to take deductions in the tax year, but you don't have to file a set-up form with the IRS. The individual 401(k) is attractive because it allows you (and your employee-spouse) to take deductible contributions in a flexible way, and you can contribute up to April 15 for the prior year. However, these plans are somewhat more complicated and expensive because you need a plan administrator, and you must report plan assets annually with IRS Form 5500 once they exceed $250,000.

Top Five Mistakes for Small Business Owners to Avoid

Article written by Eric Bank

Starting a small business can be rewarding, but also challenging. Sometimes, entrepreneurial spirit is great for launching a company but not so good for the day-to-day running of the business. But it doesn't have to be that way. Here are five common mistakes that new owners make -- avoid these and you'll have a much better chance of long-term success.

1.  Poor Planning. You can avoid a lot of grief by creating a business plan and budget for the first year of operation. A business plan indicates to investors and vendors that you have seriously thought about your enterprise, including finances, marketing, selling, organizational policies and operational procedures. The budget proves your ability to project numbers and make reasonable assumptions. You'll have to address issues of compensation, taxes, buying inventory and paying interest, among others.
2. Poor Accounting Procedures: Bookkeeping can't wait for a convenient time. You must keep your books up to date and accurate. Without precise information, you are likely to make mistakes that can cost your business dearly. Poor accounting procedures can lead to unpaid bills, uncollected revenues, cash shortages, illiquidity and even bankruptcy. If accounting isn't your thing, by all means hire a bookkeeper or an accounting service to keep your books in good order. The service is worth its weight in gold, and it's tax-deductible.
3. Poor Internal Controls: Even if you have a bookkeeper, you must also create internal controls so that no one employee can hide mistakes or embezzle. Either you or a trusted partner must periodically inspect primary financial documents and make sure they match your financial reporting. These documents include cancelled checks, bank statements, purchase orders and bills. Always sign all check personally. You can use an outside service to reconcile and audit your books, but you should also remain personally involved in creating and maintaining internal controls.
4. Poor Delegation Skills: Some entrepreneurs are, unfortunately, megalomaniacs. They find it impossible to delegate the smallest task, habitually micro-manage every employee and generally make the staff's working lives a nightmare. Inevitably, your product or service will suffer, your employees will turn surly or quit, and you'll be spread so thin that things will fall between the cracks. You can get a grip by replacing this anti-social behavior with good communication and delegation skills. Regularly meet with and talk to your staff, ask for updates (but not six times a day), and establish procedures by which you can judge whether the company is performing well. Use outside vendors as needed to supplement your staff.
5. Poor Involvement: The opposite of #4 is a detached owner who loses control of the business out of neglect. Just as you can't do everything yourself, you can't delegate all the work, because your vision will be quickly lost. Other employees might be more interested in exploiting the business for their own purposes than in following your agenda. You must find the right balance between the two extremes of involvement and lack thereof. Seek the assistance of outside lawyers, accountants and financial advisors to help you evaluate how well you are running your business and be open to their suggestions.

Top 10 Ways to Promote Your Small Business During the Holidays

Article written by EricBank

The holiday spirit puts people in a buying mood. Don't let your small business miss out on its fair share of Christmas cheer. Here are 10 tips for attracting customers and stimulating sales. Don't forget, most of these are tax-deductible -- consult with your tax preparer for all the details.

1.     Say it with music. You can turn just about any business into a festive venue by hiring a few musicians and/or singers. Christmas carols really set the mood, and live music attracts new potential customers. Couple this with some holiday decorating and promote the event on social media.

2.     Shopper guidance. Join your fellow business owners and put together a holiday buying guide featuring local merchants. Include special sale announcements and feed the information to local media and bloggers.

3.     Holiday hoopla. Set up Christmas-themed grab bags, contests, lotteries and other giveaways to attract visitors and reward them for their patronage. If you are a service company, offer a holiday tie-in, such as a free decorating or free tickets to the latest Christmas movie.

4.     Holiday cards. Don't forget to send out holiday cards. Use your customer database to dispatch cards for Thanksgiving, Christmas, Hanukah, Kwanza, New Year's or Festivus. If you have the time, pen a thoughtful, personal note that lets your customers know you're thinking of them this holiday season.

5.     Promote a holiday-appropriate charity. The poor, hungry and homeless -- humans and animals -- need help in the cold winter weather. Hospitalized children need toys, and our fighting forces overseas need CARE packages. Adopt a charity and aggressively promote your interest in it.

6.     Special customer loyalty offers. Say "Merry Christmas" to your best customers by offering them special deals on gifts and other holiday paraphernalia. Make them understand that the deals are exclusively for your longtime customers as a thank you for their business.

7.     Sales spectacles. Team up with your neighboring businesses for sales spectaculars. For example, the business on your block can set up sidewalk sales, festooned with balloons and maybe Santa himself. Bring in some petting animals and you'll be a hit with young kids and their parents. Let your imagination run wild and you'll be surprised at how many good ideas you can develop.

8.     Put out food. NOTHING attracts customers like free snacks. Sure, it might be a little costly, put almost invariably you are repaid with ramped-up sales. Do everyone a favor and gear your offerings toward healthy holiday foods like fruits, nuts and wholesome eggnog. If you live in an area that favors vegan or ethnic foods, stock up on delights that you know will be appreciated.

9.     Promote New Year's resolutions. Help your customer's improve their lives by tying-in a promotion to offer free fitness training, business consulting or other useful services.

10.  Holiday gift cards are a great promotion. Sell them at a slight discount to encourage sales. You win twice --- the sale of the cards and possible incremental sales made to the recipients when they come in to redeem the cards.

How is your small business celebrating the holidays? We'd love to hear from you! 

Leave us a note and let us and our readers know what you're up to. 

Happy Holidays from all of us at Small Business Financials!

Small Business Charitable Contribution Tips

Article written by EricBank

As we enter the final month of 2014, many small businesses are planning charitable contributions. This is a good idea, for many reasons beyond the tax deduction. Let's explore the why's and how's of intelligent charitable giving during this holiday season.

Benefits Beyond Taxes

Charitable giving is great for business, because it helps instill a positive image among your customers, especially when you pick a charity that is important to them. One feature of running a small business is that you get to know your customers, so that you can often figure out which causes they find the most appealing. If in doubt, just ask! In one 2010 survey, 90 percent of respondents said they wanted a business to tell them how it is supporting a cause. You also can boost employee morale by giving to a cause they find important, helping to foster a community feeling inside the company. Giving helps your marketing efforts by allowing you to connect with local leaders in a different context, and even garner some coverage on the local news.

How to Proceed

You need to plan the amounts and recipients of your charitable giving early enough in the year so that you can budget and put aside sufficient cash. This can be a challenge to a busy business owner, but consider it another necessity of the job. Select a charity to which your business has some plausible connection. Do you sell food as a retailer or restaurant? Contribute to a charity that runs a food bank or sends food packages to our military personnel overseas. Dentists, doctors, lawyers and other professionals can offer free services to the needy who otherwise couldn't afford to pay. Involving your employees in the decision helps to empower them and increase job satisfaction. Make sure the recipient is legitimate -- the well-known charities are usually a safe bet. Let your customers know what you are doing -- don't hide your light under a bushel basket!

Get Your Tax Deduction

Your business does good when it contributes to charity and does well by its bottom line through the resulting tax deduction. Make sure the recipient's tax status provides you with a deductible expense. The charity is usually a tax-exempt 501(c)(3) outfit and will probably accept volunteered services, inventory and sponsorship of local events in addition to cold hard cash. In general, you can deduct up to 50 percent of your adjusted gross income for charitable contributions, although non-cash contributions can be a little tricky. Here are some tips:

• You can't deduct contributions to a specific person, only to the organization.

• Sole proprietors itemize their deductions on Schedule A of Form 1040. 

• You can deduct the fair market value of contributed inventory or property, but use Form 8283 when the value exceeds $500. 

• You can't deduct volunteer work, but you can deduct some of the expenses you encounter while performing the work -- mileage, special uniforms, hosting a fundraiser, etc. 

• If you receive anything in return for your contribution, you'll have to subtract its value from your deduction. Be aware of this at charity auctions -- only the amount above the auctioned item's fair market value is deductible. Unless, of course, you donate the item as well.

7 million new jobs! Way to go small business!!

https://www.sba.gov/blogs/small-businesses-drive-us-job-recovery

Small Business Health Care Tax Credit 2014

Article written by EricBank

One of the features of the new health insurance landscape is a tax credit for small businesses to offset part of the costs of employee coverage. The amount of the credit has increased in 2014 to 50 percent of the premiums that a small business employer pays. The credit also increases to 35 percent for small tax-exempt employers. Eligible employers can receive the credit for two consecutive years.

Qualified Health Plans

To be eligible for the credit, the employer must pay premiums for employees enrolled through the Small Business Health Options Program Marketplace, although certain exceptions apply. For example, if you pay $50,000 a year for employee premiums and receive the maximum credit, you cut your tax bill -- or increase your refund -- by $25,000. The refund is limited by the total of your income tax withholding and Medicare tax liability. If you forget to apply for the credit, you can file an amended return within three years of the original filing or two years after paying the tax, whichever is later. 

Eligibility Requirements

A business can claim the tax credit if it pays at least 50 percent of each employee's health insurance, not counting employees who are dependents or family members. The business must have fewer than 25 full-time-equivalent (FTE) employees with average wages below $50,800, although the math is a little tricky -- see example below. One FTE can be achieved by one full-time or two half-time employees. The credit works on a sliding scale such that the smallest businesses -- ones with 10 or fewer employees, get the biggest credit, on a percentage basis. For an employee count between 11 and 24, the credit is reduced by a fraction in which the numerator is the number of FTEs minus 10, and the denominator is 15. If the average annual FTE wages exceeds $25,000, the reducing fraction has the excess average wage in the numerator and $25,400 (for 2014) in the denominator. The final reduction is the sum of the employee count and employee average wage reductions, and could possibly wipe out the credit entirely.

Example Calculation

Imagine an employer in 2014 has 12 FTEs and average annual wage of $30,000. The employer shells out $96,000 to pay for qualified employee health insurance premiums. The starting credit is 50 percent of the premiums, or $48,000. The employee count reduction for employees in excess of 10 is (2/15 x $48,000) or $6,400. The average annual wage reduction is (($30,000 - $25,000) / $25,400) x $48,000, or $9,449. Therefore, the total credit is equal to $48,000 - $6,400 - $9,449, or $32,151.

Claiming the Credit

To receive the credit, you must complete IRS Form 8941, Credit for Small Employer Health Insurance Premiums. Include the tax credit in your general business credit when you file your business income tax return. You may be able to carry the credit back or forward. If you are a small tax-exempt organization qualifying for the credit, file IRS Form 990-T, Exempt Organization Business Income Tax Return -- even if you normally don't file this form -- to receive a refund.

Eight Tax-Saving Tips for Small Businesses

Article written by EricBank

If you are a sole proprietor, a small partnership, LLC or S corporation, or run a small business from your home, it's especially important to take advantage of all the tax deductions and benefits due you, since small businesses usually have limited financial resources. We've assembled eight tax-saving tips that will help reduce your tax bill and keep more money working inside the business.

·         Keep Excellent Records -- Every time you lose a receipt or transaction record for a deductible expense, you are throwing money away. It usually a matter of having good bookkeeping habits and using either a qualified tax preparer or tax-preparation software. The latter can be economical, but the former can help represent you in front of the IRS, an important consideration.

·         Professional Fees -- It's easy to remember to deduct any business taxes and licensing fees you've paid during the year. But also remember to deduct the costs of memberships to business-related organizations and the cost of books and subscriptions used by the business. This can add up to hundreds of dollars a year.

·         Borrowing Expenses -- Many a small business requires a loan or line of credit to help get through rough times or to finance operations and growth. Make sure you account for and deduct all the interest you pay for business-related loans during the year. Don't forget to deduct any debt-related fees, including ones for applications, rate-reductions, appraisals and legal activity.

·         Insurance Costs -- No, you can't deduct life insurance premiums, even on policies for key people within the company, but there are plenty of business-related insurance costs that are deductible. These include insurance policies that cover business assets -- machinery, property, equipment and so forth -- and liability insurance for a wide variety of business-related contingencies. Also, be aware that self-employed individuals can deduct health care insurance costs directly from gross income rather than as an itemized deduction.

·         Maintenance and Repair Expenses -- If you have property you use to earn income, the upkeep and repair expenses are deductible. Normally, this includes the total cost of materials and labor. If you do the labor yourself, you can only deduct the cost of materials.

·         Office Supplies -- Sheets of paper and the clips that hold them together are deductible when used for business purposes. The same is true for staplers, pens and all those other supplies necessary to keep your business humming. Different businesses often need special supplies that are deductible -- printing ink for photographers, drugs and syringes for veterinarians, etc.

·         Management and Administration -- Any money the business spends on management and administration fees is deductible. This includes banking fees and the costs of tax return preparation.

·         Home-Office Expenses -- You can deduct many of the costs of running your business from your home. This includes a pro-rated portion of mortgage interest, utilities, insurance, repairs and depreciation. The IRS even provides a simplified option to quickly figure the tax deduction based on the square footage of the office. Check IRS Publication 587 for all the details.

Four Important Factors Affecting Inventory Management

Article written by EricBank

Small merchandisers and manufacturers rely heavily on the profitable sale of inventory to stay in business, because these companies often have limited funding and sources of credit. Your gross margin -- the difference between selling price and acquisition cost -- can be affected by several factors, both internal and external. Here are four of the most important ones:

o   Economic Environment: It's always wise to run a tight ship, but never more so than when the economy slows down. In this case, a "tight ship" means buying or making only enough inventory for sale in a relatively short time period. On the other hand, when business is strong, interest rates may climb to the point where you can't afford the interest payments on the money you borrow to acquire inventory. You might have to cut back on your inventory if this happens, an unfortunate decision in a strong economy. Instead, prepare for higher interest rates by establishing a fixed-rate line of credit when rates are still reasonable. If the economy turns inflationary, consider using last-in, first-out inventory costing. By doing so, your cost of goods sold will mirror the most recent inflationary price hikes and therefore result in lower taxable income and income taxes.

o   Market Environment: Today's taste may be tomorrow's waste -- that's the way it can go with a fickle consumer base. When some of your inventory goes out of style, you'll have to mark down its price and take an accounting loss. This means restating your inventory value at the lower of cost or market, which in this case is market. Doing so boosts your COGS and thereby cuts your annual taxable income -- or even hands you a net loss for the year. Either way, it reduces your tax bill. You might have to write off inventory because of external factors like product recalls, boycotts, obsolescence, bad publicity and tariffs, to name a few. 

o   Inventory Management: Shrinkage -- theft, spoilage, damage, short shipments, misplacement -- is a big enemy of profits. Fight back with cycle counting, in which you perform a daily physical count of a different part of your inventory. Repeat the cycle until you've surveyed all of your inventory, then begin again. The advantage is that you'll detect shrinkage much sooner than if you had waited for year-end inventorying. The sooner you discover a problem, the sooner you can address it. You might have to adjust storage and security procedures, change management or security personnel, choose new suppliers, or perhaps fire a worker or two.

o   Inventory Tracking: Consider automating your inventory tracking from inception (on the manufacturing floor and/or receiving dock) to sale. High-tech features such as bar code scanners and radio frequency guns can track all movements of your stock items, allowing you to establish a perpetual inventory system. By doing so, you'll always have timely information about goods on hand and COGS. You also might be able to delay physical inventory counts, and in any event, you can integrate the information into your accounting and procurement systems

10 Energy-Saving Tips for Small Businesses

Article written by EricBank

A small business must aggressively work to cut its monthly bills -- often this can make the difference between profits and losses. Here are 10 suggestions to save money each month by lowering your energy bills and increasing your energy efficiency:

 

.   Request an Energy Audit: In most locations, your utility company will provide a free energy audit for your office or home office. The company evaluates your business' energy usage and recommends energy reductions that can save you money. This process usually involves an onsite visit and can save you hundreds or thousands of dollars a year.

.   Use an Energy Savings Calculator: There are several free online calculators available in which you enter information about your small business and receive advice about how to cut energy costs. The tips should include your upfront costs and payback periods. See for example the Energy Star Portfolio Manager.

.   Cut Lighting Bills: Switch all of your lighting to either compact fluorescent lamps or light-emitting diodes. Consider the use of motion detectors that automatically turn off lights in empty rooms. If possible, install skylights.

.   Conserve Energy Usage: You can use timed power strips, a programmable thermostat and Energy Star appliances to lower your energy usage. Replace desk computers with laptops, which are more energy efficient. Upgrade your plumbing to include an efficient water heater (perhaps solar), low-flow toilets and high efficiency urinals.

.   Slash Delivery Costs: If your small business must make deliveries throughout the day, try to combine trips and to use special GPS-based software to work out the shortest routes and routes that avoid traffic. A hybrid or all-electric vehicle is a great money-saver if you have to make many short deliveries around town each day.

.   Allow Work from Home: Can your business thrive with employees working from home part of the time? If so, you can save on energy costs in the office. You'll also save money this way if your company reimburses commuting costs. 

.   Adopt Virtual Meetings: If your business operates from more than one location or must meet with clients or potential clients, consider setting up virtual meeting technology. The price has fallen in recent years and the technology saves time, energy and resources that you'd waste on travel. 

.   Educate and Reward Employees: You should make energy conservation a company policy. Discuss it with employees and hand out written materials describing what you expect of each worker. Hold a monthly contest for the best new energy-saving ideas and hand out rewards to the winners.

.   Think Green: If you are building or expanding your workspace, think green. This means using thick insulation and drywall, putting in skylights and thermal windows, use low-energy lighting and heating systems, consider solar panels, and, if applicable, landscape your grounds with plants that require little water or care. 

.   Grab the Credit: Tax credits are available to small businesses that increase their energy efficiency. Governments at all levels want to reward you for using more efficient appliances and equipment or adding extra insulation to your office space. See the database of energy-related tax incentives at the U.S. Department of Energy webpage

 

Physical vs Perpetual Inventory

Article written by EricBank

Companies, especially merchandisers and manufacturers, use much of their working capital to obtain or produce merchandise. The decision of how to manage and account for inventoried goods can have profound effects on your cost of operations, the accuracy of your accounting data and your tax bill. You must provide the IRS with accurate valuations for the goods you have on hand and the cost of goods sold (COGS) so that it knows how to tax you properly. The method you use to count your inventory items is one of the most basic decisions you can make relative to inventory management.

 

IRS Requirements

What exactly does the IRS want?

• You must track the costs of goods on hand by practicing sound accounting methods.
• You must assign to your inventory account the costs of your acquired goods.
• You must record  the value of inventory items you transfer, use, or sell.
• Calculate ending inventory's value using the value of beginning inventory, the cost of goods acquired or manufactured during the period and the COGS.
• You should, at reasonable intervals, take physical counts of your inventory and use the information to update your inventory value so that it reflects reality.

Periodic Inventory

The essence of the periodic inventory system is to perform physical counts to determine your stock levels. One feature of this system is that you use a purchases account and debit it with all your inventory purchases. Once the period ends, you clear out the purchases account by adding its balance to the inventory account and resetting the purchases account to zero.

You make a physical count at the close of the period to determine the inventory on hand. This is the point where you adjust your book inventory balance to match the physical count. All sorts of discrepancies can appear, including ones arising from theft, damage, spoilage, obsolescence and sloppy record keeping.

 

Perpetual Inventory

Perpetual inventory systems attempt to keep track of each item from acquisition to disposition. If you have a tiny business, you can perform this task daily by hand. Larger businesses use fancy automated equipment such as point-of-sale cash registers and electronic inventory readers. The inventory receives electronic tags, either bar codes or radio frequency ID tags, which allow readers to track inventory movements.

You don't keep an inventory purchases account under the perpetual system. Instead, you immediately update the inventory account when purchases or sales occur. This system gives you immediate information about stock levels, discounts, returns and allowances.

Comparison of Methods

If your business requires timely information about COGS and inventory on hand, you'll find the perpetual inventory system better suited to your needs. As an added bonus, many of these systems place restocking orders automatically when counts run low. Because you track sales in real time, you always know your COGS. The better you keep detailed and accurate records, the longer you can wait to take a physical inventory, a costly and disruptive procedure. 

If you run a small business without the need for real-time information, you can save the cost of fancy gadgets by adopting the periodic method. And a teeny tiny business can always use the time-honored method of recording stock with pencil and paper to implement the periodic method.

Building Business Credit

This is a common theme I address with our small business owners.  I hope you find it helpful!

The Phoenix Business Journal included a pretty succinct article today about the importance of using credit even if you don't need it, to build your business credit score.

3 steps to building strong credit for your business

Sales Volume Impact Upon Total Variable Cost

Article written by EricBank

The minimum volume of sales necessary for your business to meet its profit targets can be decided using cost data. The sum of variable and fixed costs must be associated with every dollar of sales revenue. The company subtracts total costs from sales to compute operating profit. If you hold prices at current levels, higher variable costs are needed in order to increase sales volume.

 

Fixed and Variable Costs

The use of long-lived assets, such as machinery, land, factories, warehouses, vehicles and other items, are the direct sources of fixed costs. Other fixed costs, including selling and administrative expenses, are indirect. By definition, fixed costs such as leases, mortgages, depreciation and property taxes, do not change with production levels. In contrast, direct material costs (raw goods, packaging/shipping, direct labor) and electricity costs are variable, meaning they incrementally increase with operational output. The increase in unit variable costs may be straight-line for small increases in output, but can rise exponentially as production rises, due to items such as short-term rental of additional storage space, penalty electrical usage fees and payment of overtime wages.

Cost-Volume-Profit Analysis

Your company's survival requires profitable operations. To help figure the relationship between profits and production activity, you can perform a cost-volume-profit (CVP) analysis. The analysis helps you determine whether to change production levels, product mix and/or pricing. CVP requires you to calculate your contribution margin ratio:

[E1] Contribution Margin Ratio = (Sales - Total Variable Costs) / Sales

For example, if a company spends variable costs of $80,000 monthly to sell $200,000 of canned beans per month, then the contribution margin ratio equals 60 percent (($200,000 - $80,000) / $200,000). This means that the sale of each $1 dollar can of beans contributes 40 cents to variable costs and 60 cents to fixed costs.

 

Break-Even Point

The primary CVP equation expresses operating profit:

[E2] Operating Profit = Sales - Total Fixed Costs - Total Variable Costs

The break-even point (BEP) occurs at the point of minimum required production, creating zero operating profit.

[E3] At BEP: Sales = Total Variable Costs + Total Fixed Costs

By substituting E1 into E3, you get:

[E4] At BEP, Sales = Total Fixed Costs / Contribution Margin Ratio

For example, suppose the bean canning company has monthly fixed costs of $102,000. With a 60 percent contribution margin ratio, it must sell ($102,000 / 60 percent), or $170,000 of canned beans monthly to break even.

Required Profit

Now you have to calculate the sales volume necessary to provide your required profit:

[E5] Required Sales = (Required Profit + Total Fixed Cost) / Contribution Margin Ratio

For example, if the bean canning company requires $30,000 a month in operating profit, the required monthly sales volume is $220,000: (($102,000 + $30,000) / 60 percent). You will get a handle on your required sales volume by understanding your fixed and variable costs. You can also figure how many additional cans of beans to sell to attain your profit target by performing CVP on a unit basis.

How to Dispose of Accounts Receivable

Article written by EricBank

Many a small business has found itself in a cash crunch from time to time. This can be especially vexing for business-to-business (B2B) companies, which extend trade credit to other businesses and therefore depend on accounts receivable for payments -- a process that can take weeks or months. Retail businesses usually rely on credit card and cash purchases, which are normally not problematic as payment is immediate or prompt. But B2Bs might have A/R balances that represent a substantial part of working capital. In a crunch, a B2B has several options to quickly turn an A/R balance into cash.

Factoring

A bank or finance company that buys your A/R book is called a factor. The factor assumes title to the invoices in your A/R book when it buys it. In some contracts, you must guarantee that the factor receives full payment for all invoices -- this a contract with recourse. When the factor assumes all the risk of payment, it's called a non-recourse contract. Obviously, you receive less cash for a non-recourse contract. You usually receive a certain percentage of the A/R's book value and possibly a percentage of collections once they exceed the percentage you received. For instance, you might receive 80 percent of book value and 40 percent of all collections received after the factor has collected the 80 percent from your customers. You also might have to pay the factor a fee.

Auction

An online receivables exchange is a handy alternative to a standard factoring arrangement. The way it works is that you select some or all of your A/R invoices and list them on the exchange. Bidding then commences among financial institutions and banks, hopefully helping to boost the amount you'll receive for the invoices. The auction is pretty flexible, because you get to choose which invoices to unload and there aren't any long-term commitments. The risk is that the bid will be lower than the percentage you would have received from a straight-up factoring arrangement.

Pledging

 

Maybe you don't want to sell your A/R book, but still need some fast cash. Consider pledging the book as collateral for a loan from a bank or finance company. This is a recourse arrangement, but you retain title to the invoices. One good feature is that the process is invisible to your customers -- they continue to pay you, not some third party. In some cases, the lender might have you set up a lock box to receive the payments, but it will be in your name. Your balance sheet continues to list the pledged A/R balance as an asset, although you might have to add a footnote if you publish your financials.

Assignment

Assignment is a hybrid of pledging and factoring. The financial company or bank (the "assignee") pays you cash for the rights to your A/R collections. You use the A/R book as collateral for a promissory note that you sign with the assignee. It's still your job to collect your A/R invoices, but you forward the money to the assignee. The assignee has recourse in case any of the customers are deadbeats. The balance sheet requirements are similar to those for pledging, though you'll also have to show notes payable.

To count or not to count

Effects of Inventory Errors

Article written by EricBank

The difference between inventory selling price and acquisition cost is the basis for a merchandizing company's profits. The speed at which you restock inventory depends on your sales volume. To figure how quickly you are moving inventory, you can compute a measure called turnover. However, you have to avoid inventory inaccuracies lest you end up with misleading results.

Inventory Costs

As we've discussed in previous blogs, the cost of goods sold and gross profits are calculated thusly:

COGS = inventory purchases + beginning inventory - ending inventory

Gross profits = net sales - COGS = (sales - refunds -discounts) - COGS

To satisfy the IRS, you'll have to make a physical inventory count at reasonable intervals and apply adjustments to balance sheet inventory to realign it with the actual counts. You should look upon the requirement to take physical counts as a blessing, because you'll inevitably find discrepancies arising from shrinkage, damage, spoilage and other reasons.

Turnover Ratio

A successful merchandizer sells stock on hand and replenishes it with more inventory. Use the inventory turnover ratio to quantify this process:

Turnover ratio = COGS / average turnover

                      = COGS / ((beginning inventory + ending inventory) / 2)

Your goal is to increase your turnover ratio, because that indicates you are operating efficiently. A falling ratio is a red flag, since it means you have too much stock on hand. This is risky, because it increases storage costs and the chances that your older stock will become obsolete or spoiled. Ideally, you would never experience a stock-out and would only carry the amount of inventory you immediately need. Returning to reality, you have to settle for a respectable turnover ratio while keeping stock-outs and backorders to a minimum. Naturally, what constitutes a good turnover ratio depends on the industry you're in.

Effect of Errors

Let's examine sources of error in the turnover ratio's numerator, which is COGS, and in its denominator. COGS errors can occur for numerous reasons. For example, you are supposed to write down obsolete inventory, and failure to do so will understate your COGS, because it needs to absorb the loss in value of the obsolete stock. Your turnover ratio will be misleadingly low if you understate COGS. Denominator errors can crop up if you miscount or improperly record ending inventory. For example, you'll overstate turnover ratio and understate ending inventory if you fail to count everything you've stocked. Of course, errors in reporting your COGS or ending inventory will skew your tax bill, which is never a good thing.

Considerations

One excellent strategy to catch errors early on is through cycle counting. In case you're not familiar with the term, it refers to taking a partial count every day until you cycle through all your stock. Then you start all over again. Damaged and missing inventory will turn up during these spot checks. Keep in mind that, under generally accepted accounting principles, you have to restate your prior-period financial results arising from "material" errors, which are errors that result in incorrect actions. Sometimes, errors cancel over time. For example, overstating net income and ending inventory in one period will usually lead to understating these in the next period.

Let the Blame Game begin!

Today I'm seeing all over the news (yes, it's accounting news mostly) that the IRS Commissioner John Koskinen wrote a letter to Congress urging them to make a decision about the tax code for 2014, to prevent delays to the 2014 tax filing.

Does anyone else see a problem with this?

This has happened to us the last three years in a row and even when the "opening" date gets pushed back, the "closing" dates do not!  This only hurts the US population the Congress professes to care about most - the cash strapped!!

• The IRS can't get the parameters in place to get the e-file system ready to receive transmissions on time.
• The software provider can't get the software to the tax preparers.
• There is an increased risk of error.
• There is an increased risk of fraud.
• I could keep going, but I won't bore you with THOSE details.

But, what irritates me the most, is why should I have to wait until January of 2015, after Congress has it's holiday, to know what my income tax situation will be for 2014?  I know this time of year drives me crazy, but am I really crazy?

If you want more details, here is a more complete article about it:
http://www.accountingtoday.com/news/irs-watch/irs-chief-warns-congress-possible-delay-tax-season-unresolved-tax-extenders-72264-1.html?utm_campaign=daily%20b%20final-oct%208%202014&utm_medium=email&utm_source=newsletter&ET=webcpa%3Ae3164828%3A4397047a%3A&st=email